<PAGE>
As filed with the Securities and Exchange Commission
on May 5, 1994
Registration No. 33-01332
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 13 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 16 /X/
(Check appropriate box or boxes)
--------------
PRUDENTIAL U.S. GOVERNMENT FUND
(Exact name of registrant as specified in charter)
ONE SEAPORT PLAZA,
NEW YORK, NEW YORK 10292
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 214-1250
S. JANE ROSE, ESQ.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(NAME AND ADDRESS OF AGENT FOR SERVICE OF PROCESS)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE
DATE OF THE REGISTRATION STATEMENT.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX):
/ / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/X/ 60 days after filing pursuant to paragraph (a)
/ / on (__________), 1994 pursuant to paragraph (a), of
Rule 485
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant
has previously registered an indefinite number of shares of its beneficial
interest, par value $.01 per share. The Registrant will file a notice under such
Rule for its fiscal year ended October 31, 1994 on or before December 31, 1994.
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<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- ---------------------------------------------------- ----------------------------------------
<S> <C> <C> <C>
PART A
Item 1. Cover Page.............................. Cover Page
Item 2. Synopsis................................ Fund Expenses; Fund Highlights
Item 3. Condensed Financial Information......... Fund Expenses; Financial Highlights; How
the Fund Calculates Performance
Item 4. General Description of Registrant....... Cover Page; Fund Highlights, How the
Fund Invests; General Information
Item 5. Management of the Fund.................. Financial Highlights; How the Fund is
Managed; General Information
Item 6. Capital Stock and Other Securities...... Taxes, Dividends and Distributions;
General Information
Item 7. Purchase of Securities Being Offered.... Shareholder Guide; How the Fund Values
its Shares
Item 8. Redemption or Repurchase................ Shareholder Guide; How the Fund Values
its Shares; General Information
Item 9. Pending Legal Proceedings............... Not Applicable
PART B
Item 10. Cover Page.............................. Cover Page
Item 11. Table of Contents....................... Table of Contents
Item 12. General Information and History......... Not Applicable
Item 13. Investment Objectives and Policies...... Investment Objective and Policies;
Investment Restrictions
Item 14. Management of the Fund.................. Trustees and Officers; Manager;
Distributor
Item 15. Control Persons and Principal Holders of Not Applicable
Securities..............................
Item 16. Investment Advisory and Other Manager; Distributor; Custodian,
Services................................ Transfer and Dividend Disbursing Agent
and Independent Accountants
Item 17. Brokerage Allocation and Other Portfolio Transactions and Brokerage
Practices...............................
Item 18. Capital Stock and Other Securities...... Not Applicable
Item 19. Purchase, Redemption and Pricing of Purchase and Redemption of Fund Shares;
Securities Being Offered................ Shareholder Investment Account
Item 20. Tax Status.............................. Taxes
Item 21. Underwriters............................ Distributor
Item 22. Calculation of Performance Data......... Performance Information
Item 23. Financial Statements.................... Financial Statements
PART C
Information required to be included in Part C is set forth under the appropriate Item,
so numbered, in Part C to this Post-Effective Amendment to the Registration Statement.
</TABLE>
<PAGE>
PRUDENTIAL U.S. GOVERNMENT FUND
- --------------------------------------------------------------------------------
PROSPECTUS DATED _____________, 1994
- --------------------------------------------------------------------------------
Prudential U.S. Government Fund (the Fund) is an open-end, diversified
management investment company, or mutual fund, whose investment objective is to
seek a high total return (capital appreciation plus high current income). The
Fund will seek to achieve this objective primarily by investing in U.S.
Government securities, including U.S. Treasury bills, notes, bonds and other
debt securities issued by the U.S. Treasury, and obligations issued or
guaranteed by U.S. Government agencies or instrumentalities. The Fund may also
purchase and sell put and call options on U.S. Government securities and engage
in transactions involving futures contracts on U.S. Government securities and
options on such futures. See "How the Fund Invests--Investment Objective and
Policies." The Fund's address is One Seaport Plaza, New York, New York 10292,
and its telephone number is (800) 225-1852.
- --------------------------------------------------------------------------------
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Additional information
about the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated _________, 1994, which information is
incorporated herein by reference (is legally considered a part of this
Prospectus) and is available without charge upon request to the Fund at the
address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL U.S. GOVERNMENT FUND?
Prudential U.S. Government Fund is a mutual fund. A mutual fund pools the
resources of investors by selling its shares to the public and investing the
proceeds of such sale in a portfolio of securities designed to achieve its
investment objective. Technically, the Fund is an open-end, diversified
management investment company.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is high total return (capital appreciation
plus high current income). See "How the Fund Invests--Investment Objective and
Policies" at page 6.
WHAT ARE THE FUND'S SPECIAL CHARACTERISTICS AND RISKS?
In seeking to achieve its investment objective, the Fund invests primarily in
U.S. Government securities, including U.S. Treasury bills, notes and bonds and
other debt securities issued by the U.S. Treasury and obligations issued or
guaranteed by U.S. Government agencies and instrumentalities. See "How the Fund
Invests--Investment Objective and Policies" at page 6. The Fund may also engage
in hedging, and income enhancement strategies, including the purchase and sale
of put and call options, financial futures contracts and related short-term
trading. See "How the Fund Invests--Other Investments" at page 8.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the Manager of
the Fund and is compensated for its services at an annual rate of .50 of 1% of
the Fund's average daily net assets. As of March 31, 1994, PMF served as manager
or administrator to [66] investment companies, including [37] mutual funds, with
aggregate assets of approximately [$49] billion. The Prudential Investment
Corporation (PIC or the Subadviser) furnishes investment advisory services in
connection with the management of the Fund under a Subadvisory Agreement with
PMF. See "How the Fund is Managed--Manager" at page 16.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor of
the Fund's Class A shares and is currently paid for its services at an annual
rate of .15 of 1% of the average daily net assets of the Class A shares.
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Fund's Class B and Class C shares and is currently paid for
its services at an annual rate of .90 of 1% of the average daily net assets of
the Class B shares and .75 of 1% of the average daily net assets of the Class C
shares. See "How the Fund is Managed--Distributor" at page 17.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
for all classes. There is no minimum investment requirement for certain
retirement and employee savings plans or custodial accounts for the benefit of
minors. For purchases made through the Automatic Savings Accumulation Plan, the
minimum initial and subsequent investment is $50. See "Shareholder Guide--How to
Buy Shares of the Fund" at page 22 and "Shareholder Guide--Shareholder Services"
at page 29.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund, through its transfer
agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent) at the
net asset value per share (NAV) next determined after receipt of your purchase
order by the Transfer Agent or Prudential Securities plus a sales charge which
may be imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class B or Class C shares). See "How the Fund Values its Shares"
at page 19 and "Shareholder Guide--How to Buy Shares of the Fund" at page 22.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers three classes of shares:
- Class A Shares: Sold with an initial sales charge of up to
4% of the offering price.
- Class B Shares: Sold without an initial sales charge but are
subject to a contingent deferred sales
charge or CDSC (declining from 5% to zero of
the lower of the amount invested or the
redemption proceeds) which will be imposed
on certain redemptions made within six years
of purchase. Although Class B shares are
subject to higher ongoing
distribution-related expenses than Class A
shares, Class B shares will automatically
convert to Class A shares (which are subject
to lower ongoing expenses) approximately
seven years after purchase.
- Class C Shares: Sold without an initial sales charge and for
one year after purchase, are subject to a 1%
CDSC on redemptions. Like Class B shares,
Class C shares are subject to higher ongoing
distribution-related expenses than Class A
shares but do not convert to another class.
See "Shareholder Guide--Alternative Purchase Plan" at page 23.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. See "Shareholder Guide--How To Sell Your Shares" at page 25.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to pay dividends of net investment income monthly and make
distributions of any net capital gains at least annually. Dividends and
distributions will be automatically reinvested in additional shares of the Fund
at NAV without a sales charge unless you request that they be paid to you in
cash. See "Taxes, Dividends and Distributions" at page 20.
3
<PAGE>
FUND EXPENSES
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES+ CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- ------------------------ ------------------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)..... 4% None None
Maximum Sales Load or Deferred Sales Load
Imposed on Reinvested Dividends......... None None None
Deferred Sales Load (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)........... None 5% during the first 1% on redemptions made
year, decreasing by 1% within one year of
annually to 1% in the purchase
fifth and sixth years
and 0% the seventh year*
Redemption Fees.......................... None None None
Exchange Fee............................. None None None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A SHARES CLASS B SHARES CLASS C SHARES**
-------------- ------------------------ ------------------------
<S> <C> <C> <C>
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees.......................... .50% .50% .50%
12b-1 Fees++............................. .15% .85% .75%
Other Expenses........................... .31% .31% .31%
----- ----- -----
Total Fund Operating Expenses............ .96% 1.66% 1.56%
----- ----- -----
----- ----- -----
- ------------------
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period:
Class A................................................ $ 49 $69 $ 91 $153
Class B................................................ $ 67 $82 $100 $169
Class C**.............................................. $ 26 $49 $ 85 $186
You would pay the following expenses on the same
investment, assuming no redemption:
Class A................................................ $ 49 $69 $ 91 $153
Class B................................................ $ 17 $52 $ 90 $169
Class C**.............................................. $ 16 $49 $ 85 $186
The above example with respect to Class A and Class B shares is based on restated data for the Fund's fiscal
year ended October 31, 1993. The above example with respect to Class C shares is based upon expenses
expected to have been incurred if Class C shares had been in existence during the fiscal year ended October
31, 1993. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the various costs and expenses that an
investor in the Fund will bear, whether directly or indirectly. For more complete descriptions of the
various costs and expenses, see "How the Fund is Managed." "Other Expenses" include operating expenses of
the Fund, such as Trustees' and professional fees, registration fees, reports to shareholders and transfer
agency and custodian fees.
<FN>
- ---------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion
Feature--Class B Shares."
** Estimated based on expenses expected to have been incurred if Class C
shares had been in existence during the fiscal year ended October 31, 1993.
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-based
sales charges on shares of the Fund may not exceed 6.25% of total gross
sales, subject to certain exclusions. This 6.25% limitation is imposed on
the Fund rather than on a per shareholder basis. Therefore long-term Class
B and Class C shareholders of the Fund may pay more in total sales charges
than the economic equivalent of 6.25% of such shareholders' investment in
such shares. See "How the Fund is Managed--Distributor."
++ Although the Class A, Class B and Class C Distribution and Service Plans
provide that the Fund may pay up to an annual rate of .30 of 1% of the
average daily net assets of the Class A shares and 1% of the average daily
net assets of each of the Class B and Class C shares, the Distributor has
agreed to limit its distribution expenses with respect to Class A shares of
the Fund to .15 of 1% of the average daily net asset value of the Class A
shares, with respect to the Class B shares of the Fund to .90 of 1% of the
average daily net asset value of the Class B shares and, with respect to
the Class C shares of the Fund to .75 of 1% of the average daily net assets
of the Class C shares, each for the fiscal year ending October 31, 1994.
See "How the Fund is Managed--Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following financial highlights have been audited by Deloitte & Touche,
independent accountants, whose report thereon was unqualified. This information
should be read in conjunction with the financial statements and notes thereto,
which appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class A and Class B share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. No Class C shares were outstanding during
the periods indicated.
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------
JANUARY 22,
1990@
YEAR ENDED OCTOBER 31, THROUGH
----------------------------- OCTOBER 31,
1993 1992 1991 1990
------- ------- ------- -----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 9.69 $ 9.49 $ 8.97 $ 9.31
------- ------- ------- -----------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income......... .64 .68 .66 .55
Net realized and unrealized
gain (loss)
on investment transactions... .90 .20 .52 (.34)
------- ------- ------- -----------
Total from investment
operations................... 1.54 .88 1.18 .21
------- ------- ------- -----------
LESS DISTRIBUTIONS:
Dividends from net investment
income....................... (.64) (.68) (.66) (.55)
Distributions from paid-in
capital...................... -- -- -- --
------- ------- ------- -----------
Total distributions........... (.64) (.68) (.66) (.55)
Net asset value, end of
period....................... $10.59 $ 9.69 $ 9.49 $ 8.97
------- ------- ------- -----------
------- ------- ------- -----------
TOTAL RETURN#................. 16.43% 9.39% 13.72% 2.16%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $6,849 $5,024 $2,574 $1,617
Average net assets (000)...... $6,339 $3,769 $2,158 $918
Ratios to average net assets:
Expenses, including
distribution fees.......... .96% .94% 1.24% 1.08%*
Expenses, excluding
distribution fees.......... .81% .79% 1.09% .94%*
Net investment income....... 6.35% 6.92% 7.24% 7.16%*
Portfolio turnover............ 66% 66% 236% 608%
<FN>
- -----------------
<CAPTION>
CLASS B
-----------------------------------------------------------------------------
NOVEMBER 7,
1986++
YEAR ENDED OCTOBER 31, THROUGH
--------------------------------------------------------------- OCTOBER 31,
1993 1992 1991 1990 1989+++ 1988++ 1987
-------- -------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 9.70 $ 9.50 $ 8.97 $ 9.54 $ 9.05 $ 9.04 $10.00
-------- -------- -------- -------- -------- -------- -----------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income......... .55 .59 .59 .62 .64 .66+ .65+
Net realized and unrealized
gain (loss)
on investment transactions... .90 .20 .53 (.57) .52 .13 (.85)
-------- -------- -------- -------- -------- -------- -----------
Total from investment
operations................... 1.45 .79 1.12 .05 1.16 .79 (.20)
-------- -------- -------- -------- -------- -------- -----------
LESS DISTRIBUTIONS:
Dividends from net investment
income....................... (.55) (.59) (.59) (.62) (.64) (.66) (.65)
Distributions from paid-in
capital...................... -- -- -- -- (.03) (.12) (.11)
-------- -------- -------- -------- -------- -------- -----------
Total distributions........... (.55) (.59) (.59) (.62) (.67) (.78) (.76)
Net asset value, end of
period....................... $ 10.60 $ 9.70 $ 9.50 $ 8.97 $ 9.54 $ 9.05 $ 9.04
-------- -------- -------- -------- -------- -------- -----------
-------- -------- -------- -------- -------- -------- -----------
TOTAL RETURN#................. 15.44% 8.46% 12.86% .64% 13.53% 8.79% (2.21)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $166,907 $155,143 $158,790 $172,521 $169,825 $169,261 $213,078
Average net assets (000)...... $162,107 $154,502 $168,421 $174,276 $156,322 $191,342 $184,510
Ratios to average net assets:
Expenses, including
distribution fees.......... 1.81% 1.79% 2.09% 1.99% 2.05% 1.76%+ 1.13%+*
Expenses, excluding
distribution fees.......... .81% .79% 1.09% .99% 1.06% .75%+ .23%+*
Net investment income....... 5.50% 6.07% 6.39% 6.89% 6.95% 7.36%+ 6.76%+*
Portfolio turnover............ 66% 66% 236% 608% 392% 73% 64%
<FN>
- -----------------
@ Commencement of offering of Class A shares.
# Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
++ Commencement of investment operations.
* Annualized.
+ Net of expense subsidy and fee waiver.
++ On March 1, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as manager of the Fund.
+++ Effective September 5, 1989, the Fund's investment objective changed from
seeking a high current return to seeking a high total return. Accordingly,
historical per share data and ratios may not accurately reflect future data
and ratios.
</TABLE>
5
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
THE FUND'S INVESTMENT OBJECTIVE IS TO SEEK A HIGH TOTAL RETURN (CAPITAL
APPRECIATION PLUS HIGH CURRENT INCOME). THE FUND WILL SEEK TO ACHIEVE THIS
OBJECTIVE PRIMARILY BY INVESTING IN U.S. GOVERNMENT SECURITIES, INCLUDING U.S.
TREASURY BILLS, NOTES, BONDS AND OTHER DEBT SECURITIES ISSUED BY THE U.S.
TREASURY, AND OBLIGATIONS ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES OR
INSTRUMENTALITIES. AT LEAST 65% OF THE TOTAL ASSETS OF THE FUND WILL BE INVESTED
IN U.S. GOVERNMENT SECURITIES. THERE CAN BE NO ASSURANCE THAT THE FUND WILL MEET
ITS OBJECTIVE.
THE FUND'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND MAY NOT BE CHANGED
WITHOUT THE APPROVAL OF A MAJORITY OF THE FUND'S OUTSTANDING VOTING SECURITIES
AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED (THE INVESTMENT
COMPANY ACT). FUND POLICIES THAT ARE NOT FUNDAMENTAL MAY BE MODIFIED BY THE
BOARD OF DIRECTORS.
U.S. GOVERNMENT SECURITIES
U.S. TREASURY SECURITIES
THE FUND WILL INVEST IN U.S. TREASURY SECURITIES, INCLUDING BILLS, NOTES,
BONDS AND OTHER DEBT SECURITIES ISSUED BY THE U.S. TREASURY. These instruments
are direct obligations of the U.S. Government and, as such, are backed by the
"full faith and credit" of the United States. They differ primarily in their
interest rates, the lengths of their maturities and the dates of their
issuances.
SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES
THE FUND WILL INVEST IN SECURITIES ISSUED BY AGENCIES OF THE U.S. GOVERNMENT
OR INSTRUMENTALITIES OF THE U.S. GOVERNMENT. These obligations, including those
which are guaranteed by federal agencies or instrumentalities, may or may not be
backed by the full faith and credit of the United States. Obligations of the
Government National Mortgage Association (GNMA), the Farmers Home Administration
and the Export-Import Bank are backed by the full faith and credit of the United
States. In the case of securities not backed by the full faith and credit of the
United States, the Fund must look principally to the agency issuing or
guaranteeing the obligation for ultimate repayment and may not be able to assert
a claim against the United States if the agency or instrumentality does not meet
its commitments. Securities in which the Fund may invest which are not backed by
the full faith and credit of the United States include obligations such as those
issued by the Tennessee Valley Authority, the Federal National Mortgage
Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and the
United States Postal Service, each of which has the right to borrow from the
United States Treasury to meet its obligations, and obligations of the Federal
Farm Credit Bank and the Federal Home Loan Bank, the obligations of which may
only be satisfied by the individual credit of the issuing agency. GNMA, FNMA and
FHLMC investments may include collateralized mortgage obligations. See "Other
Investments" below.
Obligations issued or guaranteed as to principal and interest by the United
States Government may be acquired by the Fund in the form of custodial receipts
that evidence ownership of future interest payments, principal payments or both
on certain United States Treasury notes or bonds. Such notes and bonds are held
in custody by a bank on behalf of the owners. These custodial receipts are
commonly referred to as Treasury strips.
6
<PAGE>
MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES
THE FUND WILL INVEST IN MORTGAGE-BACKED SECURITIES INCLUDING THOSE
REPRESENTING AN UNDIVIDED OWNERSHIP INTEREST IN A POOL OF MORTGAGES, E.G., GNMA,
FNMA AND FHLMC CERTIFICATES. The U.S. Government or the issuing agency
guarantees the payment of interest and principal of these securities. However,
the guarantees do not extend to the securities' yield or value, which are likely
to vary inversely with fluctuations in interest rates, nor do the guarantees
extend to the yield or value of the Fund's shares. See "Additional Investment
Information--Mortgage-Related Securities Issued by U.S. Government
Instrumentalities" in the Statement of Additional Information. These
certificates are in most cases "pass-through" instruments, through which the
holder receives a share of all interest and principal payments from the
mortgages underlying the certificate, net of certain fees. Because the
prepayment characteristics of the underlying mortgages vary, it is not possible
to predict accurately the average life or realized yield of a particular issue
of pass-through certificates. Mortgage-backed securities are often subject to
more rapid repayment than their stated maturity date would indicate as a result
of the pass-through of prepayments of principal on the underlying mortgage
obligations. For example, securities backed by mortgages with thirty-year
maturities are customarily treated as prepaying fully in the twelfth year and
securities backed by mortgages with fifteen-year maturities are treated as
prepaying fully in the seventh year. During periods of declining interest rates,
prepayment of mortgages underlying mortgage-backed securities can be expected to
accelerate. The Fund's ability to maintain a portfolio of high-yielding
mortgage-backed securities will be adversely affected to the extent that
prepayments of mortgages must be reinvested in securities which have lower
yields than the prepaid mortgages. Moreover, prepayments of mortgages which
underlie securities purchased at a premium could result in capital losses.
THE FUND MAY ALSO INVEST IN BALLOON PAYMENT MORTGAGE-BACKED SECURITIES. A
balloon payment mortgage-backed security is an amortizing mortgage security with
installments of principal and interest, the last installment of which is
predominantly principal.
THE FUND MAY ALSO INVEST IN MORTGAGE PASS-THROUGH SECURITIES WHERE ALL
INTEREST PAYMENTS GO TO ONE CLASS OF HOLDERS (INTEREST ONLY SECURITIES OR IOS)
AND ALL PRINCIPAL PAYMENTS GO TO A SECOND CLASS OF HOLDERS (PRINCIPAL ONLY
SECURITIES OR POS). These securities are commonly referred to as mortgage-backed
securities strips or MBS strips. The yields to maturity on IOs are very
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on yield to maturity. If the underlying mortgage
assets experience greater than anticipated prepayments of principal, the Fund
may not fully recoup its initial investment in these securities. Conversely, if
the underlying mortgage assets experience less than anticipated prepayments of
principal, the yield on POs could be materially adversely affected.
ZERO-COUPON BONDS
THE FUND MAY INVEST IN ZERO-COUPON U.S. GOVERNMENT SECURITIES. Zero-coupon
bonds are generally purchased at a discount from the face amount because the
buyer receives only the right to receive a fixed payment on a certain date in
the future and does not receive any periodic interest payments. The effect of
owning instruments which do not make current interest payments is that a fixed
yield is earned not only on the original investment but also, in effect, on all
discount accretion during the life of the obligations. This implicit
reinvestment of earnings at the same rate eliminates the risk of being unable to
reinvest distributions at a rate as high as the implicit yield on the
zero-coupon bond, but at the same time eliminates the holder's ability to
reinvest at higher rates in the future. For this reason, zero-coupon bonds are
subject to substantially greater price fluctuations during periods of changing
market interest rates than are comparable securities which pay interest
currently, which fluctuation increases the longer the period to maturity.
Although the Fund does not receive interest payments on zero-coupon bonds in
cash, it is required to accrue interest on such bonds for tax purposes.
Accordingly, in order to meet the requirement that it distribute at least 90% of
its net investment income and net short-term gains earned in each taxable year,
the Fund may have to liquidate securities or borrow money. To date, the
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Fund has not engaged in borrowing or liquidated securities solely or primarily
for the purpose of meeting income distribution requirements attributable to
investments in zero-coupon bonds. See "Taxes" in the Statement of Additional
Information.
Only zero-coupon government securities issued as such by the U.S. Government
under its Separate Trading of Registered Interest and Principal Securities
(STRIPS) program are treated by the Fund as U.S. Government securities.
Zero-coupon securities created by financial institutions (usually investment
banks) such as the Certificates of Accrual on Treasury securities (CATS) created
by Salomon Brothers, Inc. and the Lehman Investment Opportunity Notes (LIONS)
created by Shearson Lehman Hutton, Inc., may be purchased by the Fund, subject
to the 35% limit on "Other Investments," described below.
ADJUSTABLE RATE U.S. GOVERNMENT SECURITIES
THE FUND MAY INVEST IN ADJUSTABLE RATE U.S. GOVERNMENT SECURITIES. Adjustable
rate securities are debt securities having interest rates which are adjusted or
reset at periodic intervals ranging from one month to three years. The interest
rate of an adjustable rate security typically responds to changes in general
market levels of interest. The interest paid on any particular adjustable rate
security is a function of the index upon which the interest rate of that
security is based.
The adjustable rate feature of the securities in which the Fund may invest
will tend to reduce sharp changes in the Fund's net asset value in response to
normal interest rate fluctuations. As the coupon rates of the Fund's adjustable
rate securities are reset periodically, yields of these portfolio securities
will reflect changes in market rates and should cause the net asset value of the
Fund's shares to fluctuate less dramatically than that of a fund invested in
long-term fixed rate securities. However, while the adjustable rate feature of
such securities will tend to limit sharp swings in the Fund's net asset value in
response to movements in general market interest rates, it is anticipated that
during periods of fluctuations in interest rates, the net asset value of the
Fund will fluctuate. See "Other Investments" below.
OTHER INVESTMENTS
AT LEAST 65% OF THE TOTAL ASSETS OF THE FUND WILL BE INVESTED IN U.S.
GOVERNMENT SECURITIES, AS DESCRIBED ABOVE. U.S. Government securities which are
purchased pursuant to repurchase agreements or on a when-issued or delayed
delivery basis will be treated as U.S. Government securities for purposes of
this calculation. See "Repurchase Agreements" and "When-Issued and Delayed
Delivery Securities" below.
UP TO 35% OF THE TOTAL ASSETS OF THE FUND MAY BE COMMITTED TO INVESTMENTS
OTHER THAN U.S. GOVERNMENT SECURITIES. These investments would include the
securities described in this subsection ("Other Investments") as well as
purchased put and call options on securities and purchased put and call options
on futures contracts. See "Options Transactions" and "Transactions in Futures
Contracts and Options Thereon" below.
THE FUND MAY ALSO INVEST IN DEBT SECURITIES OF COMPANIES WHICH ARE RATED, OR
ARE ISSUED BY COMPANIES THAT HAVE OUTSTANDING DEBT SECURITIES RATED, A OR HIGHER
BY STANDARD & POOR'S RATINGS GROUP, MOODY'S INVESTORS SERVICE OR BY A NATIONALLY
RECOGNIZED STATISTICAL RATING ORGANIZATION (NRSRO), OR, IF NOT RATED, ARE OF
COMPARABLE QUALITY IN THE OPINION OF THE FUND'S INVESTMENT ADVISER. The prices
of debt securities generally increase when interest rates decline and decrease
when interest rates rise. See "Description of Security Ratings" in the Appendix
to the Statement of Additional Information.
THE FUND IS PERMITTED TO INVEST UP TO 20% OF ITS TOTAL ASSETS IN HIGH QUALITY
MONEY MARKET INSTRUMENTS, INCLUDING COMMERCIAL PAPER OF DOMESTIC CORPORATIONS
AND CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND OTHER OBLIGATIONS OF
DOMESTIC AND FOREIGN BANKS. Such obligations will, at the time of purchase, be
rated within the two highest quality grades as determined by Moody's Investors
Service or Standard & Poor's Ratings Group (or another nationally recognized
statistical rating organization (NRSRO)) or, if unrated, will be of equivalent
quality in the judgment of the Fund's investment adviser.
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THE FUND MAY INVEST IN OBLIGATIONS OF FOREIGN BANKS AND FOREIGN BRANCHES OF
U.S. BANKS ONLY IF AFTER GIVING EFFECT TO SUCH INVESTMENT ALL SUCH INVESTMENTS
WOULD CONSTITUTE LESS THAN 10% OF THE FUND'S TOTAL ASSETS (DETERMINED AT THE
TIME OF INVESTMENT). These investments may be subject to certain risks,
including future political and economic developments, the possible imposition of
withholding taxes on interest income, the seizure or nationalization of foreign
deposits and foreign exchange controls or other restrictions. In addition, there
may be less publicly available information about a foreign bank or foreign
branch of a U.S. bank than about a domestic bank and such entities may not be
subject to the same accounting, auditing and financial recordkeeping standards
and requirements as domestic banks.
THE FUND MAY INVEST IN DEBT SECURITIES WHICH ARE DENOMINATED IN UNITED STATES
DOLLARS AND THAT ARE ISSUED BY FOREIGN CORPORATIONS, FOREIGN GOVERNMENTS OR BY
SUPRANATIONAL ORGANIZATIONS such as the World Bank, which was chartered to
finance development projects in developing member countries; the European
Community, which is a twelve-nation organization engaged in cooperative economic
activities; the European Coal and Steel Community, which is an economic union of
various European nations' steel and coal industries; and the Asian Development
Bank, which is an international development bank established to lend funds,
promote investment and provide technical assistance to member nations in the
Asian and Pacific regions.
THE FUND MAY ALSO PURCHASE PRIVATE MORTGAGE PASS-THROUGH SECURITIES. Private
mortgage pass-through securities are structured similarly to GNMA, FNMA and
FHLMC mortgage pass-through securities and are issued by originators of and
investors in mortgage loans, including depository institutions, mortgage banks,
investment banks and special purpose subsidiaries of the foregoing. These
securities usually are backed by a pool of conventional fixed rate or adjustable
rate mortgage loans. Since private mortgage pass-through securities typically
are not guaranteed by an entity having the credit status of GNMA, FNMA and
FHLMC, such securities generally are structured with one or more types of credit
enhancement. The Fund will only purchase private mortgage pass-through
securities that are rated A or better by a NRSRO.
THE FUND MAY ALSO PURCHASE COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS). A CMO
is a security issued by a corporation or a U.S. Government instrumentality which
is backed by a portfolio of mortgages or mortgage-backed securities. The
issuer's obligation to make interest and principal payments is secured by the
underlying portfolio of mortgages or mortgage-backed securities. CMOs are
partitioned into several classes with a ranked priority by which the classes of
obligations are redeemed. The Fund may invest in CMOs issued by GNMA, FNMA or
FHLMC and in privately issued CMOs which are collateralized by mortgage-backed
securities issued by GNMA, FHLMC or FNMA or by whole loan-private mortgage
pass-through securities and by balloon payment mortgage-backed securities. CMOs
issued by GNMA, FHLMC or FNMA are considered U.S. Government securities for
purposes of this Prospectus. In reliance on recently enacted rules and on
interpretations of the Securities and Exchange Commission (SEC), the Fund's
investments in certain qualifying CMOs are not subject to the Investment Company
Act's limitation on acquiring interests in other investment companies. To the
extent the issuer of a privately issued CMO is considered to be an "investment
company" under these rules and interpretations, the Fund's investment in the
CMOs of such issuer will be limited to no more than 5% of the Fund's total
assets, and the Fund's investment in all such CMOs, together with securities
issued by other investment companies, will not exceed 5% of the Fund's total
assets. See "Additional Investment Information-- Collateralized Mortgage
Obligations" in the Statement of Additional Information.
THE FUND MAY ALSO PURCHASE ZERO-COUPON SECURITIES CREATED BY FINANCIAL
INSTITUTIONS. See "Zero-Coupon Bonds" above.
THE FUND MAY ALSO PURCHASE NON-U.S. GOVERNMENT ADJUSTABLE RATE SECURITIES.
Adjustable rate securities allow the Fund to participate in increases in
interest rates through periodic interest rate adjustments resulting in both
higher yields and lower price fluctuations. During periods of declining interest
rates, coupon rates may readjust downward resulting in lower yields to the Fund.
The value of an adjustable rate security is unlikely to rise during periods of
declining interest rates to the same extent as fixed rate instruments. With
mortgage-backed securities, interest rate declines may result in accelerated
prepayment of mortgages with the result that proceeds from prepayments will be
reinvested at lower interest rates. During periods of rising
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interest rates, changes in the coupon rate will lag behind changes in the market
rate resulting in a lower net asset value until the coupon resets to market
rates. Investors who sell shares before the interest rates in portfolio
securities are adjusted could suffer some loss of principal. Adjustable rate
securities are also typically subject to maximum increases and decreases in the
interest rate adjustment which can be made on any one adjustment date, in any
one year, or during the life of the security. In the event of dramatic increases
or decreases in prevailing market interest rates, the value of the Fund may
fluctuate more substantially since these limits may prevent the security from
fully adjusting its interest rate to the prevailing market rates. See
"Adjustable Rate U.S. Government Securities" above.
THE FUND MAY ALSO PURCHASE ADJUSTABLE RATE MORTGAGE SECURITIES (ARMS), which
are pass-through mortgage securities collateralized by mortgages with adjustable
rather than fixed rates. ARMs eligible for inclusion in a mortgage pool
generally provide for a fixed initial mortgage interest rate for either the
first three, six, twelve, thirteen, thirty-six or sixty scheduled monthly
payments. Thereafter, the interest rates are subject to periodic adjustment
based on changes to a designated benchmark index.
ARMs contain maximum and minimum rates beyond which the mortgage interest rate
may not vary over the lifetime of the security. In addition, certain ARMs
provide for additional limitations on the maximum amount by which the mortgage
interest rate may adjust for any single adjustment period. Alternatively,
certain ARMs contain limitations on changes in the required monthly payment. In
the event that a monthly payment is not sufficient to pay the interest accruing
on an ARM, any such excess interest is added to the principal balance of the
mortgage loan, which is repaid through future monthly payments. If the monthly
payment for such an instrument exceeds the sum of the interest accrued at the
applicable mortgage interest rate and the principal payment required at such
point to amortize the outstanding principal balance over the remaining term of
the loan, the excess is utilized to reduce the then outstanding principal
balance of the ARM.
THE FUND MAY ALSO INVEST IN ASSET-BACKED SECURITIES. Through the use of trusts
and special purpose subsidiaries, various types of assets, primarily automobile
and credit card receivables, have been securitized in pass-through structures
similar to mortgage pass-through structures or in a pay-through structure
similar to the collateralized mortgage structure. The Fund may invest in these
and other types of asset-backed securities which may be developed in the future.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same security interest in the related collateral. Credit card receivables
are generally unsecured. In connection with automobile receivables, the security
interests in the underlying automobiles are often not transferred when the pool
is created, with the resulting possibility that the collateral could be resold.
In general, these types of loans are of shorter average life than mortgage loans
and are less likely to have substantial prepayments.
OPTIONS TRANSACTIONS
THE FUND WRITES (I.E., SELLS) COVERED PUT AND CALL OPTIONS ON U.S. GOVERNMENT
SECURITIES. When the Fund writes an option, it receives a premium which it
retains whether or not the option is exercised. The Fund's principal reason for
writing options is to realize, through the receipt of premiums, a greater
current return than would be realized on the underlying securities alone.
THERE IS NO LIMITATION ON THE AMOUNT OF CALL OPTIONS THE FUND MAY WRITE.
HOWEVER, THE FUND MAY ONLY WRITE COVERED PUT OPTIONS TO THE EXTENT THAT COVER
FOR SUCH OPTIONS DOES NOT EXCEED 50% OF THE FUND'S NET ASSETS. See "Additional
Investment Information--Options Transactions and Related Risks" in the Statement
of Additional Information.
THE FUND MAY PURCHASE PUT AND CALL OPTIONS ON U.S. GOVERNMENT SECURITIES. The
Fund may purchase call options on U.S. Government securities it intends to
acquire in order to hedge against an anticipated market appreciation in the
price of the underlying securities at limited risk and with a limited cash
outlay. Similarly, the Fund may purchase call options on U.S. Government
securities as a hedge against appreciation in the value of other debt securities
it intends to acquire when there is a high degree of correlation between the
value of the U.S. Government securities underlying the call option and the value
of the securities to be acquired. If the market price does rise as anticipated,
the Fund will benefit from that rise but only to the extent that
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the rise exceeds the premiums paid. If the anticipated rise does not occur or if
it does not exceed the premium, the Fund will bear the expense of the option
premiums and transaction costs without gaining an offsetting benefit. If the
Fund purchases a call option on U.S. Government securities as a hedge against
appreciation in the value of other debt securities it intends to acquire, there
is an additional risk that the correlation between the two values will not be as
close as anticipated. The Fund may also purchase a call option to close an
existing option position.
The Fund may purchase put options on U.S. Government securities in an effort
to protect the value of a security which it owns against a substantial decline
in market value (protective puts). The Fund would use this strategy if the
Fund's investment adviser believes that a defensive posture is warranted for a
portion of the portfolio. Protection is provided during the life of the put
because the put gives the Fund the right to sell the underlying security at the
put exercise price, regardless of a decline in the underlying security's market
price below the exercise price. This right protects the Fund from the security's
possible decline in value below the strike price of the option. Any loss to the
Fund is limited to the premium paid for, and commissions paid in connection
with, the put plus the initial excess, if any, of the market price of the
underlying security over the put's exercise price. However, if the market price
of the security increases, the profit the Fund realizes on the sale of the
security will be reduced by the premium paid for, and the commissions paid in
connection with, the put option. The Fund may also purchase a put option to
cover a put option it has written.
The Fund may wish to protect certain portfolio securities against a decline in
market value at a time when put options on those particular securities are not
available for purchase. The Fund may therefore purchase a put option on
securities other than those it wishes to protect even though it does not hold
such other securities in its portfolio. While changes in the value of the put
option should generally offset changes in the value of the securities being
hedged, the correlation between the two values may not be as close in these
transactions as in transactions in which the Fund purchases a put option on an
underlying security it owns.
THE FUND WILL NOT PURCHASE AN OPTION ON U.S. GOVERNMENT SECURITIES IF, AS A
RESULT OF SUCH PURCHASE, MORE THAN 20% OF ITS TOTAL ASSETS WOULD BE INVESTED IN
PREMIUMS FOR SUCH OPTIONS AND ON OPTIONS ON FUTURES CONTRACTS ON U.S. GOVERNMENT
SECURITIES.
OTHER CONSIDERATIONS
ALL OPTIONS PURCHASED OR SOLD BY THE FUND WILL BE TRADED ON A U.S. SECURITIES
EXCHANGE OR WILL BE PURCHASED OR SOLD BY A PRIMARY GOVERNMENT SECURITIES DEALER
RECOGNIZED BY THE FEDERAL RESERVE BANK OF NEW YORK (OTC OPTIONS). While
exchange-traded options are in effect guaranteed by the Options Clearing
Corporation, the Fund relies on the dealer from whom it purchases an OTC option
to perform if the option is exercised. Failure by the dealer to do so would
result in the loss of premium paid by the Fund as well as loss of the expected
benefit of the transaction.
Exchange-traded options generally have a continuous liquid market while OTC
options may not. Consequently, the Fund will generally be able to realize the
value of an OTC option it has purchased only by exercising it or reselling it to
the dealer who issued it. Similarly, when the Fund writes an OTC option, it
generally will be able to close out the OTC option prior to its expiration only
by entering into a closing purchase transaction with the dealer to which the
Fund originally wrote the OTC option. While the Fund will seek to enter into OTC
options only with dealers who will agree to and which are expected to be capable
of entering into closing transactions with the Fund, there can be no assurance
that the Fund will be able to liquidate an OTC option at a favorable price at
any time prior to expiration. Until the Fund, as a covered OTC call option
writer, is able to effect a closing purchase transaction, it will not be able to
liquidate securities used as cover until the option expires, is exercised or the
Fund provides substitute cover. In the event of insolvency of the contra party,
the Fund may be unable to liquidate an OTC option. With respect to options
written by the Fund, the inability to enter into a closing transaction may
result in material losses to the Fund. For example, since the Fund must maintain
a covered position with respect to any call option on a security it writes, the
Fund may be limited in its ability to sell the underlying security while it is
obligated under an option. This requirement may impair the Fund's ability to
sell a portfolio security at a time when such a sale might be advantageous.
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The Fund's investment adviser monitors the creditworthiness of dealers with
whom the Fund enters into OTC option transactions under the Trustees' general
supervision. The Fund's ability to enter into options contracts may be limited
by the Internal Revenue Code's requirements for qualification as a registered
investment company. See "Additional Investment Information--Options Transactions
and Related Risks" in the Statement of Additional Information.
TRANSACTIONS IN FUTURES CONTRACTS AND OPTIONS THEREON
THE FUND MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS AND OPTIONS THEREON
WHICH ARE TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE FOR CERTAIN
HEDGING, RETURN ENHANCEMENT AND RISK MANAGEMENT PURPOSES IN ACCORDANCE WITH
REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION (CFTC). THESE FUTURES
CONTRACTS AND RELATED OPTIONS WILL BE ON DEBT SECURITIES, FINANCIAL INDICES,
U.S. GOVERNMENT SECURITIES, FOREIGN GOVERNMENT SECURITIES AND FOREIGN CURRENCIES
AND INCLUDE FUTURES CONTRACTS AND OPTIONS WHICH ARE LINKED TO THE LONDON
INTERBANK OFFERED RATE (LIBOR). A futures contract is an agreement to purchase
or sell an agreed amount of such securities at a set price for delivery on an
agreed future date. The Fund may purchase a futures contract as a hedge against
an anticipated decline in interest rates, and resulting increase in market
price, in securities the Fund intends to acquire. The Fund may sell a futures
contract as a hedge against an anticipated increase in interest rates, and
resulting decline in market price, in securities the Fund owns.
THE FUND MAY ALSO PURCHASE AND WRITE (I.E., SELL) "COVERED" PUT AND CALL
OPTIONS ON FUTURES CONTRACTS THAT ARE TRADED ON U.S. COMMODITY EXCHANGES. The
Fund will write options on futures contracts for hedging purposes as well as to
realize through the receipt of premium income a greater return than would be
realized on the Fund's portfolio securities alone. An option on a futures
contract gives the purchaser the right, in return for the premium paid, to
assume a position in a futures contract (a long position if the option is a call
and a short position if the option is a put) at a specified exercise price at
any time during the option exercise period. The writer of the option is required
upon exercise to assume an offsetting futures position (a short position if the
option is a call and a long position if the option is a put). Upon exercise of
the option, the assumption of offsetting futures positions by the writer and
holder of the option will be accompanied by delivery of the accumulated cash
balance in the writer's futures margin account which represents the amount by
which the market price of the futures contract, at exercise, exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option on the futures contract. The Fund may also enter into closing
transactions with respect to futures contracts and options thereon to terminate
existing positions.
THE FUND MAY ALSO FROM TIME TO TIME PURCHASE EURODOLLAR INSTRUMENTS TRADED ON
THE CHICAGO MERCANTILE EXCHANGE. EURODOLLAR INSTRUMENTS ARE ESSENTIALLY U.S.
DOLLAR-DENOMINATED FUTURES CONTRACTS OR OPTIONS THEREON WHICH ARE LINKED TO
LIBOR. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. The Fund
intends to use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps are linked. The use of these
instruments is subject to the same limitations and risks as those applicable to
the use of interest rate futures contracts and options thereon.
THE FUND WILL ENGAGE IN TRANSACTIONS IN FUTURES CONTRACTS AND OPTIONS THEREON
ONLY FOR BONA FIDE HEDGING, YIELD ENHANCEMENT AND RISK MANAGEMENT PURPOSES, IN
EACH CASE IN ACCORDANCE WITH THE RULES AND REGULATIONS OF THE CFTC, AND NOT FOR
SPECULATION.
As an alternative to BONA FIDE hedging as defined by the CFTC, the Fund may
comply with a different standard established by CFTC rules with respect to
futures contracts and options thereon purchased by the Fund incidental to the
Fund's activities in the securities markets, under which the value of the assets
underlying such positions will not exceed the sum of (i) cash set aside in an
identifiable manner or short-term U.S. Government or other U.S.
dollar-denominated high-grade short-term debt securities segregated for this
purpose, (ii) cash proceeds on existing investments due within thirty days, and
(iii) accrued profits on the particular futures contract or option thereon.
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THE FUND WILL NOT ENTER INTO FUTURES CONTRACTS OR RELATED OPTIONS FOR YIELD
ENHANCEMENT AND RISK MANAGEMENT PURPOSES FOR WHICH THE AGGREGATE INITIAL MARGIN
AND PREMIUMS EXCEED 5% OF THE LIQUIDATION VALUE OF THE FUND'S TOTAL ASSETS AFTER
TAKING INTO ACCOUNT UNREALIZED PROFITS AND UNREALIZED LOSSES ON ANY SUCH
CONTRACTS THE FUND HAS ENTERED INTO; PROVIDED, HOWEVER, THAT IN THE CASE OF AN
OPTION THAT IS IN-THE-MONEY AT THE TIME OF PURCHASE, THE IN-THE-MONEY AMOUNT MAY
BE EXCLUDED IN COMPUTING SUCH 5%. THE FUND MAY PURCHASE AND SELL FUTURES
CONTRACTS OR RELATED OPTIONS, WITHOUT LIMITATION, FOR BONA FIDE HEDGING
PURPOSES. THE FUND'S ABILITY TO ENTER INTO TRANSACTIONS IN FUTURES CONTRACTS AND
OPTIONS THEREON MAY BE LIMITED BY THE INTERNAL REVENUE CODE'S REQUIREMENTS FOR
QUALIFICATION AS A REGULATED INVESTMENT COMPANY. See "Taxes" in the Statement of
Additional Information. Except as described above, there are no other
restrictions on the Fund's ability to enter into transactions in futures
contracts and options thereon.
SPECIAL RISK CONSIDERATIONS
CERTAIN RISKS ARE INHERENT IN THE FUND'S USE OF FUTURES CONTRACTS AND OPTIONS
ON FUTURES. One such risk arises because the correlation between movements in
the price of futures and movements in the price of the debt securities that are
the subject of the hedge will not be perfect. Another risk is that the movements
in the price of futures contracts or options on futures may not move inversely
with changes in interest rates. If the Fund has sold futures contracts to hedge
securities held by the Fund and the value of the futures position declines more
than the price of such securities increases, the Fund will realize a loss on the
futures contracts which is not completely offset by the appreciation in the
price of the hedged securities. Similarly, if the Fund has written a call on a
futures contract and the value of the call increases by more than the increase
in the value of the securities held as cover, the Fund may realize a loss on the
call which is not completely offset by the appreciation in the price of the
securities held as cover and the premium received for writing the call.
The Fund's ability to establish and close out positions in futures contracts
and options on futures contracts will be subject to the existence of a liquid
secondary market. Although the Fund generally will purchase or sell only those
futures contracts and options thereon for which there appears to be an active
secondary market, there is no assurance that a liquid secondary market on an
exchange will exist for any particular futures contract or option or at any
particular time. In the event no such market exists for a particular futures
contract or option thereon in which the Fund maintains a position, it will not
be possible to effect a closing transaction in that contract and the Fund would
have to either make or take delivery under the futures contract, or in the case
of a written option, wait to sell the underlying securities until the option
expires or is exercised. In the case of a futures contract which the Fund is
unable to close, the Fund would be required to maintain margin deposits on the
contract and to make variation margin payments until the contract is closed.
Successful use of futures contracts and options thereon by the Fund is subject
to the ability of the Fund's investment adviser to predict correctly movements
in the direction of interest rates and securities prices. If the investment
adviser's expectations are not met, the Fund would be in a worse position than
if a hedging strategy had not been pursued. Certain skills required to
successfully use futures contracts or related options are different from those
required to select portfolio securities. The Fund's investment adviser advises
other investment companies which invest in futures contracts for BONA FIDE
hedging.
Exchanges on which futures contracts are traded may impose limits on the
positions that the Fund may take in certain circumstances. In addition, some
futures markets have daily limits on market price movements of certain futures
contracts.
See "Additional Investment Information--Futures Contracts on U.S. Government
Securities" in the Statement of Additional Information.
REPURCHASE AGREEMENTS
The Fund may on occasion enter into repurchase agreements, whereby the seller
of a security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The repurchase date is usually within a day or two
of the original purchase, although it may extend over a number of months. The
resale price is in excess of the purchase price, reflecting an
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agreed-upon rate of return effective for the period of time the Fund's money is
invested in the security. The Fund's repurchase agreements will at all times be
fully collateralized in an amount at least equal to the purchase price including
accrued interest earned on the underlying securities. The instruments held as
collateral are valued daily, and as the value of instruments declines, the Fund
will require additional collateral. If the seller defaults and the value of the
collateral securing the repurchase agreement declines, the Fund may incur a
loss. The Fund participates in a joint repurchase account with other investment
companies managed by Prudential Mutual Fund Management, Inc. pursuant to an
order of the SEC. See "Additional Investment Information--Repurchase Agreements"
in the Statement of Additional Information.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
The Fund may enter into reverse repurchase agreements and dollar rolls. The
proceeds from such transactions will be used for the clearance of transactions
or to take advantage of investment opportunities.
Reverse repurchase agreements involve sales by the Fund of securities
concurrently with an agreement by the Fund to repurchase the same assets at a
later date at a fixed price. During the reverse repurchase agreement period, the
Fund continues to receive principal and interest payments on these securities.
Dollar rolls involve sales by the Fund of securities for delivery in the
current month and a simultaneous contract to repurchase substantially similar
(same type and coupon) securities on a specified future date from the same
party. During the roll period, the Fund forgoes principal and interest paid on
the securities. The Fund is compensated by the difference between the current
sales price and the forward price for the future purchase (often referred to as
the "drop") as well as by the interest earned on the cash proceeds of the
initial sale. A "covered roll" is a specific type of dollar roll for which there
is an offsetting cash position or a cash equivalent security position which
matures on or before the forward settlement date of the dollar roll transaction.
The Fund will establish a segregated account with its Custodian in which it
will maintain cash, U.S. Government securities or other liquid high-grade debt
obligations equal in value to its obligations in respect of reverse repurchase
agreements and dollar rolls. Reverse repurchase agreements and dollar rolls
involve the risk that the market value of the securities retained by the Fund
may decline below the price of the securities the Fund has sold but is obligated
to repurchase under the agreement. In the event the buyer of securities under a
reverse repurchase agreement or dollar roll files for bankruptcy or becomes
insolvent, the Fund's use of the proceeds of the agreement may be restricted
pending a determination by the other party, or its trustee or receiver, whether
to enforce the Fund's obligation to repurchase the securities.
Reverse repurchase agreements and dollar rolls, including covered dollar
rolls, are speculative techniques involving leverage and are considered
borrowings by the Fund for purposes of the percentage limitations applicable to
borrowings. See "Borrowing" below.
SECURITIES LENDING
The Fund may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or equivalent collateral or secures a
letter of credit in favor of the Fund in an amount equal to at least 100% of the
market value of the securities loaned. During the time portfolio securities are
on loan, the borrower will pay the Fund an amount equivalent to any dividend or
interest paid on such securities and the Fund may invest the cash collateral and
earn additional income, or it may receive an agreed-upon amount of interest
income from the borrower. As a matter of fundamental policy, the Fund cannot
lend more than 30% of the value of its total assets.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase or sell securities on a when-issued or delayed delivery
basis. When-issued or delayed delivery transactions arise when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future in order
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to secure what is considered to be an advantageous price and yield to the Fund
at the time of entering into the transaction. The Fund's Custodian will
maintain, in a segregated account of the Fund, cash, U.S. Government securities
or other liquid high-grade debt obligations having a value equal to or greater
than the Fund's purchase commitments; the Custodian will likewise segregate
securities sold on a delayed delivery basis. The securities so purchased are
subject to market fluctuation and no interest accrues to the purchaser during
the period between purchase and settlement. At the time of delivery of the
securities, the value may be more or less than the purchase price and an
increase in the percentage of the Fund's assets committed to the purchase of
securities on a when-issued or delayed delivery basis may increase the
volatility of the Fund's net asset value.
BORROWING
The Fund may borrow money up to 20% of the value of its total assets
(calculated when the loan is made) from banks for temporary extraordinary or
emergency purposes or for the clearance of transactions. The Fund may pledge up
to 20% of its total assets to secure these borrowings.
OTHER INVESTMENT INFORMATION
The Fund is permitted to purchase the following securities and to use the
following investment techniques, although it does not anticipate that any of
them will constitute a significant component of its investment program.
SHORT SALES AGAINST-THE-BOX
The Fund may make short sales against-the-box for the purpose of deferring
realization of gain or loss for federal income tax purposes. A short sale
"against-the-box" is a short sale in which the Fund owns an equal amount of the
securities sold short or securities convertible into or exchangeable, without
payment of any further consideration, for securities of the same issue as, and
equal in amount to, the securities sold short. The Fund may engage in such short
sales only to the extent that not more than 10% of the Fund's net assets
(determined at the time of the short sale) are held as collateral for such
sales.
INTEREST RATE SWAPS
The Fund may enter into interest rate swaps. Interest rate swaps involve the
exchange by the Fund with another party of their respective commitments to pay
or receive interest, E.G., an exchange of floating rate payments for fixed-rate
payments. The Fund expects to enter into these transactions primarily to
preserve a return or spread on a particular investment or portion of its
portfolio or to protect against any increase in the price of securities the Fund
anticipates purchasing at a later date. The Fund intends to use these
transactions as a hedge and not as a speculative investment.
See "Additional Investment Information--Interest Rate Transactions" in the
Statement of Additional Information.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as amended (the Securities Act), that have a readily available market are
not considered illiquid for purposes of this limitation. The investment adviser
will monitor the liquidity of such restricted securities under the supervision
of the Board of Directors. Repurchase agreements subject to demand are deemed to
have a maturity equal to the applicable notice period.
The staff of the SEC has taken the position that purchased over-the-counter
options and the assets used as "cover" for written over-the-counter options are
illiquid securities unless the Fund and the counterparty have provided for the
Fund, at the Fund's election, to unwind the over-the-counter option. The
exercise of such an option ordinarily would involve the payment by the Fund
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of an amount designed to reflect the counterparty's economic loss from an early
termination, but does allow the Fund to treat the assets used as "cover" as
"liquid."
When the Fund enters into interest rate swaps on other than a net basis, the
entire amount of the Fund's obligations, if any, with respect to such interest
rate swaps will be treated as illiquid. To the extent that the Fund enters into
interest rate swaps on a net basis, the net amount of the excess, if any, of the
Fund's obligations over its entitlements with respect to each interest rate swap
will be treated as illiquid. The Fund will also treat non-U.S. Government POs
and IOs as illiquid securities so long as the staff of the SEC maintains its
position that such securities are illiquid.
PORTFOLIO TURNOVER
For the years ended October 31, 1993 and October 31, 1992, the turnover rates
of the Fund's portfolio were 66% and 66%, respectively. Based on its experience
in managing similar investment products, the investment adviser expects that,
under normal circumstances, the Fund's portfolio turnover rate may exceed 200%.
High portfolio turnover rate may involve correspondingly greater brokerage
commissions and other transaction costs. See "Portfolio Transactions and
Brokerage" in the Statement of Additional Information.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE TRUSTEES OF THE FUND, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended October 31, 1993, the Fund's total expenses as a
percentage of average net assets for the Fund's Class A and Class B shares were
.96% and 1.81%, respectively. See "Financial Highlights." No Class C shares were
outstanding during the fiscal year ended October 31, 1993.
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1% OF THE FUND'S AVERAGE DAILY NET
ASSETS. It was incorporated in May 1987 under the laws of the State of Delaware.
For the fiscal year ended October 31, 1993, the Fund paid management fees to PMF
of .50% of the Fund's average net assets.
As of March 31, 1994, PMF served as the manager to [37] open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to [28] closed-end investment companies with aggregate assets of
approximately [$49] billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF THE FUND AND ALSO ADMINISTERS THE FUND'S CORPORATE AFFAIRS. SEE
"MANAGER" IN THE STATEMENT OF ADDITIONAL INFORMATION.
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UNDER THE SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), PIC FURNISHES INVESTMENT ADVISORY SERVICES
IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PMF FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PIC's performance of such services.
The current portfolio manager of the Fund is Annamarie Carlucci, a Vice
President of Prudential Investment Advisors, a unit of The Prudential Investment
Corporation (PIC). Ms. Carlucci has responsibility for the day-to-day management
of the Fund's portfolio. Ms. Carlucci has managed the Fund's portfolio since
January 1991 and has been employed by PIC as a portfolio manager since 1988. Ms.
Carlucci also serves as the portfolio manager of the Prudential Structured
Maturity Fund, Prudential Series Fund Government Securities Portfolio,
Prudential Series Fund Bond Portfolio and Prudential Series Fund Zero Coupon
Portfolios.
PMF and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America (Prudential), a major diversified insurance and
financial services company.
DISTRIBUTOR
PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC. (PMFD), ONE SEAPORT PLAZA, NEW YORK,
NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF
DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS A SHARES OF THE FUND. IT IS
A WHOLLY-OWNED SUBSIDIARY OF PMF.
PRUDENTIAL SECURITIES INCORPORATED, ONE SEAPORT PLAZA, NEW YORK, NEW YORK
10292 (PRUDENTIAL SECURITIES OR PSI), IS A CORPORATION ORGANIZED UNDER THE LAWS
OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS B AND CLASS
C SHARES OF THE FUND. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND SEPARATE DISTRIBUTION AGREEMENTS
(THE DISTRIBUTION AGREEMENTS), PMFD AND PRUDENTIAL SECURITIES (COLLECTIVELY, THE
DISTRIBUTOR) INCUR THE EXPENSES OF DISTRIBUTING THE FUND'S CLASS A, CLASS B AND
CLASS C SHARES. These expenses include commissions and account servicing fees
paid to, or on account of, financial advisers of Prudential Securities and Pruco
Securities Corporation (Prusec), an affiliated broker-dealer, commissions and
account servicing fees paid to, or on account of, other broker-dealers or
financial institutions (other than national banks) which have entered into
agreements with the Distributor, advertising expenses, the cost of printing and
mailing prospectuses to potential investors and indirect and overhead costs of
Prudential Securities and Prusec associated with the sale of Fund shares,
including lease, utility, communications and sales promotion expenses. The State
of Texas requires that shares of the Fund may be sold in that state only by
dealers or other financial institutions which are registered there as
broker-dealers.
Under the Plans, the Fund is obligated to pay distribution and/or service fees
to the Distributor as compensation for its distribution and service activities,
not as reimbursement for specific expenses incurred. If the Distributor's
expenses exceed its distribution and service fees, the Fund will not be
obligated to pay any additional expenses. If the Distributor's expenses are less
than such distribution and service fees, it will retain its full fees and
realize a profit.
UNDER THE CLASS A PLAN, THE FUND MAY PAY PMFD FOR ITS DISTRIBUTION-RELATED
EXPENSES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE OF UP TO .30 OF 1% OF
THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES. The Class A Plan provides
that (i) up to .25 of 1% of the average daily net assets of the Class A shares
may be used to pay for personal service and/ or the maintenance of shareholder
accounts (service fee) and (ii) total distribution fees (including the service
fee of .25 of 1%) may not exceed .30 of 1% of the average daily net assets of
the Class A shares. PMFD has agreed to limit its distribution-related
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<PAGE>
fees payable under the Class A Plan to .15 of 1% of the average daily net assets
of the Class A shares for the fiscal year ending October 31, 1994.
For the fiscal year ended October 31, 1993, PMFD received payments of $9,508
under the Class A Plan as reimbursement of expenses related to the distribution
of Class A shares. This amount was primarily expended for payment of account
servicing fees to financial advisers and other persons who sell Class A shares.
For the fiscal year ended October 31, 1993, PMFD also received approximately
$107,100 in initial sales charges.
UNDER THE CLASS B AND CLASS C PLANS, THE FUND MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED EXPENSES WITH RESPECT TO CLASS B AND CLASS C SHARES
AT AN ANNUAL RATE OF UP TO 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS B AND
CLASS C SHARES, RESPECTIVELY. The Class B Plan provides for the payment to
Prudential Securities of (i) an asset-based sales charge of up to .75 of 1% of
the average daily net assets of the Class B shares, and (ii) a service fee of up
to .25 of 1% of the average daily net assets of the Class B shares. The Class C
Plan provides for the payment to Prudential Securities of (i) an asset-based
sales charge of up to .75 of 1% of the average daily net assets of the Class C
shares, and (ii) a service fee of up to .25 of 1% of the average daily net
assets of the Class C shares. The service fee is used to pay for personal
service and/or the maintenance of shareholder accounts. Prudential Securities
has agreed to limit its distribution-related fees payable; under the Class B
Plan, to .90 of 1% of the average daily net assets of the Class B shares and;
under the Class C Plan, .75 of 1% of the average daily net assets of the Class C
shares for the fiscal year ending October 31, 1994. Prudential Securities also
receives contingent deferred sales charges from certain redeeming shareholders.
See "Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales
Charge."
For the fiscal year ended October 31, 1993, Prudential Securities incurred
distribution expenses of approximately $2,036,000 under the Class B Plan and
received $1,621,067 from the Fund under the Class B Plan and approximately
$423,200 in contingent deferred sales charges from redemptions of Class B shares
during this period. No Class C shares were outstanding during the fiscal year
ending October 31, 1993.
For fiscal year ended October 31, 1993, the Fund paid distribution expenses of
.15% and 1% of the average daily net assets of the Class A and Class B shares,
respectively. The Fund records all payments made under the Plans as expenses in
the calculation of net investment income. No Class C shares were outstanding
during the fiscal year ended October 31, 1993.
Distribution expenses attributable to the sale of shares of the Fund will be
allocated to each class based upon the ratio of sales of each class to the sales
of all shares of the Fund other than expenses allocable to a particular class.
The distribution fee and sales charge of one class will not be used to subsidize
the sale of another class.
Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Trustees of the Fund, including a majority of the
Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
Trustees), vote annually to continue the Plan. Each Plan may be terminated at
any time by vote of a majority of the Rule 12b-1 Trustees or of a majority of
the outstanding shares of the applicable class of the Fund. The Fund will not be
obligated to pay expenses incurred under any plan if it is terminated or not
continued.
In addition to distribution and service fees paid by the Fund under the Class
A, Class B and Class C Plans, the Manager (or one of its affiliates) may make
payments to dealers and other persons who distribute shares of the Fund. Such
payments may be calculated by reference to the net asset value of the shares
sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc., governing maximum sales charges. See "Distributor" in
the Statement of Additional Information.
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PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker and/or futures commission merchant
for the Fund, provided that the commissions, fees or other remuneration it
receives are reasonable and fair. See "Portfolio Transactions and Brokerage" in
the Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02121, serves as Custodian for the Fund's portfolio securities and
cash and, in that capacity, maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. Its mailing address is P.O. Box
1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services, Inc., Raritan Plaza One, Edison, New Jersey
08837, serves as Transfer Agent and Dividend Disbursing Agent and in those
capacities maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE FUND'S NET ASSET VALUE OR NAV PER SHARE IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS, AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES OF THE FUND. NAV IS CALCULATED SEPARATELY FOR EACH
CLASS. THE TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF
THE FUND'S NAV TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Fund's Trustees. See "Net Asset Value" in the Statement of
Additional Information.
The Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Fund or days on which changes in the
value of the Fund's portfolio securities do not materially affect the NAV. The
New York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. See "Net Asset Value" in the Statement of
Additional Information.
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different NAVs and
dividends. As long as the Fund declares dividends daily, the NAV of the Class A,
Class B and Class C shares will generally be the same. It is expected, however,
that the Fund's dividends will differ by approximately the amount of the
distribution-related expense accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE ITS "YIELD" AND "TOTAL RETURN"
(INCLUDING "AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE" TOTAL RETURN) IN
ADVERTISEMENTS AND SALES LITERATURE. "YIELD" AND "TOTAL RETURN" ARE CALCULATED
SEPARATELY FOR CLASS A, CLASS B AND CLASS C SHARES. THESE FIGURES ARE BASED ON
HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The
"yield" refers to the income generated by an investment in the Fund over a
one-month or 30-day period. This income is then "annualized," that is, the
amount of income generated by the investment during that 30-day period is
assumed to be generated each 30-day period for twelve periods and is shown as a
percentage of the investment. The income
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earned on the investment is also assumed to be reinvested at the end of the
sixth 30-day period. The "total return" shows how much an investment in the Fund
would have increased (decreased) over a specified period of time (I.E., one,
five or ten years or since inception of the Fund) assuming that all
distributions and dividends by the Fund were reinvested on the reinvestment
dates during the period and less all recurring fees. The "aggregate" total
return reflects actual performance over a stated period of time. "Average
annual" total return is a hypothetical rate of return that, if achieved
annually, would have produced the same aggregate total return if performance had
been constant over the entire period. "Average annual" total return smooths out
variations in performance and takes into account any applicable initial or
contingent deferred sales charges. Neither "average annual" total return nor
"aggregate" total return takes into account any federal or state income taxes
which may be payable upon redemption. The Fund also may include comparative
performance information in advertising or marketing. Such performance
information may include data from Lipper Analytical Services, Inc., other
industry publications, business periodicals and market indices. See "Performance
Information" in the Statement of Additional Information. The Fund will include
performance data for each class of shares of the Fund in any advertisement or
information including performance data of the Fund. Further performance
information is contained in the Fund's annual and semi-annual reports to
shareholders, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE FUND HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A REGULATED
INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE FUND WILL
NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME AND CAPITAL
GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. See "Taxes" in the
Statement of Additional Information.
TAXATION OF SHAREHOLDERS
All dividends out of net investment income, together with distributions of
short-term capital gains, will be taxable as ordinary income to the shareholder
whether or not reinvested. Any net long-term capital gains (I.E., the excess of
net long-term capital gains over net short-term capital losses) distributed to
shareholders will be taxable as such to the shareholders, whether or not
reinvested and regardless of the length of time a shareholder has owned his or
her shares. The maximum long-term capital gains rate for individuals is 28%. The
maximum long-term capital gains rate for corporate shareholders is currently 35%
and is the same as the maximum corporate tax rate for ordinary income.
The Fund has obtained an opinion of counsel to the effect that the conversion
of Class B shares into Class A shares does not constitute a taxable event for
U.S. income tax purposes. However, such opinion is not binding on the Internal
Revenue Service.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Taxes" in the Statement of
Additional Information.
WITHHOLDING TAXES
Under U.S. Treasury Regulations, the Fund is required to withhold and remit to
the U.S. Treasury 31% of dividends, capital gain income and redemption proceeds
paid on the accounts of those shareholders who fail to furnish their tax
identification numbers on IRS Form W-9 (or IRS Form W-8 in the case of certain
foreign shareholders) with the required certifications regarding the
shareholder's status under the federal income tax law. Notwithstanding the
foregoing, dividends of net investment income and
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short-term capital gains to a foreign shareholder will generally be subject to
U.S. withholding tax at the rate of 30% (or lower treaty rate).
DIVIDENDS AND DISTRIBUTIONS
THE FUND EXPECTS TO DECLARE DIVIDENDS DAILY AND TO PAY DIVIDENDS OF NET
INVESTMENT INCOME, IF ANY, MONTHLY AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF
ANY NET CAPITAL GAINS. As of October 31, 1993, the Fund has a capital loss
carryforward for federal income tax purposes of approximately $9,319,000.
Accordingly, no capital gains distribution is expected to be paid to
shareholders until net gains have been realized in excess of such carryforward.
Dividends paid by the Fund with respect to each class of shares, to the extent
any dividends are paid, will be calculated in the same manner, at the same time,
on the same day and will be in the same amount except that each class will bear
its own distribution charges, generally resulting in lower dividends for Class B
and Class C shares. Distributions of capital gains, if any, will be in the same
amount for each class of shares. See "How the Fund Values its Shares."
Shares will begin earning daily dividends on the business day following the
settlement date. Shares continue to earn daily dividends until they are
redeemed. In the event an investor redeems all the shares in his or her account
at any time during the month, all daily dividends declared to the date of
redemption will be paid at the time of redemption.
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES, BASED ON
THE NET ASSET VALUE OF EACH CLASS ON THE PAYMENT DATE AND RECORD DATE,
RESPECTIVELY, OR SUCH OTHER DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE
SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE
PAYMENT DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election
should be submitted to Account Maintenance, P.O. Box 15015, New Brunswick, New
Jersey 08906-5015. If you hold shares through Prudential Securities, you should
contact your financial adviser to elect to receive dividends and distributions
in cash. The Fund will notify each shareholder after the close of the Fund's
taxable year both of the dollar amount and the taxable status of that year's
dividends and distributions on a per share basis.
WHEN THE FUND GOES "EX-DIVIDEND", ITS NAV IS REDUCED BY THE AMOUNT OF THE
DISTRIBUTION. IF YOU BUY SHARES JUST PRIOR TO THE EX-DIVIDEND DATE (WHICH
GENERALLY OCCURS FOUR BUSINESS DAYS PRIOR TO THE RECORD DATE), THE PRICE YOU PAY
WILL INCLUDE THE DISTRIBUTION AND A PORTION OF YOUR INVESTMENT WILL BE RETURNED
TO YOU AS A TAXABLE DISTRIBUTION. YOU SHOULD, THEREFORE, CONSIDER THE TIMING OF
DISTRIBUTIONS WHEN MAKING YOUR PURCHASES.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND IS AN OPEN-END INVESTMENT COMPANY WHICH WAS ORGANIZED UNDER THE LAWS
OF MASSACHUSETTS ON SEPTEMBER 22, 1986 AS AN UNINCORPORATED BUSINESS TRUST, A
FORM OF ORGANIZATION THAT IS COMMONLY CALLED A MASSACHUSETTS BUSINESS TRUST. THE
FUND IS AUTHORIZED TO ISSUE AN UNLIMITED NUMBER OF SHARES, DIVIDED INTO THREE
CLASSES, DESIGNATED CLASS A, CLASS B AND CLASS C. Each class of shares
represents an interest in the same assets of the Fund and is identical in all
respects except that (i) each class bears different distribution expenses, (ii)
each class has exclusive voting rights with respect to its distribution and
service plan (except that the Fund has agreed with the SEC in connection with
the offering of a conversion feature on Class B shares to submit any amendment
of the Class A Plan to both Class A and Class B shareholders), (iii) each class
has a different exchange privilege and (iv) only Class B shares have a
conversion feature. See "How the Fund is Managed--Distributor." The Fund has
received an order from the SEC permitting the issuance and sale of multiple
classes of shares. Currently, the Fund is offering three classes, designated
Class A, Class B and Class C shares. Pursuant to the
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Fund's Declaration of Trust, the Trustees may authorize the creation of
additional series of shares and classes within such series, with such
preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine.
The Trustees may increase or decrease the number of authorized shares. Shares
of the Fund, when issued, are fully paid, nonassessable, fully transferable and
redeemable at the option of the holder. Shares are also redeemable at the option
of the Fund under certain circumstances as described under "How to Sell Your
Shares." Each share of beneficial interest of each class is equal as to
earnings, assets and voting privileges; except as noted above, each class bears
the expenses related to the distribution of its shares. Except for the
conversion feature applicable to Class B shares, there are no conversion,
preemptive or other subscription rights. In the event of liquidation, each share
of the Fund is entitled to its portion of all of the Fund's assets after all
debt and expenses of the Fund have been paid. Since Class B and Class C shares
generally bear higher distribution expenses than Class A shares, the liquidation
proceeds to shareholders of those classes are likely to be lower than to Class A
shareholders. The Fund's shares do not have cumulative voting rights for the
election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS. SHAREHOLDERS
HAVE CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF
THE FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
Fund beyond the amount of their investment in the Fund, which is not the case
with a corporation. The Declaration of Trust of the Fund provides that
shareholders shall not be subject to any personal liability for the acts or
obligations of the Fund and that every written obligation, contract, instrument
or undertaking made by the Fund shall contain a provision to the effect that the
shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, PRUSEC, OR
DIRECTLY FROM THE FUND THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT) ATTENTION: INVESTMENT SERVICES, P.O.
BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The minimum initial investment
for Class A and Class B shares is $1,000 per class and $5,000 for Class C
shares. The minimum subsequent investment is $100 for all classes. All minimum
investment requirements are waived for certain retirement and employee savings
plans or custodial accounts for the benefit of minors. For purchases made
through the Automatic Savings Accumulation Plan, the minimum initial and
subsequent investment is $50. See "Shareholder Services."
THE PURCHASE PRICE IS THE NAV PER SHARE NEXT DETERMINED FOLLOWING RECEIPT OF
AN ORDER BY THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE
WHICH, AT YOUR OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS
A SHARES) OR (II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). SEE
"ALTERNATIVE PURCHASE PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES."
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Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a stock certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
The Fund reserves the right to reject any purchase order (including an
exchange) or to suspend or modify the continuous offering of its shares. See
"How to Sell Your Shares."
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
Transactions in Fund shares may be subject to postage and handling charges
imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company, Boston,
Massachusetts, Custody and Shareholder Services Division, Attention: Prudential
U.S. Government Fund, specifying on the wire the account number assigned by PMFS
and your name and identifying the sales charge alternative (Class A, Class B or
Class C shares).
If you arrange for receipt by State Street of Federal Funds prior to 4:15
P.M., New York time, on a business day, you may purchase shares of the Fund as
of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential U.S. Government
Fund, Class A, Class B or Class C shares and your name and individual account
number. It is not necessary to call PMFS to make subsequent purchase orders
utilizing Federal Funds. The minimum amount which may be invested by wire is
$1,000.
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS THREE CLASSES OF SHARES (CLASS A, CLASS B AND CLASS C SHARES)
WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE FOR YOUR
INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH OF TIME
YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES (ALTERNATIVE
PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE
DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
-------------------------------------- ----------------------- --------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 4% of 0.30 of 1% (Currently Initial sales charge waived or reduced
the public offering price being charged at a rate for certain purchases
of 0.15 of 1%)
CLASS B Maximum contingent deferred sales 1% (Currently being Shares convert to Class A shares
charge or CDSC of 5% of the lesser of charged at a rate of approximately seven years after
the amount invested or the redemption .90 of 1%) purchase
proceeds; declines to zero after six
years
CLASS C Maximum CDSC of 1% of the lesser of 1% (Currently being Shares do not convert to another class
the amount invested or the redemption charged at a rate of
proceeds on redemptions made within .75 of 1%)
one year of purchase
</TABLE>
The three classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive
23
<PAGE>
voting rights with respect to its plan (except as noted under the heading
"General Information--Description of Shares"), and (iii) only Class B shares
have a conversion feature. The three classes also have separate exchange
privileges. See "How to Exchange Your Shares" below. The income attributable to
each class and the dividends payable on the shares of each class will be reduced
by the amount of the distribution fee of each class. Class B and Class C shares
bear the expenses of a higher distribution fee which will generally cause them
to have higher expense ratios and to pay lower dividends than the Class A
shares.
Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) that Class B shares automatically convert to Class A
shares approximately seven years after purchase (see "Conversion Feature--Class
B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:
If you intend to hold your investment in the Fund for less than 7 years and do
not qualify for a reduced sales charge on Class A shares, since Class A shares
are subject to an initial sales charge of 4% and Class B shares are subject to a
CDSC of 5% which declines to zero over a 6 year period, you should consider
purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for 7 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 5 years in the case of Class B shares and 6 years in the case of Class
C shares] for the higher cumulative annual distribution-related fee on those
shares to exceed the initial sales charge plus cumulative annual
distribution-related fee on Class A shares. This does not take into account the
time value of money, which further reduces the impact of the higher Class B or
Class C distribution-related fee on the investment, fluctuations in net asset
value, the effect of the return on the investment over this period of time or
redemptions during which the CDSC is applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR,
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES.
SEE "REDUCTION AND WAIVER OF INITIAL SALES CHARGES" BELOW.
24
<PAGE>
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- --------------------------- ----------------- ----------------- -------------------
<S> <C> <C> <C>
$0 to $49,999 4.00% 3.75%
$50,000 to $99,999 3.50 3.25
$100,000 to $249,999 2.75 2.50
$250,000 to $499,999 2.00 1.90
$500,000 to $999,999 1.50 1.40
$1,000,000 and above* None None None
</TABLE>
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Recuced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Reduction and Waiver of Initial
Sales Charges -- Class A shares" in the Statement of Additional Information.
Class A shares may be purchased at NAV, without payment of an initial sales
charge, by pension, profit-sharing or other employee benefit plans qualified
under Section 401 of the Internal Revenue Code and deferred compensation and
annuity plans under Sections 457 and 403(b)(7) of the Internal Revenue Code
(Benefit Plans), provided that the plan has existing assets of at least $1
million invested in shares of Prudential Mutual Funds (excluding money market
funds other than those acquired pursuant to the exchange privilege) or 1,000
eligible employees or members. In the case of Benefit Plans whose accounts are
held directly with the Transfer Agent and for which the Transfer Agent does
individual account record keeping (Direct Account Benefit Plans) and Benefit
Plans sponsored by PSI or its subsidiaries (PSI or Subsidiary Prototype Benefit
Plans), Class A shares may be purchased at NAV by participants who are repaying
loans made from such plans to the participant. Additional information concerning
the reduction and waiver of initial sales charges is set forth in the Statement
of Additional Information.
In addition, Class A shares may be purchased at NAV, through Prudential
Securities or the Transfer Agent, by the following persons: (a) Directors and
officers of the Fund and other Prudential Mutual Funds, (b) employees of
Prudential Securities and PMF and their subsidiaries and members of the families
of such persons who maintain an "employee related" account at Prudential
Securities or the Transfer Agent, (c) employees and special agents of Prudential
and its subsidiaries and all persons who have retired directly from active
service with Prudential or one of its subsidiaries, (d) registered
representatives and employees of dealers who have entered into a selected dealer
agreement with Prudential Securities provided that purchases at NAV are
permitted by such person's employer and (e) investors who have a business
relationship with a financial adviser who joined Prudential Securities from
another investment firm, provided that (i) the purchase is made within 90 days
of the commencement of the financial adviser's employment at Prudential
Securities, (ii) the purchase is made with proceeds of a redemption of shares of
any open-end, non-money market fund sponsored by the financial adviser's
previous employer (other than a fund which imposes a distribution or service fee
of .25 of 1% or less) on which no deferred sales load, fee or other charge was
imposed on redemption and (iii) the financial adviser served as the client's
broker on the previous purchases.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
purchased upon the reinvestment of dividends and distributions. See "Purchase
and Redemption of Fund Shares--Reduction and Waiver of Initial Sales
Charges--Class A Shares" in the Statement of Additional Information.
25
<PAGE>
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV per share next determined
following receipt of an order by the Transfer Agent or Prudential Securities.
Although there is no sales charge imposed at the time of purchase, redemptions
of Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges."
HOW TO SELL YOUR SHARES
YOU CAN REDEEM SHARES OF THE FUND AT ANY TIME FOR CASH AT THE NAV PER SHARE
NEXT DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. See "How the Fund Values its Shares."
In certain cases, however, redemption proceeds will be reduced by the amount of
any applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST REDEEM
YOUR SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER. IF YOU
HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION SIGNED BY
YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD CERTIFICATES,
THE CERTIFICATES SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES,
MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION REQUEST TO BE
PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR
FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST
BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and
documents concerning redemptions should be sent to the Fund in care of its
Transfer Agent, Prudential Mutual Fund Services, Inc., Attention: Redemption
Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Prudential Preferred Financial Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. Such payment may be postponed or the right of
redemption suspended at times (a) when the New York Stock Exchange is closed for
other than customary weekends and holidays, (b) when trading on such Exchange is
restricted, (c) when an emergency exists as a result of which disposal by the
Fund of securities owned by it is not reasonably practicable or it is not
reasonably practicable for the Fund fairly to determine the value of its net
assets, or (d) during any other period when the SEC, by order, so permits;
provided that applicable rules and regulations of the SEC shall govern as to
whether the conditions prescribed in (b), (c) or (d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Fund, in lieu of cash, in conformity with applicable rules of the SEC.
Securities will be readily marketable and will be valued in the same manner as
in a regular redemption. See "How the Fund Values its Shares." If your shares
are redeemed in kind, you would incur transaction costs in converting the assets
into cash.
26
<PAGE>
The Fund, however, has elected to be governed by Rule 18f-1 under the Investment
Company Act, under which the Fund is obligated to redeem shares solely in cash
up to the lesser of $250,000 or 1% of the net asset value of the Fund during any
90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a net asset
value of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any involuntary redemption.
30-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege you may reinvest any portion or all of the
proceeds of such redemption in shares of the Fund at the NAV next determined
after the order is received, which must be within 30 days after the date of the
redemption. No sales charge will apply to such repurchases. You will receive PRO
RATA credit for any contingent deferred sales charge paid in connection with the
redemption of your shares. You must notify the Fund's Transfer Agent, either
directly or through Prudential Securities or Prusec, at the time the repurchase
privilege is exercised that you are entitled to credit for the contingent
deferred sales charge previously paid. Exercise of the repurchase privilege will
generally not affect federal income tax treatment of any gain realized upon
redemption. If the redemption resulted in a loss, some or all of the loss,
depending on the amount reinvested, will not be allowed for federal income tax
purposes.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares to an amount which is lower than the amount of
all payments by you for shares during the preceding six years, in the case of
Class B shares, and one year, in the case of Class C shares. A CDSC will be
applied on the lesser of the original purchase price or the current value of the
shares being redeemed. Increases in the value of your shares or shares purchased
through reinvestment of dividends or distributions are not subject to a CDSC.
The amount of any contingent deferred sales charge will be paid to and retained
by the Distributor. See "How the Fund is Managed--Distributor" and "Waiver of
the Contingent Deferred Sales Charges" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month.
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES
CHARGE AS A PERCENTAGE
OF DOLLARS INVESTED OR
YEAR SINCE PURCHASE PAYMENT MADE REDEMPTION PROCEEDS
- ---------------------------------------------------------------------- ------------------------
<S> <C>
First................................................................. 5.0%
Second................................................................ 4.0%
Third................................................................. 3.0%
Fourth................................................................ 2.0%
Fifth................................................................. 1.0%
Sixth................................................................. 1.0%
Seventh............................................................... None
</TABLE>
27
<PAGE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Fund shares made during the preceding six years
(five years for shares purchased prior to January 22, 1990); then of amounts
representing the cost of shares held beyond the applicable CDSC period; and
finally, of amounts representing the cost of shares held for the longest period
of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), or a trust, at the time of death or initial
determination of disability, provided that the shares were purchased prior to
death or disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include a lump-sum or other distribution
after retirement, or for an IRA or Section 403(b) custodial account, after
attaining age 59 1/2, a tax-free return of an excess contribution or plan
distributions following the death or disability of the shareholder (provided
that the shares were purchased prior to death or disability). The waiver does
not apply in the case of a tax-free rollover or transfer of assets, other than
one following a separation from service. In the case of Direct Account and PSI
or Subsidiary prototype Benefit Plans, the CDSC will be waived on redemptions
which represent borrowings from such plans. Shares purchased with amounts used
to repay a loan from such plans on which a CDSC was not previously deducted will
thereafter be subject to a CDSC without regard to the time such amounts were
previously invested. In the case of a 401(k) plan, the CDSC will also be waived
upon the redemption of shares purchased with amounts used to repay loans made
from the account to the participant and from which a CDSC was previously
deducted.
In addition, the CDSC will also be waived on redemptions of shares held by
Trustees of the Fund.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec, at the time of redemption, that you are entitled to waiver
of the CDSC. The waiver will be granted subject to confirmation of your
entitlement.
A quantity discount may apply to redemptions of Class B shares purchased prior
to __________, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to _______, 1994" in the Statement of
Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will occur during
the month following each calendar quarter and will be effected at relative net
asset value without the imposition of any additional sales charge. It is
currently anticipated that conversions will occur on the first Friday of the
month following each calendar quarter or, if not a business day, on the next
Friday of the month.
28
<PAGE>
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares then in your account. Each time any Eligible Shares in
your account convert to Class A shares, all shares or amounts representing Class
B shares then in your account that were acquired through the automatic
reinvestment of dividends and other distributions will convert to Class A
shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (i.e., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange, or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares. It is
currently anticipated that the first conversion of Class B shares will occur in
or about January, 1995. At that time all amounts representing Class B shares
then outstanding beyond the applicable conversion period will automatically
convert to Class A shares together with all shares or amounts representing Class
B shares acquired through the automatic reinvestment of dividends and
distributions then held in your account.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B, and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code and
(ii) that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Fund will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND, YOU HAVE AN EXCHANGE PRIVILEGE WITH CERTAIN
OTHER PRUDENTIAL MUTUAL FUNDS, INCLUDING ONE OR MORE SPECIFIED MONEY MARKET
FUNDS, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A,
CLASS B AND CLASS C SHARES OF THE FUND MAY BE EXCHANGED FOR CLASS A, CLASS B AND
CLASS C SHARES, RESPECTIVELY, OF ANOTHER FUND ON THE BASIS OF THE RELATIVE NAV.
Any applicable CDSC payable upon the redemption of shares
29
<PAGE>
exchanged will be that imposed by the Fund in which shares were initially
purchased and will be calculated from the first day of the month after the
initial purchase, excluding the time shares were held in a money market fund.
Class B and Class C shares may not be exchanged into money market funds other
than Prudential Special Money Market Fund. For purposes of calculating the
holding period applicable to the Class B conversion feature, the time period
during which Class B shares were held in a money market fund will be excluded.
See "Conversion Feature--Class B Shares" above. If your investment in shares of
Prudential Mutual Funds (excluding money market funds other than those acquired
pursuant to the exchange privilege) reach $1 million and you then hold Class B
and/or Class C shares of the Fund which are free of CDSC, you will be so
notified and offered the opportunity to exchange those shares for Class A shares
of the Fund without the imposition of any sales charge. In the case of tax-
exempt shareholders, if no response is received within 60 days of the mailing of
such notice, eligible Class B and/or Class C shares will be automatically
exchanged for Class A shares. All other shareholders must affirmatively elect to
have their eligible Class B and/or Class C shares exchanged for Class A shares.
An exchange will be treated as a redemption and purchase for tax purposes. See
"Shareholder Investment Account--Exchange Privilege" in the Statement of
Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE THE TELEPHONE
EXCHANGE PRIVILEGE ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE
TRANSFER AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter you may call
the Fund at (800) 225-1852 to execute a telephone exchange of shares, weekdays,
except holidays, between the hours of 8:00 a.m. and 6:00 p.m., New York time.
For your protection and to prevent fraudulent exchanges, your telephone call
will be recorded and you will be asked to provide your personal identification
number. A written confirmation of the exchange transaction will be sent to you.
NEITHER THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST
WHICH RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE
UNDER THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds next determined after the request is received in
good order. The Exchange Privilege is available only in states where the
exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES YOU MAY EXCHANGE YOUR SHARES
BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES."
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED ABOVE.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in the Fund, you can
take advantage of the following additional services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends or distributions are automatically
reinvested in full and fractional shares of the Fund at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
30
<PAGE>
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make regular
purchases of the Fund's shares in amounts as little as $50 via an automatic
debit to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec registered representative or the
Transfer Agent directly.
- TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the Distributor. These plans are for use by both
self-employed individuals and corporate employers. These plans permit either
self-direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from Prudential Securities or the
Transfer Agent. If you are considering adopting such a plan, you should consult
with your own legal or tax adviser with respect to the establishment and
maintenance of such a plan.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks in any amount, not
less than $100 (which amount is not necessarily recommended). Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges."
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at One Seaport
Plaza, New York, New York 10292. In addition, monthly unaudited financial data
is available from the Fund upon request.
- SHAREHOLDER INQUIRIES. Shareholder inquiries should be addressed to the Fund
at One Seaport Plaza, New York, New York 10292, or by telephone, at (800)
225-1852 (toll-free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
31
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec registered representative or telephone
the Funds at (800) 225-1852 for a free prospectus. Read the prospectus carefully
before you invest or send money.
TAXABLE BOND FUNDS
Prudential Adjustable Rate Securities Fund, Inc.
Prudential GNMA Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
__Conservatively Managed Portfolio
__Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible-R- Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Strategist Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
- - TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
- - TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- - COMMAND FUNDS
Command Money Fund
Command Government Securities Fund
Command Tax-Free Fund
- - INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
FUND HIGHLIGHTS...................................................... 2
FUND EXPENSES........................................................ 4
FINANCIAL HIGHLIGHTS................................................. 5
HOW THE FUND INVESTS................................................. 6
Investment Objective and Policies.................................. 6
Other Investments.................................................. 8
Other Investment Information....................................... 15
Investment Restrictions............................................ 16
HOW THE FUND IS MANAGED.............................................. 16
Manager............................................................ 16
Distributor........................................................ 17
Portfolio Transactions............................................. 19
Custodian and Transfer and Dividend Disbursing Agent............... 19
HOW THE FUND VALUES ITS SHARES....................................... 19
HOW THE FUND CALCULATES PERFORMANCE.................................. 19
TAXES, DIVIDENDS AND DISTRIBUTIONS................................... 20
GENERAL INFORMATION.................................................. 21
Description of Shares.............................................. 21
Additional Information............................................. 22
SHAREHOLDER GUIDE.................................................... 22
How to Buy Shares of the Fund...................................... 22
Alternative Purchase Plan.......................................... 23
How to Sell Your Shares............................................ 26
Conversion Feature................................................. 28
How to Exchange Your Shares........................................ 29
Shareholder Services............................................... 30
THE PRUDENTIAL MUTUAL FUND FAMILY.................................... A-1
</TABLE>
-------------------------------------------
130A 440134B
Class A: 743914202
CUSIP Nos.:
Class B: 743914103
Class C:
PRUDENTIAL
U.S. GOVERNMENT
FUND
- -------------------
[LOGO]
<PAGE>
PRUDENTIAL U.S. GOVERNMENT FUND
STATEMENT OF ADDITIONAL INFORMATION
DATED , 1994
Prudential U.S. Government Fund (the Fund) is an open-end, diversified
management investment company, or mutual fund, whose investment objective is to
seek a high total return (capital appreciation plus high current income). The
Fund will seek to achieve this objective primarily by investing in U.S.
Government securities, including U.S. Treasury Bills, Notes and Bonds and other
debt securities issued by the U.S. Treasury, and obligations issued or
guaranteed by U.S. Government agencies or instrumentalities. The Fund may also
purchase and sell put and call options on U.S. Government securities and engage
in transactions involving futures contracts on U.S. Government securities and
options on such futures.
The Fund's address is One Seaport Plaza, New York, New York 10292, and its
telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus, dated , 1994, a copy of
which may be obtained from the Fund at the address noted above.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CROSS-REFERENCE TO
PAGE PAGE IN PROSPECTUS
--------- -------------------
<S> <C> <C>
Additional Investment Information................................................................ B-2 6
Investment Restrictions.......................................................................... B-8 16
Trustees and Officers............................................................................ B-9 16
Manager.......................................................................................... B-12 16
Distributor...................................................................................... B-13 17
Portfolio Transactions and Brokerage............................................................. B-15 18
Purchase and Redemption of Fund Shares........................................................... B-16 22
Shareholder Investment Account................................................................... B-18 29
Net Asset Value.................................................................................. B-21 19
Performance Information.......................................................................... B-22 19
Taxes............................................................................................ B-24 20
Organization and Capitalization.................................................................. B-26 21
Custodian, Transfer and Dividend Disbursing Agent and Independent Accountants.................... B-27 19
Financial Statements............................................................................. B-28 --
Independent Auditors' Report..................................................................... B-35 --
Appendix......................................................................................... A-1 --
</TABLE>
- --------------------------------------------------------------------------------
130B 4401359
<PAGE>
ADDITIONAL INVESTMENT INFORMATION
The Fund's investment objective is to seek a high total return (capital
appreciation plus high current income). The Fund will seek to achieve this
objective primarily by investing in U.S. Government securities, including U.S.
Treasury Bills, Notes, Bonds and other debt securities issued by the U.S.
Treasury and obligations issued or guaranteed by U.S. Government agencies or
instrumentalities.
MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT INSTRUMENTALITIES
Mortgages backing the securities purchased by the Fund include conventional
thirty year fixed rate mortgages, graduated payment mortgages, fifteen year
mortgages, adjustable rate mortgages and balloon payment mortgages. A balloon
payment mortgage-backed security is an amortized mortgage security with
installments of principal and interest, the last installment of which is
predominately principal. All of these mortgages can be used to create
pass-through securities. A pass-through security is formed when mortgages are
pooled together and undivided interests in the pool or pools are sold. The cash
flow from the mortgages is passed through to the holders of the securities in
the form of periodic payments of interest, principal and prepayments (net of a
service fee). Prepayments occur when the holder of an individual mortgage
prepays the remaining principal before the mortgage's scheduled maturity date.
As a result of the pass-through of prepayments of principal on the underlying
securities, mortgage-backed securities are often subject to more rapid
prepayment of principal than their stated maturity would indicate. Because the
prepayment characteristics of the underlying mortgages vary, it is not possible
to predict accurately the realized yield or average life of a particular issue
of pass-through certificates. Prepayment rates are important because of their
effect on the yield and price of the securities. Accelerated prepayments
adversely impact yields for pass-throughs purchased at a premium. The opposite
is true for pass-throughs purchased at a discount.
GNMA CERTIFICATES. Certificates of the Government National Mortgage
Association (GNMA Certificates) are mortgage-backed securities, which evidence
an undivided interest in a pool or pools of mortgages. GNMA Certificates that
the Fund purchases are the "modified pass-through" type, which entitle the
holder to receive timely payment of all interest and principal payments due on
the mortgage pool, net of fees paid to the "issuer" and the Government National
Mortgage Association (GNMA), regardless of whether or not the mortgagor actually
makes the payment. The GNMA Certificates will represent a PRO RATA interest in
one or more pools of the following types of mortgage loans: (i) fixed rate level
payment mortgage loans; (ii) fixed rate graduated payment mortgage loans; (iii)
fixed rate growing equity mortgage loans: (iv) fixed rate mortgage loans secured
by manufactured (mobile) homes; (v) mortgage loans on multifamily residential
properties under construction; (vi) mortgage loans on completed multifamily
projects; (vii) fixed rate mortgage loans as to which escrowed funds are used to
reduce the borrower's monthly payments during the early years of the mortgage
loans ("buydown" mortgage loans); (viii) mortgage loans that provide for
adjustments in payments based on periodic changes in interest rates or in other
payment terms of the mortgage loans; and (ix) mortgage-backed serial notes. All
of these mortgage loans will be FHA Loans or VA Loans and, except as otherwise
specified above, will be fully-amortizing loans secured by first liens on
one-to-four-family housing units.
GNMA GUARANTEE. The National Housing Act authorizes GNMA to guarantee the
timely payment of principal and interest on securities backed by a pool of
mortgages insured by the Federal Housing Administration (FHA) or the Farmers'
Home Administration (FMHA), or guaranteed by the Veterans Administration (VA).
The GNMA guarantee is backed by the full faith and credit of the United States.
The GNMA is also empowered to borrow without limitation from the U.S. Treasury
if necessary to make any payments required under its guarantee.
LIFE OF GNMA CERTIFICATES. The average life of a GNMA Certificate is likely
to be substantially shorter than the original maturity of the mortgages
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will usually result in the return of the greater part of principal
investment long before the maturity of the mortgages in the pool. Foreclosures
impose no risk to principal investment because of the GNMA guarantee, except to
the extent that the Fund has purchased the certificates above par in the
secondary market.
FHLMC SECURITIES. The Federal Home Loan Mortgage Corporation (FHLMC) was
created in 1970 through enactment of Title III of the Emergency Home Finance Act
of 1970. Its purpose is to promote development of a nationwide secondary market
in conventional residential mortgages.
B-2
<PAGE>
The FHLMC issues two types of mortgage pass-through securities, mortgage
participation certificates (PCs) and guaranteed mortgage certificates (GMCs).
PCs resemble GNMA Certificates in that each PC represents a PRO RATA share of
all interest and principal payments made and owed on the underlying pool. The
FHMLC guarantees timely monthly payment of interest on PCs and the ultimate
payment of principal.
GMCs also represent a PRO RATA interest in a pool of mortgages. However,
these instruments pay interest semi-annually and return principal once a year in
guaranteed minimum payments. The expected average life of these securities is
approximately ten years.
FNMA SECURITIES. The Federal National Mortgage Association (FNMA) was
established in 1938 to create a secondary market in mortgages insured by the
FHA.
FNMA issues guaranteed mortgage pass-through certificates (FNMA
Certificates). FNMA Certificates resemble GNMA Certificates in that each FNMA
Certificate represents a PRO RATA share of all interest and principal payments
made and owed on the underlying pool. FNMA guarantees timely payment of interest
on FNMA Certificates and principal.
ADJUSTABLE RATE MORTGAGE SECURITIES. The Fund will invest in adjustable rate
mortgage securities (ARMs), which are pass-through mortgage securities
collateralized by mortgages with adjustable rather than fixed rates. Generally,
ARMs have a specified maturity date and amortize principal over their life. In
periods of declining interest rates, there is a reasonable likelihood that ARMs
will experience increased rates of prepayment of principal. However, the major
difference between ARMs and fixed rate mortgage securities is that the interest
rate and the rate of amortization of principal of ARMs can and do change in
accordance with movements in a particular, pre-specified, published interest
rate index.
The amount of interest on an ARM is calculated by adding a specified amount,
the "margin," to the index, subject to limitations on the maximum and minimum
interest that can be charged to the mortgagor during the life of the mortgage or
to maximum and minimum changes to that interest rate during a given period.
Because the interest rate on ARMs generally moves in the same direction as
market interest rates, the market value of ARMs tends to be more stable than
that of long-term fixed rate securities.
There are two main categories of indices which serve as benchmarks for
periodic adjustments to coupon rates on ARMs; those based on U.S. Treasury
securities and those derived from a calculated measure such as a cost of funds
index or a moving average of mortgage rates. Commonly utilized indices include
the one-year and five-year constant maturity Treasury Note rates, the
three-month Treasury Bill rate, the 180-day Treasury Bill rate, rates on
longer-term Treasury securities, the 11th District Federal Home Loan Bank Cost
of Funds, the National Median Cost of Funds, the one-month or three-month London
Interbank Offered Rate (LIBOR), the prime rate of a specific bank, or commercial
paper rates. Some indices, such as the one-year constant maturity Treasury Note
rate, closely mirror changes in market interest rate levels. Others, such as the
11th District Home Loan Bank Cost of Fund index (often related to ARMs issued by
FNMA), tend to lag changes in market rate levels and tend to be somewhat less
volatile.
COLLATERALIZED MORTGAGE OBLIGATIONS
Certain issuers of mortgage-backed obligations (CMOs), including certain
CMOs that have elected to be treated as Real Estate Mortgage Investment Conduits
(REMICs), are not considered investment companies pursuant to a rule recently
adopted by the Securities and Exchange Commission (SEC), and the Fund may invest
in the securities of such issuers without the limitations imposed by the
Investment Company Act of 1940 (the Investment Company Act) on investments by
the Fund in other investment companies. In addition, in reliance on an earlier
SEC interpretation, the Fund's investments in certain other qualifying CMOs,
which cannot or do not rely on the rule, are also not subject to the limitation
of the Investment Company Act on acquiring interests in other investment
companies. In order to be able to rely on SEC's interpretation, these CMOs must
be unmanaged, fixed asset issuers, that (a) invest primarily in mortgage-backed
securities, (b) do not issue redeemable securities, (c) operate under general
exemptive orders exempting them from all provisions of the Investment Company
Act and (d) are not registered or regulated under the Investment Company Act as
investment companies. To the extent that the Fund selects CMOs or REMICs that
cannot rely on the Rule or do not meet the above requirements, the Fund may not
invest more than 10% of its assets in all such entities and may not acquire more
than 3% of the voting securities of any single such entity.
B-3
<PAGE>
OTHER SECURITIES
The Fund will invest in obligations of foreign banks and foreign branches of
U.S. banks only if after giving effect to such investment all such investments
would constitute less than 10% of the Fund's total assets (determined at the
time of investment). Investing in securities of foreign companies in foreign
countries involves certain considerations and risks which are not typically
associated with investing in U.S. Government securities and those of domestic
companies. Foreign companies are not generally subject to uniform accounting,
auditing and financial standards and requirements comparable to those applicable
to U.S. companies. There may be less publicly available information about
foreign companies and governments compared to reports and ratings published
about U.S. companies. Securities of some foreign companies are less liquid and
more volatile than securities of comparable U.S. companies, and brokerage
commissions and other transaction costs on foreign securities exchanges are
generally higher than in the United States.
OPTIONS TRANSACTIONS AND RELATED RISKS
The Fund may purchase put and call options and sell covered put or covered
call options which are traded on registered securities exchanges (the Exchanges)
and may also engage in options transactions with primary U.S. Government
securities dealers recognized by the Federal Reserve Bank of New York (OTC
Options). The purchaser of a call option has the right, for a specified period
of time, to purchase the securities subject to the option at a specified price
(the exercise price). By writing a call option, the Fund becomes obligated
during the term of the option, upon exercise of the option, to sell the
underlying securities to the purchaser against receipt of the exercise price.
Conversely, the purchaser of a put option has the right, for a specified period
of time, to sell the securities subject to the option to the writer of the put
at a specified exercise price. By writing a put option, the Fund becomes
obligated during the term of the option to purchase the securities underlying
the option at the exercise price, upon exercise of the option.
The principal reason for writing options on a securities portfolio is to
attempt to realize, through the receipt of premiums, a greater return than would
be realized on the underlying securities alone. In return for the premium, the
covered call option writer gives up the opportunity for profit from a price
increase in the underlying security above the exercise price so long as the
option remains open, but retains the risk of loss should the price of the
security decline. Conversely, the put option writer gains a profit, in the form
of the premium, so long as the price of the underlying security remains above
the exercise price, but assumes an obligation to purchase the underlying
security from the buyer of the put option at the exercise price, even though the
security may fall below the exercise price, at any time during the option
period. If an option expires, the writer realizes a gain in the amount of the
premium. Such a gain may, in the case of a covered call option, be offset by a
decline in the market value of the underlying security during the option period.
If a call option is exercised, the writer realizes a gain or loss from the sale
of the underlying security. If a put option is exercised, the writer must
fulfill his obligation to purchase the underlying security at the exercise
price, which will usually exceed the market value of the underlying security at
that time.
The Fund writes only "covered" options. This means that so long as the Fund
is obligated as the writer of a call option, it will (a) own the underlying
securities subject to the option, except that, in the case of call options on
U.S. Treasury Bills, the Fund might own U.S. Treasury Bills of a different
series from those underlying the call option, but with a principal amount and
value corresponding to the option contract amount and a maturity date no later
than that of the securities deliverable under the call option, (b) have an
absolute and immediate right to acquire the securities subject to the option
without additional cash consideration upon conversion or exchange of other
securities held in its portfolio, (c) hold a call option on the same security
with an exercise price no higher than the exercise price of the call sold or, if
higher, the Fund deposits and maintains the differential in cash, U.S.
Government securities or other liquid high-grade debt obligations in a
segregated account with its custodian, State Street Bank and Trust Company (the
Custodian), or (d) deposit and maintain with its Custodian in a segregated
account cash, U.S. Government securities or other liquid high-grade debt
obligations having a value at least equal to the fluctuating market value of the
securities underlying the call. The Fund will be considered "covered" with
respect to a put option it writes if, so long as the Fund is obligated as the
writer of a put option, it will (a) deposit and maintain with its Custodian in a
segregated account cash, U.S. Government securities or other liquid high-grade
debt obligations having a value equal to or greater than the exercise price of
the option or (b) own a put option on the same security with an exercise price
the same or higher than the exercise price of the put option sold or, if lower,
deposit and maintain the differential in cash, U.S. Government securities or
other liquid high-grade debt obligations in a segregated account with its
Custodian.
So long as the obligation of the writer continues, the writer may be
assigned an exercise notice by the broker-dealer through whom the option was
sold. The exercise notice would require the writer to deliver, in the case of a
call, or take delivery of, in the
B-4
<PAGE>
case of a put, the underlying security against payment of the exercise price.
This obligation terminates upon expiration of the option, or at such earlier
time that the writer effects a closing purchase transaction by purchasing an
option covering the same underlying security and having the same exercise price
and expiration date (of the same series) as the one previously sold. Once an
option has been exercised, the writer may not execute a closing purchase
transaction. To secure the obligation to deliver the underlying security in the
case of a call option, the writer of the option is required to pledge for the
benefit of the broker the underlying security or other assets in accordance with
the rules of the Options Clearing Corporation (the OCC), an institution created
to interpose itself between buyers and sellers of options. Technically, the OCC
assumes the other side of every purchase and sale transaction on an Exchange
and, by doing so, guarantees the transaction.
To the extent that a secondary market is available on the Exchanges, the
covered option writer may close out options it has written prior to the
assignment of an exercise notice by purchasing, in a closing purchase
transaction, an option covering the same underlying security and having the same
exercise price and expiration date (of the same series) as the option previously
written. If the cost of such a closing purchase, plus transaction costs, is
greater than the premium received upon writing the original option, the writer
will incur a loss in the transaction.
The Fund may also write straddles (I.E., a combination of a call and a put
written on the same security at the same strike price where the same issue of
the security is considered "cover" for both the put and the call). In such
cases, the Fund will also segregate or deposit cash, U.S. Government securities
or liquid high-grade obligations equivalent to the amount, if any, by which the
put is "in the money". It is contemplated that the Fund's use of straddles will
be limited to 5% of the Fund's net assets (meaning that the securities used for
cover or segregated as described above will not exceed 5% of the Fund's net
assets at the time the straddle is written).
SPECIAL CONSIDERATIONS APPLICABLE TO OPTIONS
ON TREASURY BONDS AND NOTES. Because trading interest in Treasury Bonds and
Notes tends to center on the most recently auctioned issues, the Exchanges will
not indefinitely continue to introduce new series of options with expirations to
replace expiring options on particular issues. Instead, the expirations
introduced at the commencement of options trading on a particular issue will be
allowed to run their course, with the possible addition of a limited number of
new expirations as the original ones expire. Options trading on each series of
Bonds or Notes will thus be phased out as new options are listed on the more
recent issues, and a full range of expiration dates will not ordinarily be
available for every series on which options are traded.
ON TREASURY BILLS. Because the deliverable Treasury Bill changes from week
to week, writers of Treasury Bill call options cannot provide in advance for
their potential exercise settlement obligations by acquiring and holding the
underlying security. However, if the Fund holds a long position in Treasury
Bills with a principal amount corresponding to the option contract size, the
Fund may be hedged from a risk standpoint. In addition, the Fund will maintain
in a segregated account with its Custodian Treasury Bills maturing no later than
those which would be deliverable in the event of an assignment of an exercise
notice to ensure that it can meet its open option obligations.
ON GNMA CERTIFICATES. Options on GNMA Certificates are not currently traded
on any Exchange. However, the Fund engages in transactions in OTC Options on
GNMA Certificates. Since the remaining principal balance of GNMA Certificates
declines each month as a result of mortgage payments, the Fund, as a writer of a
covered GNMA call holding GNMA Certificates as "cover" to satisfy its delivery
obligation in the event of assignment of an exercise notice, may find that its
GNMA Certificates no longer have a sufficient remaining principal balance for
this purpose. Should this occur, the Fund will enter into a closing purchase
transaction or will purchase additional GNMA Certificates from the same pool (if
obtainable) or replacement GNMA Certificates in the cash market in order to
remain covered.
RISKS PERTAINING TO THE EXCHANGE-TRADED OPTION SECONDARY MARKET. An
Exchange-traded option position may be closed out only on an Exchange which
provides a secondary market for an option of the same series. Although the Fund
will generally purchase or write only those options for which there appears to
be an active secondary market, there is no assurance that a liquid secondary
market on an Exchange will exist for any particular option at any particular
time, and for some options no secondary market on an Exchange may exist. In such
event, it might not be possible to effect closing transactions in particular
options, with the result that the Fund would have to exercise its options in
order to realize any profit and may incur transaction costs in connection
therewith. If the Fund, as a covered call option writer, is unable to effect a
closing purchase transaction in a secondary market, it will not be able to sell
the underlying security until the option expires or the Fund delivers the
underlying security upon exercise.
B-5
<PAGE>
Reasons for the absence of a liquid secondary market on an Exchange include
the following: (a) insufficient trading interest in certain options; (b)
restrictions on transactions imposed by an Exchange; (c) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities; (d) interruption of the normal
operations on an Exchange; (e) inadequacy of the facilities of an Exchange or
the OCC to handle current trading volume; or (f) a decision by one or more
Exchanges to discontinue the trading of options (or a particular class or series
of options), in which event the secondary market on that Exchange (or in that
class or series of options) would cease to exist, although outstanding options
on that Exchange that had been issued by the OCC as a result of trades on that
Exchange would generally continue to be exercisable in accordance with their
terms.
The hours of trading for options on U.S. Government securities may not
conform to the hours during which the underlying securities are traded. To the
extent that the option markets close before the markets for the underlying
securities, significant price and rate movements may take place in the
underlying markets that will not be reflected in the option markets.
FUTURES CONTRACTS ON U.S. GOVERNMENT SECURITIES
Currently, futures contracts on U.S. Government securities (futures
contracts or futures) can be purchased and sold with respect to U.S. Treasury
Bonds, U.S. Treasury Notes and GNMA Certificates on the Chicago Board of Trade,
with respect to U.S. Treasury Bonds and Notes on the MidAmerica Commodity
Exchange, and with respect to U.S. Treasury Bills on the International Monetary
Market Division of the Chicago Mercantile Exchange. Eurodollar futures contracts
are currently traded on the Chicago Mercantile Exchange. They enable purchasers
to obtain a fixed rate for the lending of funds and sellers to obtain a fixed
rate for borrowings. The Fund would use Eurodollar futures contracts and options
thereon to hedge against changes in LIBOR, to which many interest rate swaps are
linked. See the discussion of "Options Transactions and Related Risks."
The Fund neither pays nor receives money upon the sale of a futures
contract. Instead, when the Fund enters into a futures contract, it will
initially be required to deposit with its Custodian for the benefit of the
futures broker an amount of "initial margin" of cash or U.S. Treasury Bills,
which currently ranges from 1/10 of 1% to 4% of the contract amount, depending
on the type of contract. Initial margin in futures transactions is different
from margin in securities transactions in that futures contract initial margin
does not involve the borrowing of funds by the customer to finance the
transactions. Rather, initial margin is in the nature of a good faith deposit on
the contract which is returned to the Fund upon termination of the futures
contract, assuming all contractual obligations have been satisfied. Subsequent
payments, called variation margin, to and from the futures broker are made on a
daily basis as the market price of the futures contract fluctuates. At any time
prior to expiration of the futures contract, the Fund may elect to close the
position by taking an offsetting position which will operate to terminate the
Fund's position in the futures contract. While futures contracts on U.S.
Government securities provide for the delivery and acceptance of securities,
most futures contracts are terminated by entering into offsetting transactions.
The Fund may purchase put and call options on futures contracts and sell
"covered" put and call options on futures contracts that are traded on U.S.
commodity exchanges. The Fund is considered "covered" with respect to a call
option it writes on a futures contract if it (a) owns a long position in the
underlying futures contract, (b) owns a security which is deliverable under the
futures contract, or (c) owns a separate call option to purchase the same
futures contract at a price no higher than the exercise price of the call option
written by the Fund or, if higher, the Fund deposits and maintains the
differential in cash, U.S Government securities or other liquid high-grade debt
obligations in a segregated account with its Custodian. The Fund will be
considered "covered" with respect to a put option it writes on a futures
contract if it (a) segregates and maintains with its Custodian cash, U.S.
Government securities or other liquid high-grade debt obligations at all times
equal in value to the exercise price of the put (less any related margin
deposited), or (b) owns a put option on the same futures contract with an
exercise price as high or higher than the price of the contract held by the Fund
or, if lower, the Fund deposits and maintains the differential in cash, U.S.
Government securities or other liquid high-grade debt obligations in a
segregated account with its Custodian. There is no limitation on the amount of
the Fund's assets which can be placed in the segregated accounts.
RISKS PERTAINING TO THE FUTURES MARKETS. Successful use of futures contracts
and options thereon by the Fund is subject to the ability of the Fund's
investment adviser to predict correctly movements in the direction of interest
rates and other factors affecting markets for securities. For example, if the
Fund has hedged against the possibility of an increase in interest rates which
would adversely affect the price of securities in its portfolio and the price of
such securities increases instead, the Fund will lose part or all of the benefit
of the increased value of its securities because it will have offsetting losses
in its futures positions. In
B-6
<PAGE>
addition, in such situations, if the Fund has insufficient cash to meet daily
variation margin requirements, it may have to sell securities to meet such
requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. The Fund may have to sell
securities at a time when it is disadvantageous to do so.
The hours of trading of futures contracts on U.S. Government securities and
options thereon may not conform to the hours during which the Fund may trade
such securities. To the extent that the futures markets close before the U.S.
Government securities markets, significant price and rate movements can take
place in the U.S. Government securities markets that cannot be reflected in the
futures markets. Further, additional futures trading sessions may result in
significant price movements, exercises of positions and margin calls at a time
when the U.S. Government securities markets are not open.
INTEREST RATE TRANSACTIONS
The Fund may enter into interest rate swaps, on either an asset-based or
liability-based basis, depending on whether hedging its assets or its
liabilities, and will usually enter into interest rate swaps on a net basis,
I.E., the two payment streams netted out, with the Fund receiving or paying, as
the case may be, only the net amount of the two payments. Inasmuch as the
hedging transactions are entered into for good faith hedging purposes, the
adviser and the Fund believe such obligations do not constitute senior
securities and, accordingly, will not treat them as being subject to its
borrowing restrictions. The net amount of the excess, if any, of the Fund's
obligations over its entitlements with respect to each interest rate swap will
be accrued on a daily basis and an amount of cash or liquid high-grade debt
securities having an aggregate net asset value at least equal to the accrued
excess will be maintained in a segregated account by a custodian that satisfies
the requirements of the Investment Company Act. To the extent that the Fund
enters into interest rate swaps on other than a net basis, the amount maintained
in a segregated account will be the full amount of the Fund's obligations, if
any, with respect to such interest rate swaps, accrued on a daily basis. The
Fund will not enter into any interest rate swaps unless the unsecured senior
debt or the claims-paying ability of the other party thereto is rated in the
highest rating category of at least one nationally recognized rating
organization at the time of entering into such transaction. If there is a
default by the other party to such a transaction, the Fund will have contractual
remedies pursuant to the agreement related to the transaction. The swap market
has grown substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid.
The use of interest rate swaps is a highly speculative activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If incorrect in its forecast of
market values, interest rates and other applicable factors, the investment
performance of the Fund would diminish compared to what it would have been if
this investment technique was never used.
The Fund may only enter into interest rate swaps to hedge its portfolio.
Interest rate swaps do not involve the delivery of securities or other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rate swaps is limited to the net amount of interest payments that the
Fund is contractually obligated to make. If the other party to an interest rate
swap defaults, the Fund's risk of loss consists of the net amount of interest
payments that the Fund is contractually entitled to receive. Since interest rate
swaps are individually negotiated, the Fund expects to achieve an acceptable
degree of correlation between its rights to receive interest on its portfolio
securities and its rights and obligations to receive and pay interest pursuant
to interest rate swaps.
REPURCHASE AGREEMENTS
The Fund's repurchase agreements will be collateralized by U.S. Government
obligations. The Fund will enter into repurchase transactions only with parties
meeting creditworthiness standards approved by the Fund's Trustees. The Fund's
investment adviser will monitor the creditworthiness of such parties, under the
general supervision of the Trustees. In the event of a default or bankruptcy by
a seller, the Fund will promptly seek to liquidate the collateral. To the extent
that the proceeds from any sale of such collateral upon a default in the
obligation to repurchase are less than the repurchase price, the Fund will
suffer a loss.
The Fund participates in a joint repurchase agreement account with other
investment companies managed by Prudential Mutual Fund Management, Inc. (PMF)
pursuant to an order of the SEC. On a daily basis, any uninvested cash balances
of the Fund may be aggregated with those of such investment companies and
invested in one or more repurchase agreements. Each fund participates in the
income earned or accrued in the joint account based on the percentage of its
investment.
B-7
<PAGE>
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities as defined in the
Investment Company Act.
The Fund may not:
1. Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of transactions); the deposit or
payment by the Fund of initial or variation margin in connection with interest
rate futures contracts or related options transactions is not considered the
purchase of a security on margin.
2. Make short sales of securities or maintain a short position, except
short sales "against the box" (the purchase of protective puts, as described in
the Prospectus, is not a short position for purposes of this investment
restriction).
3. Issue senior securities, borrow money or pledge its assets, except that
the Fund may borrow up to 20% of the value of its total assets (calculated when
the loan is made) for temporary, extraordinary or emergency purposes or for the
clearance of transactions. The Fund may pledge up to 20% of the value of its
total assets to secure such borrowings. For purposes of this restriction, the
purchase or sale of securities on a when-issued or delayed delivery basis, the
purchase of securities subject to repurchase agreements, collateral arrangements
with respect to interest rate swap transactions, reverse repurchase agreements
or dollar roll transactions or the purchase or sale of options and financial
futures contracts or options thereon, are not deemed to be a pledge of assets or
the issuance of a senior security; and neither such arrangements, the purchase
or sale of options, financial futures contracts or related options nor
obligations of the Fund to the Trustees pursuant to deferred compensation
arrangements, are deemed to be the issuance of a senior security.
4. Purchase any security (other than obligations of the U.S. Government,
its agencies, or instrumentalities) if as a result: (i) with respect to 75% of
the Fund's total assets, more than 5% of the Fund's total assets (determined at
the time of investment) would then be invested in securities of a single issuer,
or (ii) 25% or more of the Fund's total assets (determined at the time of
investment) would be invested in a single industry.
5. Purchase any security if as a result the Fund would then hold more than
10% of the outstanding voting securities of an issuer.
6. Purchase any security if as a result the Fund would then have more than
5% of its total assets (taken at current value) invested in securities of
companies (including predecessors) less than three years old, except that the
Fund may invest in the securities of any U.S. Government agency or
instrumentality, and in any security guaranteed by such an agency or
instrumentality.
7. Buy or sell commodities or commodity contracts or real estate or
interests in real estate, except it may purchase and sell securities which are
secured by real estate, securities of companies which invest or deal in real
estate, futures contracts on U.S. Government securities and options thereon and
other financial futures contracts and options thereon.
8. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter under
certain federal securities laws.
9. Make investments for the purpose of exercising control or management.
10. Invest in securities of other registered investment companies, except by
purchases in the open market involving only customary brokerage commissions and
as a result of which not more than 5% of its total assets (determined at the
time of investment) would be invested in such securities, or except as part of a
merger, consolidation or other acquisition.
11. Invest in interests in oil, gas or other mineral exploration or
development programs.
12. Make loans, except (i) through repurchase agreements and (ii) loans of
portfolio securities limited to 30% of the Fund's total assets.
13. Purchase warrants if as a result the Fund would then have more than 5%
of its total assets (determined at the time of investment) invested in warrants.
B-8
<PAGE>
14. Write, purchase or sell puts, calls or combinations thereof, or purchase
or sell futures contracts or related options, except that the Fund may write put
and call options on U.S. Government securities, purchase put and call options on
U.S. Government securities and purchase or sell futures contracts on U.S.
Government securities and purchase or sell options thereon, as well as purchase
or sell other financial futures contracts and related options thereon.
In order to comply with certain state "blue sky" restrictions, the Fund will
not as a matter of operating policy purchase the securities of any one issuer
if, to the knowledge of the Fund, any officer or Trustee of the Fund or the
Fund's administrator or the Fund's investment adviser owns more than 1/2 of 1%
of the outstanding securities of such issuer, and such officers and Trustees who
own more than 1/2 of 1% own in the aggregate more than 5% of the outstanding
securities of such issuer.
Although not a fundamental policy, the Fund has agreed with a state
securities commission that the Fund will limit its investment in warrants which
are not listed on the New York Stock Exchange or the American Stock Exchange to
no more than 2% of the value of its total assets (determined at the time of
investment).
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the Fund's assets, it is intended that if the percentage
limitation is met at the time the investment is made. A later change in
percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that the Fund's
asset coverage for borrowings falls below 300%, the Fund will take prompt action
to reduce its borrowings, as required by applicable law.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS WITH FUND DURING PAST FIVE YEARS
- --------------------------- ----------------------- -----------------------------------------------------------------
<S> <C> <C>
Stephen C. Eyre Trustee Executive Director, The John A. Hartford Foundation, (charitable
c/o Prudential Mutual Fund foundation) (since May 1985); Director of Faircom, Inc., Trustee
Management, Inc. Emeritus of Pace University.
One Seaport Plaza
New York, NY
Delayne Dedrick Gold Trustee Marketing and Management Consultant.
c/o Prudential Mutual Fund
Management, Inc.
One Seaport Plaza
New York, NY
Don G. Hoff Trustee Chairman and Chief Executive Officer of Intertec, Inc. (a private
c/o Prudential Mutual Fund investment company specializing in technology); (formerly
Management, Inc. Chairman and Chief Executive Officer of AT&E Corporation
One Seaport Plaza (telecommunications) (1974-1991); Director of the Asia Pacific
New York, NY Fund, Inc. and The Greater China Fund, Inc.
*Harry A. Jacobs, Jr. Trustee Senior Director (since January 1986) of Prudential Securities
One Seaport Plaza Incorporated (Prudential Securities); formerly Interim Chairman
New York, NY and Chief Executive Officer of Prudential Mutual Fund Management
Inc. (PMF)(June-September 1993); Chairman of the Board of
Prudential Securities (1982-1985); Chairman and Chief Executive
Officer of Bache Group Inc. (1977-1982); Trustee of The Trudeau
Institute; Director of The First Australia Fund, Inc., The First
Australia Prime Income Fund, Inc., The Global Government Plus
Fund, Inc., The Global Yield Fund, Inc. and the Center for
National Policy.
</TABLE>
B-9
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS WITH FUND DURING PAST FIVE YEARS
- --------------------------- ----------------------- -----------------------------------------------------------------
<S> <C> <C>
Sidney R. Knafel Trustee Managing Partner of SRK Management Company
c/o Prudential Mutual (investments) since 1981; Chairman of Insight
Fund Management, Inc. Communications Company, L.P. and Microbiological
One Seaport Plaza Associates, Inc.; Director of Cellular Com-
New York, NY munications, Inc., Cellular Communications
International, Inc., Cellular Communications of
Puerto Rico Inc., IGENE Biotechnology, Inc.,
International CabelTel Incorporated, Medical
Imaging Centers of America, Inc. and a number of
private companies.
Robert E. LaBlanc Trustee President of Robert E. LaBlanc Associates, Inc.
c/o Prudential Mutual (telecommunications) since 1981; Director of Contel
Fund Management, Inc. Cellular, Inc., M/A-COM, Inc., Storage Technology
One Seaport Plaza Corporation, TIE communications, Inc. and Tribune
New York, NY Company; Trustee of Manhattan College.
*Lawrence C. McQuade President and Vice Chairman of PMF (since 1988) and Managing
One Seaport Plaza Trustee Director, Investment Banking of Prudential
New York, NY Securities (1988-1991); Director, BUNZL, P.L.C.
(since June 1991); Director, Quixote Corporation
(since February 1992); formerly Director of Crazy
Eddie Inc. (1987-1990) of Kaiser Tech., Ltd.,
Kaiser Aluminum and Chemical Corp. (March
1987-November 1988); formerly Executive Vice
President and Director of W. R. Grace & Co;
President and Director of The High Yield Income
Fund, Inc., The Global Yield Fund, Inc. and The
Global Government Plus Fund, Inc.
Thomas A. Owens, Jr. Trustee Consultant.
c/o Prudential Mutual
Fund Management, Inc.
One Seaport Plaza
New York, NY
*Richard A. Redeker Trustee President, Chief Executive Officer and Director
One Seaport Plaza (since October 1993); Prudential Mutual Fund
New York, NY Management, Inc. (PMF); Executive Vice President,
Director and Member of the Operating Committee
(since October 1933); Prudential Securities
Incorporated (Prudential Securities); Director
(since October 1993) of Prudential Securities
Group, Inc. (PSG). Formerly Senior Executive Vice
President and Director of Kemper Financial Ser-
vices, Inc. (September 1978-September 1993);
Director of The Global Government Plus Fund, Inc.
The Global Yield Fund, Inc. and The High Yield
Income Fund, Inc.
Clay T. Whitehead Trustee President of National Exchange Inc. (since May
c/o Prudential Mutual 1983).
Fund Management, Inc.
One Seaport Plaza
New York, NY
</TABLE>
B-10
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS WITH FUND DURING PAST FIVE YEARS
- --------------------------- ----------------------- -----------------------------------------------------------------
<S> <C> <C>
Robert F. Gunia Vice President Director (since January 1989), Chief Administrative
One Seaport Plaza Officer (since August 1990) and Executive Vice
New York, NY President, Treasurer and Chief Financial Officer
(since June 1987) of PMF; Senior Vice President
(since March 1987) of Prudential Securities; Vice
President and Director of The Asia Pacific Fund,
Inc. (since May 1989).
S. Jane Rose Secretary Senior Vice President (since January 1991), Senior
One Seaport Plaza Counsel (since June 1987) and First Vice President
New York, NY (June 1987-December 1990) of PMF; Senior Vice
President and Senior Counsel of Prudential
Securities (since July 1992); formerly Vice
President and Associate General Counsel of
Prudential Securities.
Susan C. Cote Treasurer and Senior Vice President (since January 1989) and First
One Seaport Plaza Principal Vice President (June 1987-December 1988) of PMF;
New York, NY Financial and Ac- Senior Vice President (since January 1992) and Vice
counting Officer President (January 1986-December 1991) of
Prudential Securities.
Domenick Pugliese Assistant Vice President (since June 1992) and Associate
One Seaport Plaza Secretary General Counsel (since March 1992) of PMF; Vice
New York, NY President and Associate General Counsel of
Prudential Securities (since July 1992); prior
thereto, associated with the law firm of Battle
Fowler.
<FN>
- ------------------------
* "Interested" director as defined in the Investment Company Act of 1940.
</TABLE>
Trustees and officers of the Fund are also trustees, directors and officers
of some or all of the other investment companies distributed by Prudential
Securities or Prudential Mutual Fund Distributors, Inc. (PMFD).
The officers conduct and supervise the daily business operations of the
Fund, while the Trustees, in addition to their functions set forth under
"Manager" and "Distributor," review such actions and decide on general policy.
The Fund pays each of its Trustees who is not an affiliated person of the
Manager annual compensation of $7,500 in addition to certain out-of-pocket
expenses. The chairman of the Audit Committee receives an additional $1,500 per
year.
As of March 31, 1994, the Trustees and officers of the Fund, as a group,
owned less than 1% of the outstanding shares of beneficial interest of the Fund.
Trustees may receive their Trustees' fees pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of Trustees' fees which accrue interest at a rate equivalent to
the prevailing rate applicable to 90-day U.S. Treasury Bills at the beginning of
each calendar quarter or at the daily rate of return of the Fund (the Fund
rate). Payment of the interest so accrued is also deferred and accruals become
payable at the option of the Trustee. The Fund's obligation to make payments of
deferred Trustees' fees, together with interest thereon, is a general obligation
of the Fund.
As of March 31, 1994, the Krasnow Institute for Advanced Study, P.O. Box
9416, Rosslyn Station, Arlington, VA 22219, owned beneficially 38,383 Class A
shares (5.47% of the outstanding Class A shares).
As of March 31, 1994, Prudential Securities was the record holder for other
beneficial owners of 464,836 Class A shares (or 66.2% of the outstanding Class A
shares) and 9,707,047 Class B shares (or 64.8% of the outstanding Class B
shares) of the Fund. In the event of any meetings of shareholders, Prudential
Securities will forward, or cause the forwarding of, proxy materials to the
beneficial owners for which it is the record holder.
MANAGER
The manager of the Fund is Prudential Mutual Fund Management, Inc. (PMF or
the Manager), One Seaport Plaza, New York, New York 10292. PMF serves as manager
to all of the other investment companies that, together with the Fund, comprise
the
B-11
<PAGE>
"Prudential Mutual Funds." See "How the Fund is Managed--Manager" in the
Prospectus. As of March 31, 1994 PMF managed and/or administered open-end and
closed-end management investment companies with assets of approximately [$49]
billion and, according to the Investment Company Institute, as of December 31,
1993, the Prudential Mutual Funds were the 12th largest family of mutual funds
in the United States.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PMF, subject to the supervision of the Fund's Trustees and in
conformity with the stated policies of the Fund, manages both the investment
operations of the Fund and the composition of the Fund's portfolio, including
the purchase, retention, disposition and loan of securities. In connection
therewith, PMF is obligated to keep certain books and records of the Fund. PMF
also administers the Fund's corporate affairs and, in connection therewith,
furnishes the Fund with office facilities, together with those ordinary clerical
and bookkeeping services which are not being furnished by State Street Bank and
Trust Company, the Fund's custodian, and Prudential Mutual Fund Services, Inc.
(PMFS or the Transfer Agent), the Fund's transfer and dividend disbursing agent.
The management services of PMF for the Fund are not exclusive under the terms of
the Management Agreement and PMF is free to, and does, render management
services to others.
For its services, PMF receives, pursuant to the Management Agreement, a fee
at an annual rate of .50 of 1% of the Fund's average daily net assets. The fee
is computed daily and payable monthly. The Management Agreement also provides
that, in the event the expenses of the Fund (including the fees of PMF, but
excluding interest, taxes, brokerage commissions, distribution fees and
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business) for any fiscal year
exceed the lowest applicable annual expense limitation established and enforced
pursuant to the statutes or regulations of any jurisdiction in which the Fund's
shares are qualified for offer and sale, the compensation due to PMF will be
reduced by the amount of such excess. Reductions in excess of the total
compensation payable to PMF will be paid by PMF to the Fund. No such reductions
were required during the fiscal year ended October 31, 1993. Currently, the Fund
believes that the most restrictive expense limitation of state securities
commissions is 2 1/2% of the Fund's average daily net assets up to $30 million,
2% of the next $70 million of such assets and 1 1/2% of such assets in excess of
$100 million.
In connection with its management of the business affairs of the Fund, PMF
bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel except
the fees and expenses of Trustees who are not affiliated persons of PMF or the
Fund's investment adviser;
(b) all expenses incurred by PMF or by the Fund in connection with managing
the ordinary course of the Fund's business, other than those assumed by the Fund
as described below; and
(c) the costs and expenses payable to The Prudential Investment Corporation
(PIC) pursuant to the subadvisory agreement between PMF and PIC (the Subadvisory
Agreement).
Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses: (a) the fees payable to the Manager, (b) the
fees and expenses of Trustees who are not affiliated persons of the Manager or
the Fund's investment adviser, (c) the fees and certain expenses of the
Custodian and Transfer and Dividend Disbursing Agent, including the cost of
providing records to the Manager in connection with its obligation of
maintaining required records of the Fund and of pricing the Fund's shares, (d)
the charges and expenses of legal counsel and independent accountants for the
Fund, (e) brokerage commissions and any issue or transfer taxes chargeable to
the Fund in connection with its securities transactions, (f) all taxes and
corporate fees payable by the Fund to governmental agencies, (g) the fees of any
trade associations of which the Fund may be a member, (h) the cost of stock
certificates representing shares of the Fund, (i) the cost of fidelity and
liability insurance, (j) certain organization expenses of the Fund and the fees
and expenses involved in registering and maintaining registration of the Fund
and of its shares with the SEC, registering the Fund and qualifying its shares
under state securities laws, including the preparation and printing of the
Fund's registration statements and prospectuses for such purposes, (k) allocable
communications expenses with respect to investor services and all expenses of
shareholders' and Trustees' meetings and of preparing, printing and mailing
reports, proxy statements and prospectuses to shareholders in the amount
necessary for distribution to the shareholders, (l) litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Fund's business and (m) distribution fees.
The Management Agreement provides that PMF will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the matters
to which the Management Agreement relates, except a loss resulting from willful
misfeasance, bad faith, gross negligence or reckless disregard of duty. The
Management Agreement provides that it will terminate automatically if assigned,
and that it may be terminated without penalty by either party upon not more than
60 days'
B-12
<PAGE>
nor less than 30 days' written notice. The Management Agreement will continue in
effect for a period of more than two years from the date of execution only so
long as such continuance is specifically approved at least annually in
conformity with the Investment Company Act. The Management Agreement was last
approved by the Trustees of the Fund, including all of the Trustees who are not
parties to the contract or interested persons of any such party as defined in
the Investment Company Act on June 3, 1993 and by shareholders of the Fund on
February 25, 1988.
For the fiscal years ended October 31, 1993, 1992 and 1991, PMF earned
management fees of $842,229, $791,342 and $852,897, respectively.
PMF has entered into a Subadvisory Agreement with PIC (the Subadviser), a
wholly-owned subsidiary of Prudential. The Subadvisory Agreement provides that
PIC will furnish investment advisory services in connection with the management
of the Fund. In connection therewith, PIC is obligated to keep certain books and
records of the Fund. PMF continues to have responsibility for all investment
advisory services pursuant to the Management Agreement and supervises PIC's
performance of such services. PIC is reimbursed by PMF for the reasonable costs
and expenses incurred by PIC in furnishing services to PMF.
The Subadvisory Agreement was last approved by the Trustees, including a
majority of the Trustees who are not interested persons as defined in the
Investment Company Act, on June 3, 1993 and was approved by the shareholders of
the Fund at a Special Meeting of Shareholders held on February 25, 1988.
The Subadvisory Agreement provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by the Fund, PMF or PIC upon not more than 60 days', nor less than 30
days', written notice. The Subadvisory Agreement provides that it will continue
in effect for a period of more than two years from its execution only so long as
such continuance is specifically approved at least annually in accordance with
the requirements of the Investment Company Act.
The Manager and the Subadviser (The Prudential Investment Corporation) are
indirect subsidiaries of The Prudential which, as of December 31, 1993, was the
largest insurance company in North America. Prudential has been engaged in the
insurance business since 1875. In July 1993, Institutional Investor ranked The
Prudential the third largest institutional money manager of the 300 largest
money management organizations in the United States as of December 31, 1992.
DISTRIBUTOR
Prudential Mutual Fund Distributors, Inc. (PMFD), One Seaport Plaza, New
York, New York 10292, acts as the distributor of the Class A shares of the Fund.
Prudential Securities Incorporated, One Seaport Plaza, New York, New York 10292
(Prudential Securities), acts as the distributor of the Class B and Class C
shares of the Fund.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the Fund
under Rule 12b-1 under the Investment Company Act and separate distribution
agreements (the Distribution Agreements), PMFD and Prudential Securities
(collectively the Distributor) incur the expenses of distributing the Fund's
Class A, Class B and Class C shares, respectively. See "How the Fund is
Managed--Distributor" in the Prospectus.
Prior to January 22, 1990, the Fund offered only one class of shares (the
then existing Class B shares). On October 17, 1989, the Trustees, including a
majority of the Trustees who are not interested persons of the Fund and who have
no direct or indirect financial interest in the operation of the Class A or
Class B Plan or in any agreement related to either Plan (the Rule 12b-1
Trustees), at a meeting called for the purpose of voting on each Plan, adopted a
new plan of distribution for the Class A shares of the Fund (the Class A Plan)
and approved an amended and restated plan of distribution with respect to the
Class B shares of the Fund (the Class B Plan). On June 3, 1993, the Board of
Directors, including a majority of the Rule 12b-1 Directors, at a meeting called
for the purpose of voting on each Plan, approved the continuance of the Plans
and Distribution Agreements and approved modifications of the Fund's Class A and
Class B Plans and Distribution Agreements to conform them with recent amendments
to the National Association of Securities Dealers, Inc. (NASD) maximum sales
charge rule described below. As so modified, the Class A Plan provides that (i)
up to .25 of 1% of the average daily net assets of the Class A shares may be
used to pay for personal service and the maintenance of shareholder accounts
(service fee) and (ii) total distribution fees (including the service fee of .25
of 1%) may not exceed .30 of 1%. As so modified, the Class B Plan provides that
(i) up to .25 of 1% of the average daily net assets of the Class B shares may be
paid as a service fee and (ii) up to .75 of 1% (not including the service fee)
may be used as reimbursement for distribution-related expenses with respect to
the Class B shares (asset-based sales charge). The Class A Plan was approved by
the Class A shareholders on December 19, 1990. The Class B Plan was approved by
shareholders of the Fund on January 11, 1990. On June 3, 1993, the Trustees,
including a majority of the Rule 12b-1 Trustees, at a meeting called
B-13
<PAGE>
for the purpose of voting on each Plan, adopted a plan of distribution for the
Class C shares of the Fund and approved further amendments to the plans of
distribution for the Fund's Class A and Class B shares changing them from
reimbursement type plans to compensation type plans. The Plans were last
approved by the Trustees, including a majority of the Rule 12b-1 Trustees, on
June 3, 1993. The Class A Plan, as amended, was approved by Class A and Class B
shareholders, and the Class B Plan, as amended, was approved by Class B
shareholders on __________, 1994. The Class C Plan was approved by the sole
shareholder of Class C shares on __________, 1994.
CLASS A PLAN. For the fiscal year ended October 31, 1993 PMFD received
payments of $9,508 under the Class A Plan as reimbursement of expenses related
to the distribution of Class A shares. This amount was primarily expended for
payment of account servicing fees to financial advisers and other persons who
sell Class A shares. For the fiscal year ended October 31, 1993, PMFD also
received approximately $107,100 in initial sales charges.
CLASS B PLAN. For the fiscal year ended October 31, 1993, Prudential
Securities received $1,621,067 from the Fund under the Class B Plan and spent
approximately $2,036,000 in distributing the Fund's Class B shares. It is
estimated that of this amount approximately $20,800 (1%) was spent on printing
and mailing of prospectuses to other than current shareholders; $361,600 (17.8%)
on compensation to Prusec, Prudential Securities, an affiliated broker-dealer,
for commissions to its financial advisers and other expenses, including an
allocation on account of overhead and other branch office distribution-related
expenses, incurred by it for distribution of Fund shares and $1,653,600 (81.2%)
on the aggregate of (i) payments of commissions and account servicing fees to
its financial advisers ($763,000 or 37.5%) and (ii) an allocation on account of
overhead and other branch office distribution-related expenses ($890,600 or
43.7%). The term "overhead and other branch office distribution-related
expenses" represents (a) the expenses of operating branch offices of Prudential
Securities or Prusec in connection with the sale of Fund shares, including lease
costs, the salaries and employee benefits of operations and sales support
personnel, utility costs, communication costs and the costs of stationery and
supplies, (b) the costs of client sales seminars, (c) expenses of mutual fund
sales coordinators to promote the sale of Fund shares and (d) other incidental
expenses relating to branch promotion of Fund sales.
Prudential Securities also receives the proceeds of contingent deferred
sales charges paid by holders of Class B shares upon certain redemptions of
Class B shares. See "Shareholder Guide--How to Sell Your Shares--Contingent
Deferred Sales Charges" in the Prospectus. For the fiscal year ended October 31,
1993, Prudential Securities received approximately $423,200 in contingent
deferred sales charges.
CLASS C PLAN. Prudential Securities receives the proceeds of contingent
deferred sales charges paid by investors upon certain redemptions of Class C
shares. See "Shareholder Guide--How to Sell Your Shares--Contingent Deferred
Sales Charges" in the Prospectus. Prior to the date of this Statement of
Additional Information, no distribution expenses were incurred under the Class C
Plan.
The Class A, Class B and Class C Plans continue in effect from year to year,
provided that each such continuance is approved at least annually by a vote of
the Trustees, including a majority vote of the Rule 12b-1 Trustees, cast in
person at a meeting called for the purpose of voting on such continuance. The
Plans may each be terminated at any time, without penalty, by the vote of a
majority of the Rule 12b-1 Trustees or by the vote of the holders of a majority
of the outstanding shares of the applicable class on not more than 30 days'
written notice to any other party to the Plans. The Plans may not be amended to
increase materially the amounts to be spent for the services described therein
without approval by the shareholders of the applicable class (by both Class A
and Class B shareholders, voting separately, in the case of material amendments
to the Class A Plan), and all material amendments are required to be approved by
the Trustees in the manner described above. Each Plan will automatically
terminate in the event of its assignment. The Fund will not be contractually
obligated to pay expenses incurred under any Plan if it is terminated or not
continued.
Pursuant to each Plan, the Trustees will review at least quarterly a written
report of the distribution expenses incurred on behalf of each class of shares
of the Fund by the Distributor. The report includes an itemization of the
distribution expenses and the purposes of such expenditures. In addition, as
long as the Plans remain in effect, the selection and nomination of Rule 12b-1
Trustees shall be committed to the Rule 12b-1 Trustees.
Pursuant to each Distribution Agreement, the Fund has agreed to indemnify
PMFD and Prudential Securities to the extent permitted by applicable law against
certain liabilities under the Securities Act of 1933, as amended. Each
Distribution Agreement was last approved by the Trustees, including a majority
of the Rule 12b-1 Trustees, on June 3, 1993.
B-14
<PAGE>
NASD MAXIMUM SALES CHARGE RULE. Pursuant to rules of the NASD, the
Distributor is required to limit aggregate initial sales charges, deferred sales
charges and asset-based sales charges to 6.25% of total gross sales of each
class of shares. In the case of Class B shares, interest charges on unreimbursed
distribution expenses equal to the prime rate plus one percent per annum may be
added to the 6.25% limitation. Sales from the reinvestment of dividends and
distributions are not required to be included in the calculation of the 6.25%
limitation. The annual asset-based sales charge on shares of the Fund may not
exceed .75 of 1% per class. The 6.25% limitation applies to the Fund rather than
on a per shareholder basis. If aggregate sales charges were to exceed 6.25% of
total gross sales of any class, all sales charges on shares of that class would
be suspended.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities, futures
contracts and options on such securities and futures contracts for the Fund, the
selection of brokers, dealers and futures commission merchants to effect the
transactions and the negotiation of brokerage commissions, if any.
Broker-dealers may receive brokerage commissions on Fund portfolio transactions,
including options, futures, and options on futures transactions and the purchase
and sale of underlying securities upon the exercise of options. Orders may be
directed to any broker or futures commission merchant including, to the extent
and in the manner permitted by applicable law, Prudential Securities and its
affiliates. The term "Manager" as used in this section includes the Subadviser.
In the U.S. Government securities market, securities are generally traded on
a "net" basis with dealers acting as principal for their own accounts without a
stated commission, although the price of the security usually includes a profit
to the dealer. In underwritten offerings, securities are purchased at a fixed
price which includes an amount of compensation to the underwriter, generally
referred to as the underwriter's concession or discount. On occasion, certain
money market instruments and agency securities may be purchased directly from
the issuer, in which case no commissions or discounts are paid. The Fund will
not deal with Prudential Securities or any affiliates in any transaction in
which Prudential Securities or any affiliates acts as principal. Thus, it will
not deal in U.S. Government securities with Prudential Securities acting as
market maker, and it will not execute a negotiated trade with Prudential
Securities if execution involves Prudential Securities' acting as principal with
respect to any part of the Fund's order.
Portfolio securities may not be purchased from any underwriting or selling
syndicate of which Prudential Securities (or any affiliate), during the
existence of the syndicate, is a principal underwriter (as defined in the
Investment Company Act), except in accordance with rules of the SEC. This
limitation, in the opinion of the Fund, will not significantly affect the Fund's
ability to pursue its present investment objective. However, in the future, in
other circumstances, the Fund may be at a disadvantage because of this
limitation in comparison to other funds with similar objectives but not subject
to such limitations.
In placing orders for portfolio securities of the Fund, the Manager is
required to give primary consideration to obtaining the most favorable price and
efficient execution. This means that the Manager will seek to execute each
transaction at a price and commission, if any, which provide the most favorable
total cost or proceeds reasonably attainable in the circumstances. While the
Manager generally seeks reasonably competitive spreads or commissions, the Fund
will not necessarily be paying the lowest spread or commission available. Within
the framework of this policy, the Manager will consider the research and
investment services provided by brokers, dealers or futures commission merchants
who effect or are parties to portfolio transactions of the Fund, the Manager or
its clients. Such research and investment services are those which brokerage
houses customarily provide to institutional investors and include statistical
and economic data and research reports on particular companies and industries.
Such services are used by the Manager in connection with all of its investment
activities, and some of such services obtained in connection with the execution
of transactions for the Fund may be used in managing other investment accounts.
Conversely, brokers, dealers or futures commission merchants furnishing such
services may be selected for the execution of transactions of such other
accounts, whose aggregate assets are far larger than the Fund, and the services
furnished by such brokers, dealers or futures commission merchants may be used
by the Manager in providing investment management for the Fund. Commission rates
are established pursuant to negotiations with the broker, dealer or futures
commission merchant based on the quality and quantity of execution services
provided by the broker or futures commission merchant in the light of generally
prevailing rates. The Manager is authorized to pay higher commissions on
brokerage transactions for the Fund to brokers, dealers and futures commission
merchants other than Prudential Securities in order to secure research and
investment services described above, subject to review by the Fund's Trustees
from time to time as to the extent and continuation of this practice. The
allocation of orders among brokers and futures commission merchants and the
commission rates paid are reviewed periodically by the Fund's Trustees.
B-15
<PAGE>
Subject to the above considerations, Prudential Securities may act as a
broker or futures commission merchant for the Fund. In order for Prudential
Securities (or any affiliate) to effect any portfolio transactions for the Fund,
the commissions, fees or other remuneration received by Prudential Securities
(or any affiliate) must be reasonable and fair compared to the commissions, fees
or other remuneration paid to other such brokers or futures commission merchants
in connection with comparable transactions involving similar securities or
futures contracts being purchased or sold on an exchange or board of trade
during a comparable period of time. This standard would allow Prudential
Securities (or any affiliate) to receive no more than the remuneration which
would be expected to be received by an unaffiliated broker or futures commission
merchant in a commensurate arms-length transaction. Furthermore, the Trustees of
the Fund, including a majority of the Rule 12b-1 Trustees, have adopted
procedures which are reasonably designed to provide that any commissions, fees
or other remuneration paid to Prudential Securities (or any affiliate) are
consistent with the foregoing standard. In accordance with Section 11(a) under
the Securities Exchange Act of 1934, Prudential Securities may not retain
compensation for effecting transactions on a national securities exchange for
the Fund unless the Fund has expressly authorized the retention of such
compensation. Prudential Securities must furnish to the Fund at least annually a
statement setting forth the total amount of all compensation retained by
Prudential Securities from transactions effected for the Fund during the
applicable period. Brokerage transactions with Prudential Securities (or any
affiliate) are also subject to such fiduciary standards as may be imposed upon
Prudential Securities (or such affiliate) by applicable law.
During the fiscal years ended October 31, 1993, 1992 and 1991, the Fund paid
no brokerage commissions to Prudential Securities.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share, plus a sales charge which, at the election of the
investor, may be imposed either (i) at the time of purchase (Class A shares) or
(ii) on a deferred basis (Class B or Class C shares). See "Shareholder
Guide--Alternative Purchase Plan" in the Prospectus.
Each class of shares represents an interest in the same portfolio of
investments of the Fund and has the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except
that the Fund has agreed with the SEC in connection with the offering of a
conversion feature on Class B shares to submit any amendment of the Class A
distribution and service plan to both Class A and Class B shareholders) and
(iii) only Class B shares have a conversion feature. See "Distributor." Each
class also has separate exchange privileges. See "Shareholder Investment
Account--Exchange Privilege."
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares are sold at a maximum sales charge of 4% and Class
B* and Class C* shares are sold at net asset value. Using the Fund's net asset
value at October 31, 1993, the maximum offering price of the Fund's shares is as
follows:
<TABLE>
<S> <C>
CLASS A
Net asset value and redemption price per Class A share................. $ 10.59
Maximum sales charge (4% of offering price)............................ .50
---------
Offering price to public............................................... $ 11.09
---------
---------
CLASS B
Net asset value, offering price and redemption price per Class B
share*............................................................... $ 10.60
---------
---------
CLASS C
Net asset value, offering price and redemption price per Class C
share*............................................................... $ 10.60
---------
---------
<FN>
--------------------
* Class B and Class C shares are subject to a contingent deferred sales
charge on certain redemptions. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus.
</TABLE>
B-16
<PAGE>
REDUCED INITIAL SALES CHARGES--CLASS A SHARES
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential Mutual Funds, the purchases
may be combined to take advantage of the reduced sales charges applicable to
larger purchases. See the table of breakpoints under "Shareholder Guide--How to
Buy Shares of the Fund" in the Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or group that
holds 25% or more of the outstanding voting securities of a company will be
deemed to control the company, and a partnership will be deemed to be controlled
by each of its general partners);
(e) a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse; and
(g) one or more employee benefit plans of a company controlled by an
individual.
[In addition, an eligible group of related Fund investors may include the
following: an employer (or group of related employers) and one or more qualified
retirement plans of such employer or employers (an employer controlling,
controlled by or under common control with another employer is deemed related to
that employer).]
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will be granted
subject to confirmation of the investor's holdings. The Combined Purchase and
Cumulative Purchase Privilege does not apply to individual participants in the
retirement and group plans described above under "Retirement and Group Plans."
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of the shares of
the Fund and shares of other Prudential Mutual Funds (excluding money market
funds other than those acquired pursuant to the exchange privilege) to determine
the reduced sales charge. However, the value of shares held directly with the
Transfer Agent and through Prudential Securities will not be aggregated to
determine the reduced sales charge. All shares must be held either directly with
the Transfer Agent or through Prudential Securities. The value of existing
holdings for purposes of determining the reduced sales charge is calculated
using the maximum offering price (net asset value plus maximum sales charge) as
of the previous business day. See "How the Fund Values its Shares" in the
Prospectus. The Distributor must be notified at the time of purchase that the
investor is entitled to a reduced sales charge. The reduced sales charges will
be granted subject to confirmation of the investor's holdings. Rights of
accumulation are not available to individual participants in any retirement or
group plans.
LETTER OF INTENT. Reduced sales charges are available to investors or an
eligible group of related investors who enter into a written Letter of Intent
providing for the purchase, within a thirteen-month period, of shares of the
Fund and shares of other Prudential Mutual Funds. All shares of the Fund and
shares of other Prudential Mutual Funds (excluding money market funds other than
those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent
and through Prudential Securities will not be aggregated to determine the
reduced sales charge. All shares must be held either directly with the Transfer
Agent or through Prudential Securities. Letters of Intent are not available to
individual participants in any retirement or group plans.
A Letter of Intent permits a purchaser to establish a total investment goal
to be achieved by any number of investments over a thirteen-month period. Each
investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. Escrowed Class A shares totaling 5% of the dollar amount of the
Letter
B-17
<PAGE>
of Intent will be held by the Transfer Agent in the name of the purchaser. The
effective date of a Letter of Intent may be back-dated up to 90 days, in order
that any investments made during this 90-day period, valued at the purchaser's
cost, can be applied to the fulfillment of the Letter of Intent goal.
The Letter of Intent does not obligate the investor to purchase, nor the
Fund to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the thirteen-month period, the purchaser is required to pay
the difference between the sales charge otherwise applicable to the purchases
made during this period and sales charges actually paid. Such payment may be
made directly to the Distributor or, if not paid, the Distributor will liquidate
sufficient escrowed shares to obtain such difference. If the goal is exceeded in
an amount which qualifies for a lower sales charge, a price adjustment is made
by refunding to the purchaser the amount of excess sales charge, if any, paid
during the thirteen-month period. Investors electing to purchase Class A shares
of the Fund pursuant to a Letter of Intent should carefully read such Letter of
Intent.
QUANTITY DISCOUNT--CLASS B SHARES PURCHASED PRIOR TO ___________, 1994
The CDSC is reduced on redemptions of Class B shares of the Fund purchased
prior to __________, 1994 if immediately after a purchase of such shares, the
aggregate cost of all Class B shares of the Fund owned by you in a single
account exceeded $500,000. For example, if you purchased $100,000 of Class B
shares of the Fund and the following year purchase an additional $450,000 of
Class B shares with the result that the aggregate cost of your Class B shares
following the second purchase was $550,000, the quantity discount would be
available for the second purchase of $450,000 but not for the first purchase of
$100,000. The quantity discount will be imposed at the following rates depending
on whether the aggregate value exceeded $500,000 or $1 million:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF DOLLARS INVESTED
OR REDEMPTION PROCEEDS
------------------------------------
YEAR SINCE PURCHASE $500,001 TO $1 OVER $1
PAYMENT MADE MILLION MILLION
- ------------------------------ ------------------- --------------
<S> <C> <C>
First......................... 3.0% 2.0%
Second........................ 2.0% 1.0%
Third......................... 1.0% 0 %
Fourth and thereafter......... 0 % 0 %
</TABLE>
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to the reduced CDSC. The reduced CDSC will be granted subject to
confirmation of your holdings.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which a record of the shares held is
maintained by the Transfer Agent. If a share certificate is desired, it must be
requested in writing for each transaction. Certificates are issued only for full
shares and may be redeposited in the Account at any time. There is no charge to
the investor for issuance of a certificate. Whenever a transaction takes place
in the Shareholder Investment Account, the shareholder will be mailed a
statement showing the transaction and the status of the Account. The Fund makes
available to the shareholders the following privileges and plans.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS. For the
convenience of investors, all dividends and distributions are automatically
reinvested in full and fractional shares of the Fund at net asset value per
share. An investor may direct the Transfer Agent in writing not less than five
full business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. In the case of recently
purchased shares for which registration instructions have not been received on
the record date, cash payment will be made directly to the dealer. Any
shareholder who receives a cash payment representing a dividend or distribution
may reinvest such distribution at net asset value by returning the check or the
proceeds to the Transfer Agent within 30 days after the payment date. Such
investment will be made at the net asset value per share next determined after
receipt of the check or proceeds by the Transfer Agent.
EXCHANGE PRIVILEGE
The Fund makes available to its shareholders the privilege of exchanging
their shares of the Fund for shares of certain other Prudential Mutual Funds,
including one or more specified money market funds, subject in each case to the
minimum investment requirements of such funds. Shares of such other Prudential
Mutual Funds may also be exchanged for shares of the Fund. All
B-18
<PAGE>
exchanges are made on the basis of relative net asset value next determined
after receipt of an order in proper form. An exchange will be treated as a
redemption and purchase for tax purposes. Shares may be exchanged for shares of
another fund only if shares of such fund may legally be sold under applicable
state laws. For retirement and group plans having a limited menu of Prudential
Mutual Funds, the Exchange Privilege is available for those funds eligible for
investment in the particular program.
It is contemplated that the Exchange Privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
CLASS A. Shareholders of the Fund may exchange their Class A shares for
Class A shares of certain other Prudential Mutual Funds, shares of Prudential
Structured Maturity Fund and Prudential Government Securities Trust
(Intermediate Term Series) and shares of the money market funds specified below.
No fee or sales load will be imposed upon the exchange. Shareholders of money
market funds who acquired such shares upon exchange of Class A shares may use
the Exchange Privilege only to acquire Class A shares of the Prudential Mutual
Funds participating in the Exchange Privilege.
The following money market funds participate in the Class A Exchange
Privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets
Prudential Tax-Free Money Fund
CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B and
Class C shares for Class B and Class C shares, respectively, of certain other
Prudential Mutual Funds and shares of Prudential Special Money Market Fund, a
money market fund. No CDSC will be payable upon such exchange, but a CDSC may be
payable upon the redemption of Class B and Class C shares acquired as a result
of the exchange. The applicable sales charge will be that imposed by the fund in
which shares were initially purchased and the purchase date will be deemed to be
the date of the initial purchase, rather than the date of the exchange.
Class B and Class C shares of the Fund may also be exchanged for shares of
an eligible money market fund without imposition of any CDSC at the time of
exchange. Upon subsequent redemption from such money market fund or after re-
exchange into the Fund, such shares will be subject to the CDSC calculated
without regard to the time such shares were held in the money market fund. In
order to minimize the period of time in which shares are subject to a CDSC,
shares exchanged out of the money market fund will be exchanged on the basis of
their remaining holding periods, with the longest remaining holding periods
being transferred first. In measuring the time period shares are held in a money
market fund and "tolled" for purposes of calculating the CDSC holding period,
exchanges are deemed to have been made on the last day of the month. Thus, if
shares are exchanged into the Fund from a money market fund during the month
(and are held in the Fund at the end of the month), the entire month will be
included in the CDSC holding period. Conversely, if shares are exchanged into a
money market fund prior to the last day of the month (and are held in the money
market fund on the last day of the month), the entire month will be excluded
from the CDSC holding period. For purposes of calculating the seven year holding
period applicable to the Class B conversion feature, the time period during
which Class B shares were held in a money market fund will be excluded.
At any time after acquiring shares of other funds participating in the Class
B or Class C exchange privilege, a shareholder may again exchange those shares
(and any reinvested dividends and distributions) for Class B or Class C shares
of the Fund, respectively, without subjecting such shares to any CDSC. Shares of
any fund participating in the Class B or Class C Exchange Privilege that were
acquired through reinvestment of dividends or distributions may be exchanged for
Class B or Class C shares of other funds without being subject to any CDSC.
B-19
<PAGE>
Additional details about the Exchange Privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on sixty days' notice, and any fund, including the Fund,
or the Distributor, has the right to reject any exchange application relating to
such fund's shares.
DOLLAR COST AVERAGING. Dollar cost averaging is a method of accumulating
shares by investing a fixed amount of dollars in shares at set intervals. An
investor buys more shares when the price is low and fewer shares when the price
is high. The average cost per share is lower than it would be if a constant
number of shares were bought at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $4,800 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2007, the cost of four years at a private
college could reach $163,000 and over $97,000 at a public university.(1)
The following chart shows how must you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)
<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- -------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
25 Years.................. $ 110 $ 165 $ 220 $ 275
20 Years.................. 176 264 352 440
15 Years.................. 296 444 592 740
10 Years.................. 555 833 1,110 1,388
5 Years................... 1,371 2,057 2,742 3,428
See "Automatic Savings Accumulation Plan."
<FN>
- ------------------------
(1) Source information concerning the costs of education at public universities
is available from The College Board Annual Survey of Colleges, 1992. Information
about the costs of private colleges is from the Digest of Education Statistics,
1992; The National Center for Educational Statistics; and the U.S. Department of
Education. Average costs for private institutions include tuition, fees, room
and board.
(2) The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not intended
to reflect the performance of an investment in shares of the Fund. The
investment return and principal value of an investment will fluctuate so that an
investor's shares when redeemed may be worth more or less than their original
cost.
</TABLE>
AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP)
Under ASAP, an investor may arrange to have a fixed amount automatically
invested in shares of the Fund monthly by authorizing his or her bank account or
Prudential Securities Account (including a Command Account) to be debited to
invest specified dollar amounts in shares of the Fund. The investor's bank must
be a member of the Automatic Clearing House System. Stock certificates are not
issued to ASAP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through Prudential
Securities or the Transfer Agent. Such withdrawal plan provides for monthly or
quarterly checks in any amount, except as provided below, up to the value of the
shares in the shareholder's account. Withdrawals of Class B or Class C shares
may be subject to a CDSC. See "Shareholder Guide-- How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and (iii)
the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at net asset
value on shares held under this plan. See "Shareholder Investment Account--
Automatic Reinvestment of Dividends and/or Distributions."
B-20
<PAGE>
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may be
terminated at any time, and the Distributor reserves the right to initiate a fee
of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must generally be recognized for federal income tax
purposes. In addition, withdrawals made concurrently with purchases of
additional shares are inadvisable because of the sales charge applicable to (i)
the purchase of Class A shares and (ii) the withdrawal of Class B and Class C
shares. Each shareholder should consult his or her own tax adviser with regard
to the tax consequences of the systematic withdrawal plan, particularly if used
in connection with a retirement plan.
TAX-DEFERRED RETIREMENT PLANS
Various qualified retirement plans, including a 401(k) plan, self-directed
individual retirement accounts and "tax sheltered accounts" under Section
403(b)(7) of the Internal Revenue Code are available through the Distributor.
These plans are for use by both self-employed individuals and corporate
employers. These plans permit either self-direction of accounts by participants,
or a pooled account arrangement. Information regarding the establishment of
these plans, the administration, custodial fees and other details are available
from Prudential Securities or the Transfer Agent.
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.
TAX-DEFERRED RETIREMENT ACCOUNTS
INDIVIDUAL RETIREMENT ACCOUNTS. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account until
the earnings are withdrawn. The following chart represents a comparison of the
earnings in a personal savings account with those in an IRA, assuming a $2,000
annual contribution, an 8% rate of return and a 39.6% federal income tax bracket
and shows how much more retirement income can accumulate within an IRA as
opposed to a taxable individual savings account.
<TABLE>
<CAPTION>
TAX-DEFERRED COMPOUNDING(1)
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
-------------------- -------- --------
<S> <C> <C>
10 years............ $ 26,165 $ 31,291
15 years............ 44,675 58,649
20 years............ 68,109 98,846
25 years............ 97,780 157,909
30 years............ 135,346 244,692
<FN>
- ------------------------
(1) The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings in
the IRA account will be subject to tax when withdrawn from the account.
</TABLE>
NET ASSET VALUE
The net asset value per share is the net worth of the Fund (assets,
including securities at value, minus liabilities) divided by the number of
shares outstanding. Net asset value is calculated separately for each class. The
Fund computes its net asset value at 4:15 p.m., New York time on each day the
New York Stock Exchange is open for trading except days on which no orders to
purchase, sell or redeem Fund shares have been received or on days on which
changes in the value of the Fund's portfolio investments do not affect net asset
value.
Under the Investment Company Act, the Trustees are responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Trustees, the value of each U.S.
Government security for which
B-21
<PAGE>
quotations are available will be based on the valuation provided by an
independent pricing service. Pricing services consider such factors as security
prices, yields, maturities, call features, ratings and developments relating to
specific securities in arriving at securities valuations. Exchange-traded
options on U.S. Government securities are valued at their last sale price as of
the close of options trading on the applicable exchanges. If there is no sale on
the applicable options exchange on a given day, options are valued at the
average of the quoted bid and asked prices as of the close of the applicable
exchange. Futures contracts are marked to market daily, and options thereon are
valued at their last sale price, as of the close of the applicable commodities
exchanges.
Securities or other assets for which market quotations are not readily
available (including OTC Options) are valued at their fair value as determined
in good faith by the Investment Adviser under procedures established by the
Fund's Trustees. Short-term debt securities which mature in more than 60 days
are valued at current market quotations. Short-term debt securities which mature
in 60 days or less are valued at amortized cost if their original term to
maturity from the date of purchase was 60 days or less, or by amortizing their
value on the 61st day prior to maturity, if their term to maturity from the date
of purchase exceeded 60 days, unless the Trustees determine that such valuation
does not represent fair value.
In the event that the New York Stock Exchange or the national securities
exchanges on which stock options are traded adopt different trading hours on
either a permanent or temporary basis, the Trustees of the Fund will reconsider
the time at which net asset value is computed. In addition, the Fund may compute
its net asset value as of any time permitted pursuant to any exemption, order or
statement of the Securities and Exchange Commission or its staff. The New York
Stock Exchange is closed on the following holidays: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
The net asset value of Class B and Class C shares will generally be lower
than the net asset value of Class A shares as a result of the larger
distribution-related fee to which Class B and Class C shares are subject. It is
expected, however, that the net asset value per share of each class will tend to
converge immediately after the recording of dividends which will differ by
approximately the amount of the distribution expense accrual differential among
the classes.
PERFORMANCE INFORMATION
YIELD. The Fund may from time to time advertise its yield as calculated over
a 30-day period. Yield is determined separately for Class A, Class B and Class C
shares. The yield will be computed by dividing the Fund's net investment income
per share earned during this 30-day period by the maximum offering price per
share on the last day of this period. Yield is calculated according to the
following formula:
a - b
YIELD = 2[( ------- +1)to the power of 6 - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive
dividends.
d = the maximum offering price per share on the last day of the
period.
The yield for the 30-day period ended October 31, 1993 for the Fund's Class
A and Class B shares was 5.02% and 4.39%, respectively. During this period, no
Class C shares were outstanding.
Yield fluctuates and an annualized yield quotation is not a representation
by the Fund as to what an investment in the Fund will actually yield for any
given period. Yields for the Fund will vary based on a number of factors
including changes in net asset value, market conditions, the level of interest
rates and the level of Fund income and expenses.
B-22
<PAGE>
AVERAGE ANNUAL TOTAL RETURN. The Fund may also advertise its average annual
total return. Average annual total return is determined separately for Class A,
Class B and Class C shares. See "How the Fund Calculates Performance" in the
Prospectus.
Average annual total return is computed according to the following formula:
P(1+T)to the power of n = ERV
Where: P = a hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value at the end of the 1, 5 or 10 year periods
(or fractional portion thereof) of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year periods.
Average annual total return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal or
state income taxes that may be payable upon redemption.
The average annual total return for Class A shares for the one year period
ended December 31, 1993 and for the period from January 22, 1990 (commencement
of operations) to October 31, 1993 was 11.19% and 9.59%, respectively. The
average annual total return for Class B shares for the one and five year periods
ended on December 31, 1993 and for the period from November 7, 1986
(commencement of operations) to December 31, 1993 was 10.44%, 9.91% and 8.05%,
respectively. During these periods, no Class C shares were outstanding. Without
the fee waiver and expense subsidy the average annual total return with respect
to the Class B shares for the five year period ended October 31, 1993 and for
the period since inception would have been 9.91% and 8.05%, respectively.
AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B and
Class C shares. See "How the Fund Calculates Performance" in the Prospectus.
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed according to the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $1000.
ERV = ending redeemable value at the end of the 1, 5 or 10 year
periods (or fractional portion thereof) of a hypothetical $1000
payment made at the beginning of the 1, 5 or 10 year periods.
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
The aggregate total return for Class A shares for the one year period ended
on October 31, 1993 and for the period from January 22, 1990 (commencement of
operations) to October 31, 1993 was 16.43% and 47.98%, respectively. The
aggregate total return for Class B shares for the one and five year periods
ended on October 31, 1993 and for the period November 7, 1986 (commencement of
operations) to December 31, 1993 was 15.44%, 61.47% and 71.78%, respectively.
During these periods, no Class C shares were outstanding.
B-23
<PAGE>
PERFORMANCE CHART
From time to time, the performance of the Fund may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long-term and the rate of inflation.(1)
[GRAPHIC]
(1) Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation--1993
Yearbook", (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Common stock returns are based on the Standard & Poor's 500 Stock
Index, a market-weighted, unmanaged index of 500 common stocks in a variety of
industry sectors. It is a commonly used indicator of broad stock price
movements. This chart is for illustrative purposes only, and is not intended to
represent the performance of any particular investment or fund.
TAXES
GENERAL. The Fund has qualified and intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code for
each taxable year. Accordingly, the Fund must, among other things, (a) derive at
least 90% of its gross income from dividends, interest and gains from the sale
or other disposition of securities or foreign currencies or other income
including income from options and futures on such securities derived with
respect to its business of investing in such securities, options, futures or
currencies; (b) derive less than 30% of its gross income from the sale or other
disposition of securities and certain options, futures and forward contracts and
foreign currencies held less than three months; and (c) diversify its holdings
so that, at the end of each fiscal quarter, (i) 50% of the market value of the
Fund's assets is represented by cash, U.S. Government securities and other
securities limited, in respect of any one issuer, to an amount not greater than
5% of the Fund's assets and not more than 10% of the outstanding voting
securities of any such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than the U.S.
Government). There are also requirements that may limit the Fund's ability to
engage in transactions involving options on securities, interest rate futures
and options thereon.
The Fund has received a private letter ruling from the Internal Revenue
Service (IRS) to the effect that the Fund's investments in options on U.S.
Government securities, in futures contracts on U.S. Government securities and in
options thereon will in effect be treated as investments in U.S. Government
securities for purposes of requirements (a) and (c) above, and that certain
constructive gains realized on such investments as a result of marking such
investments to market will not constitute gains from the sale or other
disposition of a security held for less than three months. Receipt of this
ruling has ameliorated, but did not eliminate, the impact of Subchapter M's
limitation on gains from the sale of securities held for less than three months.
B-24
<PAGE>
Under the Internal Revenue Code, gains from options and futures derived with
respect to the Fund's business of investing in U.S. Government securities will
be treated as gains from the sale of securities for the purpose of requirement
(a) above. In addition, under the Internal Revenue Code, to the extent that
certain options, short sales and other instruments are considered to be a part
of "designated hedge," increases or decreases in the values of such instruments
may be netted against increases or decreases in the value of the securities so
hedged may be netted for the purpose of requirement (b) above.
As a regulated investment company, the Fund will not be subject to federal
income tax on its net investment income and capital gains, if any, that it
distributes to its shareholders, provided (among other things) that it
distributes at least 90% of its net investment income and net short-term capital
gains earned in each taxable year. Distributions of net investment income and
net short-term capital gains will be taxable to shareholders at ordinary income
rates regardless of whether shareholders receive such distributions in
additional shares or in cash. Distributions of net long-term capital gains, if
any, are taxable as long-term capital gains regardless of whether shareholders
receive such distributions in additional shares or in cash; this is true
regardless of how long an investor has held his or her Fund shares. However, if
a shareholder holds shares in the Fund for not more than six months, then any
loss recognized on the sale of such shares will be treated as long-term capital
loss to the extent of any distribution on the shares which was treated as
long-term capital gain. Shareholders will be notified annually by the Fund as to
the federal tax status of distributions made by the Fund. A 4% nondeductible
excise tax will be imposed on the Fund to the extent the Fund does not meet
certain distribution requirements by the end of each calendar year.
Distributions may be subject to additional state and local taxes. Shareholders
are urged to consult their own tax advisers with respect to their individual
circumstances.
Any loss realized on a sale, redemption or exchange of shares of the Fund by
a shareholder will be disallowed to the extent the shares are replaced within a
61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the Fund.
For federal income tax purposes, the Fund has a capital loss carryforward as
of October 31, 1993 of approximately $9,319,000 of which $1,017,000 expires in
1997 and $8,302,000 expires in 1998. Accordingly, no capital gains distribution
is expected to be paid to shareholders until net gains have been realized in
excess of such carryforward.
The per share dividends on Class B and Class C shares will be lower than the
per share dividends and distributions on Class A shares as a result of the
higher distribution-related fee applicable to the Class B and Class C shares.
The per share distributions of capital gains, if any, will be in the same amount
for Class A, Class B and Class C shares.
LISTED OPTIONS AND FUTURES. Exchange-traded futures contracts, listed
options on futures contracts and listed options on U.S. Government securities
constitute "Section 1256 contracts" under the Internal Revenue Code. Section
1256 contracts are required to be "marked-to-market" at the end of the Fund's
tax year; that is, treated as having been sold at market value. Sixty percent of
any gain or loss recognized as a result of such "deemed sales" will be treated
as long-term capital gain or loss and the remainder will be treated as
short-term capital gain or loss. The Fund has received a private letter ruling
that a "deemed sale" of a security held for less than three months at the end of
a tax year will not result in gain from the sale of securities held for less
than three months for purposes of determining qualification of the Fund as a
regulated investment company. In addition, to the extent that the Section 1256
contracts are considered to be part of a "designated hedge" with U.S. Government
securities, pursuant to regulations to be promulgated under the Internal Revenue
Code, the increases or decreases in the value of the Section 1256 contract would
be netted with the increases or decreases in the U.S. Government securities for
the purpose of determining gains from securities held for less than three
months.
If the Fund holds a U.S. Government security which is offset by a Section
1256 contract, the Fund is considered to hold a "mixed straddle." The Fund may
elect whether to make a straddle-by-straddle identification of mixed straddles.
By electing to identify its mixed straddles, the Fund can avoid the application
of certain rules which could, in some circumstances, cause deferral or
disallowance of losses, the change of long-term capital gains into short-term
capital gains, or the change of short-term capital losses into long-term capital
losses but would subject itself to the following rules.
If the Fund owns a U.S. Government security and acquires an offsetting
Section 1256 contract in a transaction which the Fund elects to identify as a
mixed straddle, the acquisition of the offsetting position will result in
recognition of the unrealized gain or loss on the U.S. Government security. This
gain or loss will be long-term or short-term depending on the holding period of
the
B-25
<PAGE>
security at the time the mixed straddle is entered into. This recognition of
unrealized gain or loss will be taken into account, however, in determining the
amount of income available for the Fund's annual distributions, and can result
in an amount which is greater or less than the Fund's net realized gains being
available for such distributions. If an amount which is less than the Fund's net
realized gains is available for distribution, the Fund may elect to distribute
more than such available amount, up to the full amount of such net realized
gains.
The rules for determining whether gain or loss upon exercise, expiration or
termination of an identified mixed straddle will be treated as long-term,
short-term, or 60% long-term and 40% short-term are complex. In general, which
treatment applies will depend upon the order of disposition of the Section 1256
and the non-Section 1256 positions of a straddle and whether all or fewer than
all of such positions are disposed of on any day.
If the Fund does not elect to identify a mixed straddle, no recognition of
gain or loss on the U.S. Government securities in the Fund's portfolio will
result when the mixed straddle is entered into. However, any losses realized on
the straddle will be governed by a number of tax rules which might, under
certain circumstances, defer or disallow the losses in whole or in part, change
long-term gains into short-term gains, or change short-term losses into
long-term losses. A deferral or disallowance of recognition of a realized loss
may result in an amount being available for the Fund's annual distributions
which is greater than the Fund's net realized gains.
The Fund may also elect under Section 1256(d) of the Internal Revenue Code
that the provisions of Section 1256 will not apply to mixed straddles. In the
case of such an election, the taxation of options on U.S. Government securities
will parallel the taxation of OTC Options discussed below, and the taxation of
futures will be governed by provisions of the Internal Revenue Code dealing with
taxation of capital assets generally.
OTC OPTIONS. OTC Options, I.E., non-listed options on U.S. Government
securities, are not Section 1256 contracts. If an OTC Option written by the Fund
on U.S. Government securities expires, the amount of the premium will be treated
as short-term capital gain. If the option is terminated through a closing
purchase transaction, the Fund will generally recognize a short-term capital
gain or loss, depending on whether the premium income is greater or less than
the amount paid by the Fund in the closing transaction. If U.S. Government
securities are delivered by the Fund upon exercise of a written call option, or
sold to the Fund upon exercise of a written put option, the premium received
when the option was written will be treated as an addition to the proceeds
received in the case of the call option, or a decrease in the cost basis of the
security received in the case of a put option. The gain or loss realized on the
exercise of a written call option will be long-term or short-term depending upon
the holding period of the U.S. Government security delivered.
The premium paid for a purchased put or call option is a capital
expenditure, and loss will be realized on the expiration, and gain or loss will
be realized upon the sale of, a put or call option. The characterization of the
gain or loss as short-term or long-term will depend upon the holding period of
the option. If U.S. Government securities are purchased by the Fund upon
exercise of a purchased call option, or delivered by the Fund upon exercise of a
purchased put option, the premium paid when the option was purchased will be
treated as an addition to the basis of the securities purchased in the case of a
call option, or as a decrease in the proceeds received for the securities
delivered in the case of a put option.
Losses realized on straddles which include a purchased put option, can,
under certain circumstances, be subject to a number of tax rules which might
defer or disallow the losses in whole or in part, change long-term gains into
short-term gains, or change short-term losses into long-term losses. As noted
above, a deferral or disallowance of recognition of realized loss can result in
an amount which is greater than the Fund's net realized gains being available
for annual distributions.
ORGANIZATION AND CAPITALIZATION
The Fund was initially incorporated in Maryland on September 19, 1985. The
Fund was subsequently reorganized as a Massachusetts business trust on October
2, 1986 as Prudential-Bache Government Plus Fund II. On July 12, 1989, the
Fund's shareholders voted to change the name of the Fund to Prudential-Bache
U.S. Government Fund. On December 6, 1991, the Fund's name was changed to its
current name, Prudential U.S. Government Fund. The Declaration of Trust and the
By-Laws of the Fund are designed to make the Fund similar in certain respects to
a Massachusetts business corporation. The principal distinction between the two
forms relates to shareholder liability. Under Massachusetts law, shareholders of
a business trust may, in certain circumstances, be held personally liable as
partners for the obligations of the Fund beyond the amount of their investment
in the Fund, which is not the case with a corporation. The Fund believes that
this risk is not material. The Declaration
B-26
<PAGE>
of Trust of the Fund provides that shareholders shall not be subject to any
personal liability for the acts or obligations of the Fund and that every
written obligation, contract, instrument or undertaking made by the Fund shall
contain a provision to the effect that the shareholders are not individually
bound thereunder.
Counsel for the Fund has advised the Fund that no personal liability with
respect to contract obligations will attach to shareholders when adequate notice
of such provision of the Declaration of Trust is given, except possibly in a few
jurisdictions. With respect to all types of claims in the latter jurisdictions
and with respect to tort claims, contract claims when the provision referred to
is omitted from the undertaking, claims for taxes and certain statutory
liabilities, a shareholder may be held personally liable to the extent that
claims are not satisfied by the Fund. However, upon payment of any such
liability the shareholder will be entitled to reimbursement from the general
assets of the Fund. The Trustees intend to conduct the operations of the Fund in
such a way as to avoid, to the extent possible, ultimate liability of the
shareholders for liabilities of the Fund.
The Declaration of Trust further provides that no Trustee, officer, employee
or agent of the Fund is liable to the Fund or to a shareholder, nor is any
Trustee, officer, employee or agent liable to any third persons in connection
with the affairs of the Fund, except as such liability may arise from his own
bad faith, willful misfeasance, gross negligence, or reckless disregard of his
duties. It also provides that all third parties shall look solely to the Fund
property for satisfaction of claims arising in connection with the affairs of
the Fund. With the exceptions stated, the Declaration of Trust permits the
Trustees to provide for the indemnification of Trustees, officers, employees or
agents of the Fund against all liability in connection with the affairs of the
Fund.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts, 02171 serves as Custodian for the Fund's portfolio securities and
cash and in that capacity maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. See "How the Fund is
Managed--Custodian and Transfer and Dividend Disbursing Agent" in the
Prospectus.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the Fund.
Its mailing address is P.O. Box 15005, New Brunswick, New Jersey 08906-5005.
PMFS is a wholly-owned subsidiary of PMF. PMFS provides customary transfer
agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, payment of dividends and distributions, and related
functions. For these services, PMFS receives an annual fee per shareholder
account, a new account set-up fee for each manually-established account and a
monthly inactive zero balance account fee per shareholder account. PMFS is also
reimbursed for its out-of-pocket expenses, including but not limited to postage,
stationery, printing, allocable communications expenses and other costs. For the
fiscal year ended October 31, 1993, the Fund incurred fees of approximately
$215,000 for the services of PMFS.
Deloitte & Touche, 1633 Broadway, New York, New York 10019, serves as the
Fund's independent accountants and in that capacity audits the Fund's annual
financial statements.
B-27
<PAGE>
- --------------------------------------------------------------------------------
PRUDENTIAL U.S. GOVERNMENT FUND PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
- --------- ------------------------------------------------------- ------------
<C> <S> <C>
LONG-TERM INVESTMENTS--96.5%
U.S. TREASURY SECURITIES--30.3%
U.S. Treasury Bonds,
$ 4,000 10.75%, 8/15/05...................................... $ 5,746,880
6,400 12.00%, 8/15/13...................................... 10,206,976
6,000 11.25%, 2/15/15...................................... 9,580,320
2,030 8.125%, 8/15/19...................................... 2,508,309
4,000 7.875%, 2/15/21...................................... 4,836,240
U.S. Treasury Notes,
1,000 3.875%, 9/30/95...................................... 998,120
1,000 7.75%, 3/31/96....................................... 1,081,410
3,000 6.75%, 5/31/97....................................... 3,220,320
6,000 5.125%, 3/31/98...................................... 6,090,960
4,500 5.125%, 4/30/98...................................... 4,564,665
Zero Coupon Treasury Bonds,
16,000 Zero Coupon, 11/15/15................................ 3,780,319
------------
Total U.S. Treasury Securities
(cost $48,552,767)................................... 52,614,519
------------
U.S. GOVERNMENT AGENCIES--22.7%
Federal National Mortgage Assoc.,
5,000 9.80%, 5/10/00....................................... 5,415,600
40,000 Zero Coupon, 7/05/14................................. 9,700,000
Resolution Funding Corp.,
15,000 8.875%, 7/15/20...................................... 19,954,650
Tennessee Valley Auth.,
4,000 8.75%, 10/01/19...................................... 4,368,440
------------
Total U.S. Government Agencies
(cost $31,904,386)................................... 39,438,690
------------
MORTGAGE-RELATED SECURITIES--17.4%
Federal Home Loan Mortgage Corp.,
1,500 7.50%, 9/15/05, (CMO)................................ 1,569,375
2,200 7.50%, 7/15/07, (CMO)................................ 2,271,500
Federal National Mortgage Assoc.,
5,000 8.50%, 3/25/09, (CMO)................................ 5,253,100
19 Series 111, Class D, (I/O), (CMO).................... 71,009
5,000 6.50%, 7/25/20, (CMO)................................ 4,998,400
5,000 8.25%, 3/25/21, (CMO)................................ 5,328,100
Government National Mortgage Assoc.,
6,017 8.50%, 6/15/21....................................... 6,375,168
4,125 9.00%, 11/15/15-8/15/21.............................. 4,403,404
------------
Total Mortgage-Related Securities
(cost $29,438,930)................................... 30,270,056
------------
CORPORATE BONDS--19.3%
DOMESTIC--15.9%
Bausch & Lomb, Inc.,
3,500 6.80%, 12/12/96...................................... 3,696,315
Communications Satellite Corp.,
3,000 8.125%, 4/01/04...................................... 3,434,700
Dean Witter Discover & Co.,
1,500 6.00%, 3/01/98....................................... 1,536,810
Ford Motor Credit Co.,
2,000 6.25%, 2/26/98....................................... 2,061,740
Georgia Power Co.,
2,000 4.75%, 3/01/96....................................... 2,008,820
Heinz (H.J.) Co.,
1,500 6.875%, 1/15/03...................................... 1,606,845
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
- --------- ------------------------------------------------------- ------------
<C> <S> <C>
NationsBank Corp.,
$ 2,500 6.625%, 1/15/98...................................... $ 2,629,900
Republic N.Y. Corp.,
2,000 9.70%, 2/01/09....................................... 2,610,880
Southern California Edison Co.,
2,000 5.875%, 2/01/98...................................... 2,051,800
USLIFE Corp.,
2,000 6.375%, 6/15/00...................................... 2,039,240
Zeneca Wilmington, Inc.,
2,000 6.30%, 6/15/03....................................... 2,034,400
Zurich Reinsurance Centre Holdings, Inc.,
2,000 7.125%, 10/15/23..................................... 1,962,060
------------
Total Domestic (cost $27,188,210)...................... 27,673,510
------------
YANKEE--3.4%
Hanson Plc.,
2,000 7.735%, 1/15/03...................................... 2,168,360
Pohang Iron & Steel Ltd.,
2,000 6.625%, 7/01/03...................................... 2,021,780
Svenska Handelsbanken,
1,500 8.125%, 8/15/07...................................... 1,714,950
------------
Total Yankee
(cost $5,586,738).................................... 5,905,090
------------
Total Corporate Bonds
(cost $32,774,948)................................... 33,578,600
------------
FOREIGN GOVERNMENT BONDS--3.7%
Province of British Columbia,
2,000 7.00%, 1/15/03....................................... 2,159,760
Province of Quebec,
2,000 9.125%, 3/01/00...................................... 2,355,140
Republic of Italy,
2,000 6.875%, 9/27/23...................................... 1,970,820
------------
Total Foreign Government Bonds
(cost $6,170,820).................................... 6,485,720
------------
ASSET BACKED SECURITIES--3.1%
Chase Manhattan Credit Card Trust,
5,000 7.40%, 5/15/00
(cost $4,993,900).................................... 5,364,050
------------
Total Long-Term Investments
(cost $153,835,751).................................. 167,751,635
------------
SHORT-TERM INVESTMENT
TIME DEPOSIT--1.7%
Fuji Bank, Ltd.,
2,880 3.00%, 11/01/93
(cost $2,880,000).................................... 2,880,000
------------
TOTAL INVESTMENTS--98.2%
(cost $156,715,751; Note 4).......................... 170,631,635
Other assets in excess of liabilities--1.8%............ 3,123,871
------------
NET ASSETS--100%....................................... $173,755,506
------------
------------
<FN>
- ------------------------------
CMO--Collateralized Mortgage Obligations.
I/O--Interest Only.
</TABLE>
B-28 See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
PRUDENTIAL U.S. GOVERNMENT FUND
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS OCTOBER 31, 1993
----------------
<S> <C>
Investments, at value (cost $156,715,751)...................................... $170,631,635
Cash........................................................................... 1,539,593
Interest receivable............................................................ 2,231,697
Receivable for Fund shares sold................................................ 358,070
Other assets................................................................... 3,867
----------------
Total assets............................................................... 174,764,862
----------------
<CAPTION>
LIABILITIES
<S> <C>
Payable for Fund shares reacquired............................................. 407,826
Dividends payable.............................................................. 256,858
Accrued expenses............................................................... 127,049
Due to Distributors............................................................ 143,443
Due to Manager................................................................. 74,180
----------------
Total liabilities.......................................................... 1,009,356
----------------
NET ASSETS..................................................................... $173,755,506
----------------
----------------
Net assets were comprised of:
Shares of beneficial interest, at par........................................ $ 163,990
Paid-in capital in excess of par............................................. 169,606,591
----------------
169,770,581
Accumulated net realized losses.............................................. (9,930,959)
Net unrealized appreciation.................................................. 13,915,884
----------------
NET ASSETS AT OCTOBER 31, 1993................................................. $173,755,506
----------------
Class A:
Net asset value and redemption price per share ($6,848,531 DIVIDED BY
646,730 shares of beneficial interest issued and outstanding).............. $10.59
Maximum sales charge (4.5% of offering price)................................ .50
----------------
Maximum offering price to public............................................. $11.09
----------------
----------------
Class B:
Net asset value, offering price and redemption price per share ($166,906,975
DIVIDED BY 15,752,300 shares of beneficial interest issued and
outstanding)............................................................... $10.60
----------------
----------------
</TABLE>
B-29 See Notes to Financial Statements.
<PAGE>
- ----------------------------------------------
PRUDENTIAL U.S. GOVERNMENT FUND
STATEMENT OF OPERATIONS
- ----------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
NET INVESTMENT INCOME 1993
-----------
<S> <C>
Income
Interest and discount earned......................... $12,311,281
-----------
Expenses
Distribution fee--Class A............................ 9,508
Distribution fee--Class B............................ 1,621,067
Management fee....................................... 842,229
Transfer agent's fees and expenses................... 275,000
Custodian's fees and expenses........................ 110,000
Trustees' fees....................................... 54,000
Registration fees.................................... 39,000
Audit fee............................................ 30,000
Legal fees........................................... 5,000
Miscellaneous........................................ 13,064
-----------
Total expenses..................................... 2,998,868
-----------
Net investment income.................................. 9,312,413
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Investment transactions.............................. 6,713,276
Financial futures contracts.......................... (612,137)
-----------
6,101,139
-----------
Net change in unrealized appreciation of investments... 8,892,501
-----------
Net gain on investments................................ 14,993,640
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS... $24,306,053
-----------
-----------
</TABLE>
- ---------------------------------------------------
PRUDENTIAL U.S. GOVERNMENT FUND
STATEMENT OF CHANGES IN NET ASSETS
- ----------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
INCREASE (DECREASE) --------------------------
IN NET ASSETS 1993 1992
------------ ------------
<S> <C> <C>
Operations
Net investment income................. $ 9,312,413 $ 9,644,784
Net realized gain on investments...... 6,101,139 3,202,179
Net change in unrealized appreciation
of investments...................... 8,892,501 (23,492)
------------ ------------
Net increase in net assets resulting
from operations..................... 24,306,053 12,823,471
------------ ------------
Dividends to shareholders from net
investment income (Note 1)
Class A............................... (402,303) (262,423)
Class B............................... (8,910,110) (9,382,361)
------------ ------------
(9,312,413) (9,644,784)
------------ ------------
Fund share transactions (Note 5)
Net proceeds from shares subscribed... 83,709,350 69,673,768
Net asset value of shares issued in
reinvestment of dividends........... 6,045,712 6,024,862
Cost of shares reacquired............. (91,160,162) (80,074,858)
------------ ------------
Net decrease in net assets from Fund
share transactions.................... (1,405,100) (4,376,228)
------------ ------------
Total increase (decrease)............... 13,588,540 (1,197,541)
NET ASSETS
Beginning of year....................... 160,166,966 161,364,507
------------ ------------
End of year............................. $173,755,506 $160,166,966
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements.
B-30
<PAGE>
- --------------------------------------------------------------------------------
PRUDENTIAL U.S. GOVERNMENT FUND
Notes to Financial Statements
- --------------------------------------------------------------------------------
Prudential U.S. Government Fund (the "Fund") was organized as a Massachusetts
business trust on October 2, 1986. Investment operations commenced on November
7, 1986. The Fund's primary investment objective is to seek a high total return,
capital appreciation plus high current income, primarily through investment in
U.S. Government securities and obligations issued or guaranteed by U.S.
Government agencies or instrumentalities. The ability of issuers of debt
securities, other than those issued or guaranteed by the U.S. Government, may be
affected by economic developments in a specific industry or region.
Note 1. Accounting Policies
The following is a summary of significant accounting
policies followed by the Fund in the preparation of its financial statements.
SECURITY VALUATION: The Board of Trustees has authorized the use of an
independent pricing service to determine valuations for normal institutional
size trading units of securities. The pricing service considers such factors as
security prices, yields, maturities, call features, ratings and developments
relating to specific securities in arriving at securities valuations. Options
and financial futures contracts listed on exchanges are valued at their closing
price on the applicable exchange. When market quotations are not readily
available, a security is valued at fair value as determined in good faith by or
under the direction of the Board of Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost which approximates market value.
FINANCIAL FUTURES CONTRACTS: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Fund is required to pledge to the broker an amount of cash and/or
other assets equal to a certain percentage of the contract amount. This amount
is known as the "initial margin". Subsequent payments, known as "variation
margin", are made or received by the Series each day, depending on the daily
fluctuations in the value of the underlying security. Such variation margin is
recorded for financial statement purposes on a daily basis as unrealized gain or
loss. The Fund invests in financial futures contracts solely for the purpose of
hedging its existing portfolio securities or securities the Fund intends to
purchase against fluctuations in value caused by changes in prevailing market
interest rates. Should interest rates move unexpectedly, the Fund may not
achieve the anticipated benefits of the financial futures contracts and may
realize a loss. The use of futures transactions involves the risk of imperfect
correlation in movements in the price of futures contracts, interest rates and
the underlying hedged assets.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on the trade date. Realized gains or losses on sales of investments are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis.
Net investment income, other than distribution fees, and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
FEDERAL INCOME TAXES: It is the Fund's policy to continue to meet the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable net income to its shareholders.
Therefore, no federal income tax provision is required.
DIVIDENDS AND DISTRIBUTIONS: Dividends from net investment income are accrued
daily and payable monthly. The Fund will distribute annually any net realized
capital gains in excess of capital loss carry-forward if any. Dividends and
distributions are recorded on the ex-dividend date.
Income distributions and capital gains distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
RECLASSIFICATION OF CAPITAL ACCOUNTS: Effective November 1, 1992, the Fund began
accounting and reporting for distributions to shareholders in accordance with
Statement of Position 93-2: Determination, Disclosure, and Financial Statement
Presentation of Income, Capital Gain, and Return of Capital Distributions by
Investment Companies. The effect caused by adopting this statement was to
decrease paid-in-capital and decrease accumulated net realized losses by $6,842
compared to amounts previously reported through October 31, 1992. Net investment
income, net realized gains, and net assets were not affected by this change.
Note 2. Agreements
The Fund has a management agreement with Prudential
Mutual Fund Management, Inc. ("PMF"). Pursuant to this agreement, PMF has
responsibility for all investment advisory services and supervises the
subadviser's performance of such services. PMF has entered into a subadvisory
agreement with The Prudential Investment Corporation ("PIC"); PIC furnishes
investment advisory services in connection with the management of the Fund. PMF
pays for the cost of the subadviser's services, the compensation of officers of
the Fund, occupancy and certain clerical and bookkeeping costs of the Fund. The
Fund bears all other costs and expenses.
B-31
<PAGE>
The management fee paid PMF is computed daily and payable monthly at an annual
rate of .50 of 1% of the Fund's average daily net assets.
The Fund has distribution agreements with Prudential Mutual Fund Distributors,
Inc. ("PMFD"), which acts as the distributor of the Class A shares of the Fund,
and Prudential Securities Incorporated ("PSI"), which acts as distributor of the
Class B shares of the Fund (collectively the "Distributors"). To reimburse the
Distributors for their expenses incurred in distributing the Fund's Class A and
B shares, the Fund, pursuant to plans of distribution, pays the Distributors a
reimbursement, accrued daily and payable monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD for its
distribution-related expenses with respect to Class A shares, accrued daily and
payable monthly, at an annual rate of up to .30 of 1% of the average daily net
assets of the Class A shares. Such expenses under the Class A Plan were .15 of
1% of the average daily net assets of the Class A shares for the fiscal year
ended October 31, 1993. PMFD pays various broker-dealers, including PSI and
Pruco Securities Corporation ("Prusec"), affiliated broker-dealers, for account
servicing fees and other expenses incurred by such broker-dealers.
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to the Class B shares, accrued daily
and paid monthly, at an annual rate of up to 1% of the average daily net assets
of the Class B shares.
The Class B distribution expenses include commission credits for payments of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution-related expenses, interest and/or carrying
charges, the cost of printing and mailing prospectuses to potential investors
and of advertising incurred in connection with the distribution of shares.
The Distributors recover the distribution expenses and service fees incurred
through the receipt of reimbursement payments from the Fund under the Plans and
the receipt of initial sales charges (Class A only) and contingent deferred
sales charges (Class B only) from shareholders.
PMFD has advised the Fund that it has received approximately $107,100 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended October 31, 1993. From these fees, PMFD paid such sales charges to
dealers which in turn paid commissions to sales persons.
With respect to the Class B Plan, at any given time the amount of expenses
incurred by PSI in distributing the Fund's shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total reimbursement made by the Fund
pursuant to the Class B Plan. For the year ended October 31, 1993, PSI advised
the Fund that it received approximately $423,200 in contingent deferred sales
charges imposed upon redemptions by shareholders. PSI, as distributor, has also
advised the Fund that at October 31, 1993, the amount of distribution expenses
incurred by PSI and not yet reimbursed by the Fund or recovered through
contingent deferred sales charges approximated $34,800. This amount may be
recovered through future payments under the Class B Plan or contingent deferred
sales charges.
In the event of termination or noncontinuation of the Class B Plan, the Fund
would not be contractually obligated to pay PSI, as distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services, Inc. ("PMFS"), a
wholly-owned subsidiary of PMF, serves as the Fund's
transfer agent. During the fiscal year ended October 31, 1993, the Fund incurred
fees of approximately $215,000 for the services of PMFS. As of October 31, 1993,
approximately $18,000 of such fees were due to PMFS. Transfer agent fees and
expenses in the Statement of Operations include certain out-of-pocket expenses
paid to non-affiliates.
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than
short-term investments, for the fiscal year ended October 31, 1993 were
$98,802,525 and $101,424,731, respectively.
The federal income tax basis of the Fund's investments at October 31, 1993 was
$156,715,751 and accordingly, net unrealized appreciation of investments for
federal income tax purposes was $13,915,884 (gross unrealized appreciation-
$14,521,731; gross unrealized depreciation-$605,847).
For federal income tax purposes, the Fund has a capital loss carryforward as
of October 31, 1993 of approximately $9,319,000 of which $1,017,000 expires in
1997 and $8,302,000 expires in 1998. Accordingly, no capital gains distribution
is expected to be paid to shareholders until net gains have been realized in
excess of such carryforward.
Note 5. Capital
The Fund offers both Class A and Class B shares. Class A
shares are sold with a front-end sales charge of up to 4.5%. Class B shares are
sold with a contingent deferred sales charge which declines from 5% to zero
depending on the period of time the shares are held. Both classes of shares
B-32
<PAGE>
have equal earnings, assets and voting privileges except that each class bears
different distribution expenses and has exclusive voting rights with respect to
its distribution plan.
The Fund has authorized an unlimited number of shares of beneficial interest
of each class at $.01 par value. Transactions in shares of beneficial interest
for the fiscal years ended October 31, 1993 and 1992 were as follows:
<TABLE>
<CAPTION>
CLASS A SHARES AMOUNT
- -------------------------------------------------- ---------- ------------
<S> <C> <C>
Year ended October 31, 1993:
Shares sold....................................... 750,713 $ 7,553,655
Shares issued in reinvestment of dividends........ 26,658 272,022
Shares reacquired................................. (649,104) (6,560,954)
---------- ------------
Net increase in shares outstanding................ 128,267 $ 1,264,723
---------- ------------
---------- ------------
Year ended October 31, 1992:
Shares sold....................................... 585,157 $ 5,686,194
Shares issued in reinvestment of dividends........ 17,268 167,246
Shares reacquired................................. (355,255) (3,470,324)
---------- ------------
Net increase in shares outstanding................ 247,170 $ 2,383,116
---------- ------------
---------- ------------
<CAPTION>
CLASS B SHARES AMOUNT
- -------------------------------------------------- ---------- ------------
<S> <C> <C>
Year ended October 31, 1993:
Shares sold....................................... 7,467,812 $ 76,155,695
Shares issued in reinvestment of dividends........ 565,555 5,773,690
Shares reacquired................................. (8,280,106) (84,599,208)
---------- ------------
Net decrease in shares outstanding................ (246,739) $ (2,669,823)
---------- ------------
---------- ------------
Year ended October 31, 1992:
Shares sold....................................... 6,589,480 $ 63,987,574
Shares issued in reinvestment of dividends........ 605,743 5,857,616
Shares reacquired................................. (7,916,199) (76,604,534)
---------- ------------
Net decrease in shares outstanding................ (720,976) $ (6,759,344)
---------- ------------
---------- ------------
</TABLE>
B-33
<PAGE>
- --------------------------------------------------------------------------------
PRUDENTIAL U.S. GOVERNMENT FUND
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B
----------------------------------------- ------------------------------------------------
JANUARY 22,
YEAR ENDED 1990@
OCTOBER 31, THROUGH YEAR ENDED OCTOBER 31,
--------------------------- OCTOBER 31, ------------------------------------------------
1993 1992 1991 1990 1993 1992 1991 1990 1989
------- ------- ------- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 9.69 $ 9.49 $ 8.97 $ 9.31 $ 9.70 $ 9.50 $ 8.97 $ 9.54 $ 9.05
------- ------- ------- ----------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income......... .64 .68 .66 .55 .55 .59 .59 .62 .64
Net realized and unrealized
gain (loss) on investment
transactions................. .90 .20 .52 (.34) .90 .20 .53 (.57) .52
------- ------- ------- ----------- -------- -------- -------- -------- --------
Total from investment
operations................ 1.54 .88 1.18 .21 1.45 .79 1.12 .05 1.16
------- ------- ------- ----------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment
income....................... (.64) (.68) (.66) (.55) (.55) (.59) (.59) (.62) (.64)
Distributions from
paid-in-capital.............. -- -- -- -- -- -- -- -- (.03)
------- ------- ------- ----------- -------- -------- -------- -------- --------
Total distributions......... (.64) (.68) (.66) (.55) (.55) (.59) (.59) (.62) (.67)
------- ------- ------- ----------- -------- -------- -------- -------- --------
Net asset value, end of
period....................... $ 10.59 $ 9.69 $ 9.49 $ 8.97 $ 10.60 $ 9.70 $ 9.50 $ 8.97 $ 9.54
------- ------- ------- ----------- -------- -------- -------- -------- --------
------- ------- ------- ----------- -------- -------- -------- -------- --------
TOTAL RETURN#................. 16.43% 9.39% 13.72% 2.16% 15.44% 8.46% 12.86% .64% 13.53%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $ 6,849 $ 5,024 $ 2,574 $1,617 $166,907 $155,143 $158,790 $172,521 $169,825
Average net assets (000)...... $ 6,339 $ 3,769 $ 2,158 $ 918 $162,107 $154,502 $168,421 $174,276 $156,322
Ratios to average net assets:
Expenses, including
distribution fees......... .96% .94% 1.24% 1.08%* 1.81% 1.79% 2.09% 1.99% 2.05%
Expenses, excluding
distribution fees......... .81% .79% 1.09% .94%* .81% .79% 1.09% .99% 1.06%
Net investment income....... 6.35% 6.92% 7.24% 7.16%* 5.50% 6.07% 6.39% 6.89% 6.95%
Portfolio turnover............ 66% 66% 236% 608% 66% 66% 236% 608% 392%
<FN>
- ------------------------------
* Annualized.
@ Commencement of offering of Class A shares.
# Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
See Notes to Financial Statements.
B-34
<PAGE>
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Shareholders and Trustees
Prudential U.S. Government Fund
We have audited the accompanying statement of assets and liabilities of
Prudential U.S. Government Fund, including the portfolio of investments, as of
October 31, 1993, the related statements of operations for the year then ended
and of changes in net assets for each of the two years in the period then ended,
and the financial highlights for each of the five years in the period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
October 31, 1993 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential U.S.
Government Fund, as of October 31, 1993 the results of its operations, the
changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche
New York, New York
December 15, 1993
B-35
<PAGE>
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
AAA: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than Aaa bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA: Bonds which are rated Baa are considered as medium grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
COMMERCIAL PAPER
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months.
P-1: The designation "Prime-1" or "P-1" indicates the highest quality
repayment capacity of the rated issue.
P-2: The designation "Prime-2" or "P-2" indicates a strong capacity for
repayment.
STANDARD & POOR'S CORPORATION
AAA: Debt rated AAA has the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
A-1
<PAGE>
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB, B, CCC, CC: Debt rated BB, B, CCC and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties of major risk exposures to adverse
conditions.
COMMERCIAL PAPER
Standard & Poor's commercial paper ratings are current assessments of the
likelihood of timely payment of debt having an original maturity of no more than
270 days.
A-1: The A-1 designation indicates that the degree of safety regarding
timely payment is very strong.
A-2: Capacity for timely payment on issues with the designation A-2 is
strong. However, the relative degree of safety is not as overwhelming as for
issues designated A-1.
A-2
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS:
(1) The following Financial Statement is included in the Prospectus,
constituting Part A of this Post-Effective Amendment to the Registration
Statement:
Financial Highlights.
(2) The following Financial Statements are included in the Statement of
Additional Information constituting Part B of this Post-Effective Amendment
to the Registration Statement on Form N-1A:
Independent Auditors' Report.
Portfolio of Investments at October 31, 1993.
Statement of Assets and Liabilities at October 31, 1993.
Statement of Operations for the year ended October 31, 1993.
Statement of Changes in Net Assets for the years ended October 31,
1993 and 1992.
Notes to Financial Statements (Part B).
Financial Highlights.
(B) EXHIBITS:
1. (a) Declaration of Trust of the Registrant filed September 22, 1986
with the Commonwealth of Massachusetts. Incorporated by reference to
Exhibit No. 1 to the Registration Statement on Form N-1A,
Pre-Effective Amendment No. 2 (File No. 33-01332).
(b) Amendment to Declaration of Trust of Registrant filed September
8, 1986 with the Commonwealth of Massachusetts. Incorporated by
reference to Exhibit No. 1(b) to the Registration Statement on Form
N-1A, Post-Effective Amendment No. 6 (File No. 33-01332).
(c) Amendments to Declaration of Trust of Registrant filed January
18, 1990 with the Commonwealth of Massachusetts. Incorporated by
reference to Exhibit No. 1(c) to the Registration Statement on Form
N-1A, Post-Effective Amendment No. 9 (File No. 33-01332).
(d) Amendments to Declaration of Trust of Registrant filed December
6, 1991 with the Commonwealth of Massachusetts. Incorporated by
reference to Exhibit 1(d) to the Registration Statement on Form
N-1A, Post-Effective Amendment No. 10 (File No. 33-01332).
(e) Form of Amended and Restated Declaration of Trust.*
2. Amended and Restated By-Laws of the Registrant.*
3. Not Applicable.
4. (a) Specimen of Share Certificate. Incorporated by reference to
Exhibit No. 4 to the Registration Statement on Form N-1A,
Post-Effective Amendment No. 9 (File No. 33-01332).
(b) Instruments Defining Rights of Shareholders, incorporated by
reference to Exhibit 4(b) to the Registration Statement on Form
N-1A, Post-Effective Amendment No. 12 (File No. 33-013321) filed via
EDGAR on December 30, 1993.
5. (a) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc. Incorporated by reference to Exhibit
No. 5(a) to the Registration Statement on Form N-1A, Post-Effective
Amendment No. 4 (File No. 33-01332).
C-1
<PAGE>
(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation. Incorporated by
reference to Exhibit No. 5(b) to the Registration Statement on Form
N-1A, Post-Effective Amendment No. 4 (File No. 33-01332).
6. (a)(i) Distribution Agreement with respect to the Class A shares
between the Registrant and Prudential Mutual Fund Distributors, Inc
dated July 1, 1993, incorporated by reference to Exhibit 6(a)(i) to
the Registration Statement on Form N-1A, Post-Effective Amendment
No. 12 (File No. 33-01332) filed via EDGAR on December 30, 1993.
(ii) Distribution Agreement with respect to the Class B shares
between the Registrant and Prudential Securities Inc dated July 1,
1993, incorporated by reference to Exhibit 6(a)(2) to the
Registration Statement on Form N-1A, Post-Effective Amendment No. 12
(File No. 33-01332) filed via EDGAR on December 30, 1993.
(iii) Form of Distribution and Service Agreement for Class A
shares.*
(iv) Form of Distribution and Service Agreement for Class B shares.*
(v) Form of Distribution and Service Agreement for Class C shares.*
(b) Dealer Agreement. Incorporated by reference to Exhibit No. 6(b)
to the Registration Statement on Form N-1A (File No. 33-01332).
7. Not Applicable.
8. (a) Custodian Contract between the Registrant and State Street Bank
and Trust Company. Incorporated by reference to Exhibit 8(a) to the
Registration Statement on Form N-1A, Post-Effective Amendment No. 10
(File No. 33-01332).
(b) Special Custody Account Agreement among the Registrant, State
Street Bank and Trust Company and Merrill Lynch, Pierce, Fenner &
Smith. Incorporated by reference to Exhibit No. 8(b) to the
Registration Statement on Form N-1A, Post-Effective Amendment No. 1
(File No. 33-01332).
(c) Customer Agreement between the Registrant and Merrill Lynch
Futures Inc. Incorporated by reference to Exhibit No. 8(c) to the
Registration Statement on Form N-1A, Post-Effective Amendment No. 1
(File No. 33-01332).
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc. Incorporated by reference to
Exhibit No. 9(c) to the Registration Statement on Form N-1A,
Post-Effective Amendment No. 2 (File No. 33-01332).
10. Opinion of Shereff, Friedman, Hoffman & Goodman. Incorporated by
reference to Exhibit No. 10 to the Registration Statement on Form
N-1A, Pre-Effective Amendment No. 2 (File No. 33-01332).
11. Consent of Independent Accountants.*
12. Not Applicable.
13. (a) Purchase Agreement. Incorporated by reference to Exhibit No.
13(a) to the Registration Statement on Form N-1A, Pre-Effective
Amendment No. 2 (File No. 33-01332).
(b) Agreement and Plan of Reorganization and Liquidation.
Incorporated by reference to Exhibit No. 13(b) to the Registration
Statement on Form N-1A, Pre-Effective Amendment No. 2 (File No.
33-01332).
14. Not Applicable.
15. (a)(i) Distribution and Service Plan with respect to the Class A
shares dated July 1, 1993, incorporated by reference to Exhibit
15(a)(i) to the Registration Statement on Form N-1A, Post-Effective
Amendment No. 12 (File No. 33-01332) filed via EDGAR on December 30,
1993.
(ii) Distribution and Service Plan with respect to the Class B
shares dated July 1, 1993, incorporated by reference to Exhibit
15(a)(ii) to the Registration Statement on Form N-1A, Post-Effective
Amendment No. 12 (File No. 33-01332) filed via EDGAR on December 30,
1993.
(b)(i) Form of Distribution and Service Plan for Class A shares.*
(ii) Form of Distribution and Service Plan for Class B shares.*
(iii) Form of Distribution and Service Plan for Class C shares.*
C-2
<PAGE>
16. Schedule of Computation of Performance Quotations. Incorporated by
reference to Exhibit No. 16 to the Registration Statement on Form
N-1A, Post-Effective Amendment No. 4 (File No. 33-01332).
- --------------
*Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
No person is controlled by or under common control with the Registrant.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of March 31, 1994 there were 312 and 6,759 record holders of Class A and
Class B common stock, $.01 par value per share, of the Registrant, respectively.
ITEM 27. INDEMNIFICATION.
As permitted by Section 17(h) and (i) of the Investment Company Act of 1940
(the 1940 Act) and pursuant to Article VI of the Fund's By-Laws (Exhibit 2 to
the Registration Statement), officers, directors, employees and agents of the
Registrant will not be liable to the Registrant, any stockholder, officer,
director, employee, agent or other person for any action or failure to act,
except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
Section 2-418 of Maryland General Corporation Law permits indemnification of
directors who acted in good faith and reasonably believed that the conduct was
in the best interests of the Registrant. As permitted by Section 17(i) of the
1940 Act, pursuant to Section 10 of each Distribution Agreement (Exhibit 6(a) to
the Registration Statement), each Distributor of the Registrant may be
indemnified against liabilities which it may incur, except liabilities arising
from bad faith, gross negligence, willful misfeasance or reckless disregard of
duties.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (Securities Act) may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1940 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in connection with the successful defense of any
action, suit or proceeding) is asserted against the Registrant by such director,
officer or controlling person in connection with the shares being registered,
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the 1940 Act and will be governed by the final adjudication of such
issue.
The Registrant has purchased an insurance policy insuring its officers and
directors against liabilities, and certain costs of defending claims against
such officers and directors, to the extent such officers and directors are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and directors under certain circumstances.
Section 9 of the Management Agreement (Exhibit 5(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 5(b) to the
Registration Statement) limit the liability of Prudential Mutual Fund
Management, Inc. (PMF) and The Prudential Investment Corporation (PIC),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective duties or from reckless
disregard by them of their respective obligations and duties under the
agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and each Distribution Agreement in a manner consistent
with Release No. 11330 of the Securities and Exchange Commission under the 1940
Act so long as the interpretation of Sections 17(h) and 17(i) of such Act remain
in effect and are consistently applied.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) Prudential Mutual Fund Management (PMF)
See "How the Fund is Managed--Manager" in the Prospectus constituting Part A
of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
C-3
<PAGE>
The business and other connections of the officers of PMF are listed in
Schedules A and D of Form ADV of PMF as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104, filed in October, 1993).
The business and other connections of PMF's directors and principal executive
officers are set forth below. Except as otherwise indicated, the address of each
person is One Seaport Plaza, New York, NY 10292.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PMF PRINCIPAL OCCUPATIONS
- ----------------------- -------------------- --------------------------------------------------------------------
<S> <C> <C>
Brendan D. Boyle Executive Vice Executive Vice President and Director of Marketing, PMF
President and
Director of
Marketing
John D. Brookmeyer, Jr. Director Senior Vice President, PIC; Senior Vice President, The Prudential
Two Gateway Center Insurance Company of America (Prudential)
Newark, NJ 07102
Susan C. Cote Senior Vice Senior Vice President, PMF; Senior Vice President, Prudential
President Securities
Fred A. Fiandaca Executive Vice Executive Vice President, Chief Operating Officer and Director, PMF;
Raritan Plaza One President, Chief Chairman, Chief Operating Officer and Director, Prudential Mutual
Edison, NJ 08847 Operating Officer Fund Services, Inc.
and Director
Stephen P . Fisher Senior Vice Senior Vice President, PMF; Senior Vice President, Prudential
President Securities
Frank W. Giordano Executive Vice Executive Vice President, General Counsel and Secretary, PMF; Senior
President, General Vice President, Prudential Securities
Counsel and
Secretary
Robert F. Gunia Executive Vice Executive Vice President, Chief Administrative Officer, Chief
President, Chief Financial Officer and Director, PMF; Senior Vice President,
Administrative Prudential Securities Inc.
Officer, Chief
Financial Officer
and Director
Eugene B. Heimberg Director Senior Vice President, Prudential; President, Director and Chief
Prudential Plaza Investment Officer, PIC
Newark, NJ 07101
Lawrence C. McQuade Vice Chairman Vice Chairman, PMF
Leland B. Paton Director Executive Vice President and Director, Prudential Securities;
Director, Prudential Securities Group, Inc. ("PSG")
Richard A. Redeker President, Chief President, Chief Executive Officer and Director, PMF; Executive Vice
Executive Officer President Director and Member of Operating Committee, Prudential
and Director Securities; Director, PSG
S. Jane Rose Senior Vice Senior Vice President, Senior Counsel and Assistant Secretary, PMF;
President, Senior Senior Vice President and Senior Counsel, Prudential Securities
Counsel and
Assistant Secretary
Donald G. Southwell Director Senior Vice President, Prudential, Director, PSG
213 Washington Street
Newark, N.J. 07102
</TABLE>
C-4
<PAGE>
(b) Prudential Investment Corporation (PIC)
See "How the Fund is Managed--Subadviser" in the Prospectus constituting Part
A of this Registration Statement and "Subadviser" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of PIC's directors and executive officers
are as set forth below. Except as otherwise indicated, the address of each
person is Prudential Plaza, Newark, NJ 07101.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ----------------------- -------------------- --------------------------------------------------------------------
<S> <C> <C>
Martin A. Berkowitz Senior Vice Presi- Senior Vice President, Chief Financial Officer and Chief Compliance
dent, Chief Officer, PIC; Vice President, Prudential
Financial Officer
and Chief Compliance
Officer
William M. Bethke Senior Vice Senior Vice President, Prudential; Senior Vice President, PIC
Two Gateway Center President
Newark NJ 07102
John D. Brookmeyer, Jr. Senior Vice Senior Vice President, Prudential; Senior Vice President, PIC
Two Gateway Center President
Newark, NJ 07102
Eugene B. Heimberg President, Director Senior Vice President, Prudential; President, Director and Chief
and Chief Investment Investment Officer, PIC
Officer
Garnett L. Keith, Jr. Director Vice Chairman and Director, Prudential; Director, PIC
Harry E. Knapp, Jr. Vice President Vice President, Prudential; Vice President, PIC
Four Gateway Center
Newark, NJ 07102
William P . Link Senior Vice Executive Vice President, Prudential; Senior Vice President, PIC
Four Gateway Center President
Newark, NJ 07102
Robert E. Riley Executive Vice Executive Vice President, Prudential; Executive Vice President, PIC;
800 Boylston Ave President Director, PSG
Boston, MA 02199
James W. Stevens Executive Vice Executive Vice President, Prudential; Executive Vice President, PIC;
Four Gateway Center President Director, PSG
Newark, NJ 07102
Robert C. Winters Director Chairman of the Board and Chief Executive Officer, Prudential;
Chairman of the Board and Director, PSG
Claude J. Zinngrabe, Executive Vice Vice President, Prudential; Executive Vice President, PIC
Jr. President
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a)(i) Prudential Securities
Prudential Securities is distributor for Prudential Government Securities
Trust (Intermediate Term Series), The Target Portfolio Trust and for Class B
shares of Prudential Adjustable Rate Securities Fund, Inc., The BlackRock
Government Income Trust, Prudential California Municipal Fund and (California
Series), Prudential Equity Fund, Inc., Prudential Equity Income Fund, Prudential
FlexiFund, Prudential Global Fund, Inc., Prudential-Bache Global Genesis Fund,
Inc. (d/b/a Prudential Global Genesis Fund), Prudential-Bache Global Natural
Resources Fund, Inc. (d/b/a Prudential Global Natural Resources Fund),
Prudential-Bache GNMA Fund, Inc. (d/b/a Prudential GNMA Fund), Prudential-Bache
Government Plus Fund, Inc. (d/b/a Prudential Government Plus Fund), Prudential
Growth Fund, Inc., Prudential-Bache Growth Opportunity Fund, Inc. (d/b/a
Prudential Growth Opportunity Fund), Prudential-Bache High Yield
C-5
<PAGE>
Fund, Inc. (d/b/a Prudential High Yield Fund), Prudential IncomeVertible-R-
Fund, Inc., Prudential Intermediate Global Income Fund, Inc., Prudential
Multi-Sector Fund, Inc., Prudential Municipal Bond Fund, Prudential Municipal
Series Fund (except Connecticut Money Market Series, Massachusetts Money Market
Series, New York Money Market Series, New Jersey Money Market Series and Florida
Series), Prudential-Bache National Municipals Fund, Inc. (d/b/a Prudential
National Municipals Fund), Prudential Pacific Growth Fund, Inc., Prudential
Short-Term Global Income Fund, Inc., Prudential U.S. Government Fund,
Prudential-Bache Utility Fund, Inc. (d/b/a Prudential Utility Fund), Global
Utility Fund, Inc. and Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth
Equity Fund). Prudential Securities is also a depositor for the following unit
investment trusts:
The Corporate Income Fund
Corporate Investment Trust Fund
Equity Income Fund
Government Securities Income Fund
International Bond Fund
Municipal Investment Trust
Prudential Equity Trust Shares
National Equity Trust
Prudential Unit Trusts
Government Securities Equity Trust
National Municipal Trust
(ii) Prudential Mutual Fund Distributors, Inc.
Prudential Mutual Fund Distributors, Inc. is distributor for Command
Government Fund, Command Money Fund, Command Tax-Free Fund, Prudential
California Municipal Fund (California Money Market Series and California Income
Series and Class A shares of the California Series), Prudential Government
Securities Trust (Money Market Series and U.S. Treasury Money Market Series),
Prudential-Bache MoneyMart Assets (d/b/a Prudential MoneyMart Assets),
Prudential Municipal Series Fund (Connecticut Money Market Series, Massachusetts
Money Market Series, New York Money Market Series, New Jersey Money Market
Series and Florida Series), Prudential Institutional Liquidity Portfolio, Inc.,
Prudential-Bache Special Money Market Fund, Inc. (d/b/a Prudential Special Money
Market Fund), Prudential-Bache Structured Maturity Fund, Inc. (d/b/a/ Prudential
Structured Maturity Fund), Prudential-Bache Tax-Free Money Fund, Inc. (d/b/a
Prudential Tax-Free Money Fund), and for Class A shares of Prudential Adjustable
Rate Securities Fund, Inc., The BlackRock Government Income Trust, Prudential
California Municipal Fund (California Series), Prudential Equity Fund, Inc.,
Prudential Equity Income Fund, Prudential FlexiFund, Prudential Global Fund,
Inc., Prudential-Bache Global Genesis Fund, Inc. (d/b/a Prudential Global
Genesis Fund), Prudential-Bache Global Natural Resources Fund, Inc. (d/b/a
Prudential Global Natural Resources Fund), Prudential-Bache GNMA Fund, Inc.
(d/b/a Prudential GNMA Fund), Prudential-Bache Government Plus Fund, Inc. (d/b/a
Prudential Government Plus Fund), Prudential Growth Fund, Inc., Prudential-Bache
Growth Opportunity Fund, Inc. (d/b/a Prudential Growth Opportunity Fund),
Prudential-Bache High Yield Fund, Inc. (d/b/a Prudential High Yield Fund),
Prudential IncomeVertible(R) Fund, Inc., Prudential Intermediate Global Income
Fund, Inc., Prudential Multi-Sector Fund, Inc., Prudential Municipal Bond Fund,
Prudential Municipal Series Fund (Arizona Series, Georgia Series, Maryland
Series, Massachusetts Series, Michigan Series, Minnesota Series, New Jersey
Series, North Carolina Series, Ohio Series and Pennsylvania Series),
Prudential-Bache National Municipals Fund, Inc. (d/b/a Prudential National
Municipals Fund), Prudential Pacific Growth Fund, Inc., Prudential Short-Term
Global Income Fund, Inc., Prudential U.S. Government Fund and Prudential-Bache
Utility Fund, Inc. (d/b/a Prudential Utility Fund), Global Utility Fund, Inc.,
and Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth Equity Fund).
(b)(i) Information concerning the directors and officers of Prudential
Securities Incorporated is set forth below.
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
- ---------------------- ---------------------------------------- -------------
<S> <C> <C>
Alan D. Hogan......... Executive Vice President, Chief None
Administrative Officer and Director
Howard A. Knight...... Executive Vice President, Director, None
Corporate Strategy and New Business
Development
George A. Murray...... Executive Vice President and Director None
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
- ---------------------- ---------------------------------------- -------------
<S> <C> <C>
John P . Murray....... Executive Vice President and Director of None
Risk Management
Leland B. Paton....... Executive Vice President and Director None
Richard A. Redeker.... Director Director
Hardwick Simmons...... Chief Executive Officer, President and None
Director
Lee Spencer........... Interim General Counsel None
</TABLE>
(ii) Prudential Mutual Fund Distributors, Inc.:
<TABLE>
<S> <C> <C>
Joanne Accurso-Soto... Vice President None
Dennis Annarumma...... Vice President, Assistant Treasurer and None
Assistant Comptroller
Phyllis J. Berman..... Vice President None
Fred A. Fiandaca...... President, Chief Executive Officer and None
Director
Raritan Plaza One
Edison, NJ 08847
Stephen P. Fisher..... Vice President None
Frank W. Giordano..... Executive Vice President, General None
Counsel, Secretary and Director
Robert F. Gunia....... Executive Vice President, Treasurer, Vice
Comptroller and Director President
Andrew J. Varley...... Vice President None
Anita L. Whelan....... Vice President and Assistant Secretary None
<FN>
- --------------
(1)The address of each person named is One Seaport Plaza, New York, NY 10292
unless otherwise indicated.
</TABLE>
(c) Registrant has no principal underwriter who is not an affiliated person of
the Registrant.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices of
State Street Bank and Trust Company, 1776 Heritage Drive, North Quincy,
Massachusetts, The Prudential Investment Corporation, Prudential Plaza, 745
Broad Street, Newark, New Jersey, the Registrant, One Seaport Plaza, New York,
New York, and Prudential Mutual Fund Services, Inc., Raritan Plaza One, Edison,
New Jersey. Documents required by Rules 31a-1 (b)(5), (6), (7), (9), (10) and
(11) and 31a-1(f) will be kept at Two Gateway Center, documents required by
Rules 31a-1(b)(4) and (11) and 31a-1(d) at One Seaport Plaza and the remaining
accounts, books and other documents required by such other pertinent provisions
of Section 31(a) and the Rules promulgated thereunder will be kept by State
Street Bank and Trust Company and Prudential Mutual Fund Services, Inc.
ITEM 31. MANAGEMENT SERVICES
Other than as set forth under the captions "How the Fund is Managed--Manager"
and "How the Fund is Managed--Distributor" in the Prospectus and the captions
"Manager" and "Distributor" in the Statement of Additional Information,
constituting Parts A and B, respectively, of this Registration Statement,
Registrant is not a party to any management-related service contract.
ITEM 32. UNDERTAKINGS
1. The Registrant undertakes to furnish to each person to whom a prospectus
is delivered with a copy of the Registrant's latest annual report to
shareholders upon request and without charge.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Post-Effective
Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, and State of
New York, on the 5th day of May, 1994.
PRUDENTIAL-U.S. GOVERNMENT FUND, INC.
/s/ Lawrence C. McQuade
----------------------------------------------------------------------
(LAWRENCE C. MCQUADE, PRESIDENT)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------------- -------------------------------------- -----------
<S> <C> <C>
/s/ Lawrence C. McQuade President and Director
- -------------------------------------
LAWRENCE C. MCQUADE
/s/ Stephen C. Eyre Trustee May 5, 1994
- -------------------------------------
STEPHEN C. EYRE
/s/ Delayne D. Gold Trustee May 5, 1994
- -------------------------------------
DELAYNE D. GOLD
/s/ Don G. Hoff Trustee May 5, 1994
- -------------------------------------
DON G. HOFF
/s/ Harry A. Jacobs, Jr. Trustee May 5, 1994
- -------------------------------------
HARRY A. JACOBS, JR.
/s/ Sidney E. Knafel Trustee May 5, 1994
- -------------------------------------
SIDNEY E. KNAFEL
/s/ Robert E. LaBlanc Trustee May 5, 1994
- -------------------------------------
ROBERT E. LABLANC
/s/ Thomas A. Owens, Jr. Trustee May 5, 1994
- -------------------------------------
THOMAS A. OWENS, JR.
/s/ Richard A. Redeker Trustee May 5, 1994
- -------------------------------------
RICHARD A. REDEKER
/s/ Clay T. Whitehead Trustee May 5, 1994
- -------------------------------------
CLAY T. WHITEHEAD
/s/ Susan C. Cote Treasurer and Principal Financial and May 5, 1994
- ------------------------------------- Accounting Officer
SUSAN C. COTE
</TABLE>
<PAGE>
PRUDENTIAL U.S. GOVERNMENT FUND
EXHIBIT INDEX
1. (a) Declaration of Trust of the Registrant filed September 22, 1986 with the
Commonwealth of Massachusetts. Incorporated by reference to Exhibit No. 1 to
the Registration Statement on Form N-1A, Pre-Effective Amendment No. 2 (File
No. 33-01332).
(b) Amendment to Declaration of Trust of Registrant filed September 8, 1986
with the Commonwealth of Massachusetts. Incorporated by reference to Exhibit
No. 1(b) to the Registration Statement on Form N-1A, Post-Effective
Amendment No. 6 (File No. 33-01332).
(c) Amendments to Declaration of Trust of Registrant filed January 18, 1990
with the Commonwealth of Massachusetts. Incorporated by reference to Exhibit
No. 1(c) to the Registration Statement on Form N-1A, Post-Effective
Amendment No. 9 (File No. 33-01332).
(d) Amendments to Declaration of Trust of Registrant filed December 6, 1991
with the Commonwealth of Massachusetts. Incorporated by reference to Exhibit
1(d) to the Registration Statement on Form N-1A, Post-Effective Amendment
No. 10 (File No. 33-01332).
(e) Form of Amended and Restated Declaration of Trust.* ....................
2. Amended and Restated By-Laws of the Registrant.* ...........................
3. Not Applicable.
4. (a) Specimen of Share Certificate. Incorporated by reference to Exhibit No.
4 to the Registration Statement on Form N-1A, Post-Effective Amendment No. 9
(File No. 33-01332).
(b) Instruments defining rights of holders of securities being offered
incorporated by reference to Exhibit 4(b) to the Registration Statement on
Form N-1A, Post-Effective Amendment No. 12 (File No. 33-013321) filed via
EDGAR on December 30, 1993.
5. (a) Management Agreement between the Registrant and Prudential Mutual Fund
Management, Inc. Incorporated by reference to Exhibit No. 5(a) to the
Registration Statement on Form N-1A, Post-Effective Amendment No. 4 (File
No. 33-01332).
(b) Subadvisory Agreement between Prudential Mutual Fund Management, Inc.
and The Prudential Investment Corporation. Incorporated by reference to
Exhibit No. 5(b) to the Registration Statement on Form N-1A, Post-Effective
Amendment No. 4 (File No. 33-01332).
6. (a)(i) Distribution Agreement with respect to the Class A shares between the
Registrant and Prudential Mutual Fund Distributors, Inc. dated July 1, 1993,
incorporated by reference to Exhibit 6(a)(i) to the Registration Statement
on Form N-1A, Post-Effective Amendment No. 12 (File No. 33-01332) filed via
EDGAR on December 30, 1993.
(ii) Distribution Agreement with respect to the Class B shares between the
Registrant and Prudential Securities Inc. dated July 1, 1993, incorporated
by reference to Exhibit 6(a)(ii) to the Registration Statement on Form N-1A,
Post-Effective Amendment No. 12 (File No. 33-01332) filed via EDGAR on
December 30, 1993.
(iii)_Form of Distribution and Service Agreement for Class A shares.* ......
(iv)_Form of Distribution and Service Agreement for Class B shares.* .......
(v)_Form of Distribution and Service Agreement for Class C shares.* ........
(b) Dealer Agreement. Incorporated by reference to Exhibit No. 6(b) to the
Registration Statement on Form N-1A (File No. 33-01332).
7. Not Applicable.
8. (a) Custodian Contract between the Registrant and State Street Bank and
Trust Company. Incorporated by reference to Exhibit 8(a) to the Registration
Statement on Form N-1A, Post-Effective Amendment No. 10 (File No. 33-01332).
(b) Special Custody Account Agreement among the Registrant, State Street
Bank and Trust Company and Merrill Lynch, Pierce, Fenner & Smith.
Incorporated by reference to Exhibit No. 8(b) to the Registration Statement
on Form N-1A, Post-Effective Amendment No. 1 (File No. 33-01332).
(c) Customer Agreement between the Registrant and Merrill Lynch Futures Inc.
Incorporated by reference to Exhibit No. 8(c) to the Registration Statement
on Form N-1A, Post-Effective Amendment No. 1 (File No. 33-01332).
<PAGE>
9. Transfer Agency and Service Agreement between the Registrant and Prudential
Mutual Fund Services, Inc. Incorporated by reference to Exhibit No. 9(c) to
the Registration Statement on Form N-1A, Post-Effective Amendment No. 2
(File No. 33-01332).
10. Opinion of Shereff, Friedman, Hoffman & Goodman. Incorporated by reference
to Exhibit No. 10 to the Registration Statement on Form N-1A, Pre-Effective
Amendment No. 2 (File No. 33-01332).
11. Consent of Independent Accountants* ........................................
12. Not Applicable.
13. (a) Purchase Agreement. Incorporated by reference to Exhibit No. 13(a) to
the Registration Statement on Form N-1A, Pre-Effective Amendment No. 2 (File
No. 33-01332).
(b) Agreement and Plan of Reorganization and Liquidation. Incorporated by
reference to Exhibit No. 13(b) to the Registration Statement on Form N-1A,
Pre-Effective Amendment No. 2 (File No. 33-01332).
14. Not Applicable.
15. (a)(i) Distribution and Service Plan with respect to the Class A shares
dated July 1, 1993, incorporated by reference to Exhibit 15(a)(i) to the
Registration Statement on Form N-1A, Post-Effective Amendment No. 12 (File
No. 33-01332) filed via EDGAR on December 30, 1993.
(ii) Distribution and Service Plan with respect to the Class B shares dated
July 1, 1993, incorporated by reference to Exhibit 15(a)(ii) to the
Registration Statement on Form N-1A, Post-Effective Amendment No. 12 (File
No. 33-01332) filed via EDGAR on December 30, 1993.
(b)(i)_Form of Distribution and Service Plan for Class A shares.* ..........
(ii)_Form of Distribution and Service Plan for Class B shares.* ............
(iii)_Form of Distribution and Service Plan for Class C shares.* ...........
16. Schedule of Computation of Performance Quotations. Incorporated by reference
to Exhibit No. 16 to the Registration Statement on Form N-1A, Post-Effective
Amendment No. 4 (File No. 33-01332).
- ------------------------
* Filed herewith.
<PAGE>
EXHIBIT 99.2
Dated as of March 4, 1993
BY-LAWS
OF
PRUDENTIAL U.S. GOVERNMENT FUND
ARTICLE I
DEFINITIONS
The terms "Administrator", "Commission", "Custodian", "Declaration",
"Distributor", "Investment Adviser", "1940 Act", "Shareholder", "Shares",
"Transfer", "Transfer Agent", "Trust", "Trust Property", "Trustees", and
"Majority Shareholder Vote", have the respective meanings given them in the
Declaration of Trust of Prudential U.S. Government Fund dated September 25,
1986, as amended or restated from time to time.
ARTICLE II
OFFICES
Section 1. PRINCIPAL OFFICE. Until changed by the Trustees, the principal
office of the Trust in The Commonwealth of Massachusetts shall be in the City of
Boston, County of Suffolk.
Section 2. OTHER OFFICES. The Trust may have offices in such other places
without as well as within the Commonwealth as the Trustees may from time to time
determine.
<PAGE>
ARTICLE III
SHAREHOLDERS
Section 1. MEETINGS. Meetings of the Shareholders shall be held to the
extent provided in the Declaration at such place within or without The
Commonwealth of Massachusetts as the Trustees shall designate. The holders of a
majority of outstanding Shares of the Trust or series of the Trust present in
person or by proxy and entitled to vote shall constitute a quorum with respect
to Shares of the Trust or such series at any meeting of the Shareholders.
Section 2. NOTICE OF MEETINGS. Notice of all meetings of the
Shareholders, stating the time, place and purposes of the meeting, shall be
given by the Trustees by mail to each Shareholder at his or her address as
recorded on the register of the Trust mailed at least ten (10) days and not more
than ninety (90) days before the meeting. Only the business stated in the
notice of the meeting shall be considered at such meeting. Any adjourned
meeting may be held as adjourned without further notice. No notice need be
given to any Shareholder who shall have failed to inform the Trust of his or her
current address or if a written waiver of notice, executed before or after the
meeting by the Shareholder or his or her attorney thereunto authorized, is filed
with the records of the meeting.
Section 3. RECORD DATE FOR MEETINGS AND OTHER PURPOSES. For the purpose
of determining the Shareholders who are entitled to notice of and to vote at any
meeting, or to participate in any distribution, or for the purpose of any other
action, the Trustees may from time to time close the transfer books for such
period, not
<PAGE>
exceeding thirty (30) days, as the Trustees may determine; or without closing
the transfer books the Trustees may fix a date not more than ninety (90) days
prior to the date of any meeting of Shareholders or distribution or other action
as a record date for the determinations of the persons to be treated as
Shareholders of record for such purposes, except for dividend payments which
shall be governed by the Declaration.
Section 4. PROXIES. At any meeting of Shareholders, any holder of Shares
entitled to vote thereat may vote by proxy, provided that no proxy shall be
voted at any meeting unless it shall have been placed on file with the
Secretary, or with such other officer or agent of the Trust as the Secretary may
direct, for verification prior to the time at which such vote shall be taken.
Proxies may be solicited in the name of one or more Trustees or one or more of
the officers of the Trust. Only Shareholders of record shall be entitled to
vote. Each whole Share shall be entitled to one vote as to any matter on which
it is entitled by the Declaration to vote, and each fractional Share shall be
entitled to a proportionate fractional vote. When any Share is held jointly by
several persons, any one of them may vote at any meeting in person or by proxy
in respect of such Share, but if more than one of them shall be present at such
meeting in person or by proxy, and such joint owners of their proxies so present
disagree as to any vote to be cast, such vote shall not be received in respect
of such Share. A proxy purporting to be executed by or on behalf of a
Shareholder shall be deemed valid unless challenged at or prior to its exercise,
and the burden of proving invalidity
<PAGE>
shall rest on the challenger. If the holder of any such Share is a minor or a
person of unsound mind, and subject to guardianship or the legal control of any
other person as regards the charge or management of such Share, he or she may
vote by his or her guardian or such other person appointed or having such
control, and such vote may be given in person or by proxy.
Section 5. INSPECTION OF RECORDS. The records of the Trust shall be open
to inspection by Shareholders to the same extent as is permitted shareholders of
a Massachusetts business corporation.
Section 6. ACTION WITHOUT MEETING. Any action which may be taken by
Shareholders may be taken without a meeting if a majority of Shareholders of the
Trust (or such larger proportion thereof as shall be required by law, the
Declaration or these By-Laws for approval of such matter) consent to the action
in writing and the written consents are filed with the records of the meetings
of Shareholders. Such consents shall be treated for all purposes as a vote
taken at a meeting of Shareholders.
ARTICLE IV
TRUSTEES
Section 1. MEETINGS OF THE TRUSTEES. The Trustees may in their discretion
provide for regular or stated meetings of the Trustees. Notice of regular or
stated meetings need not be given. Meetings of the Trustees other than regular
or stated meetings shall be held whenever called by the President, or by any one
of the Trustees, at the time being in office. Notice of the time and place of
each meeting other than regular or stated meetings shall be given by the
Secretary or an Assistant Secretary or by the
<PAGE>
officer or Trustee calling the meeting and shall be mailed to each Trustee at
least two days before the meeting, or shall be telegraphed, cabled, or wired to
each Trustee at his or her business address, or personally delivered to him or
her at least one day before the meeting. Such notice may, however, be waived by
any Trustee. Notice of a meeting need not be given to any Trustee if a written
waiver of notice, executed by him or her before or after the meeting, is filed
with the records of the meeting, or to any Trustee who attends the meeting
without protesting prior thereto or at its commencement the lack of notice to
him or her. A notice or waiver of notice need not specify the purpose of any
meeting. The Trustees may meet by means of a telephone conference circuit or
similar communications equipment by means of which all persons participating in
the meeting are connected, which meeting shall be deemed to have been held at a
place designated by the Trustees at the meeting. Participation in a telephone
conference meeting shall constitute presence in person at such meeting. Any
action required or permitted to be taken at any meeting of the Trustees may be
taken by the Trustees without a meeting if all the Trustees consent to the
action in writing and the written consents are filed with the records of the
Trustees' meetings. Such consents shall be treated for all purposes as a vote
taken at a meeting of the Trustees.
Section 2. QUORUM AND MANNER OF ACTING. A majority of the Trustees shall
be present in person at any regular or special meeting of the Trustees in order
to constitute a quorum for the transaction of business at such meetings and
(except as otherwise
<PAGE>
required by law, the Declaration or these By-Laws) the act of a majority of the
Trustees present at any such meeting, at which a quorum is present, shall be the
act of the Trustees. In the absence of a quorum, a majority of the Trustees
present may adjourn the meeting from time to time until a quorum shall be
present. Notice of an adjourned meeting need not be given.
ARTICLE V
COMMITTEES
Section 1. EXECUTIVE AND OTHER COMMITTEES. The Trustees by vote of a
majority of all the Trustees may elect from their own number an Executive
Committee to consist of not less than three (3) Trustees to hold office at the
pleasure of the Trustees, which shall have the power to conduct the current and
ordinary business of the Trust while the Trustees are not in session, including
the purchase and sale of securities and the designation of securities to be
delivered upon redemption of Shares of the Trust, and such other powers of the
Trustees as the Trustees may, from time to time, delegate to them except those
powers which by law, the Declaration or these By-Laws they are prohibited from
delegating. The Trustees may also elect from their own number or otherwise
other Committees from time to time, the number composing such Committees, the
powers conferred upon the same (subject to the same limitations as with respect
to the Executive Committee) and the term of membership on such Committees to be
determined by the Trustees. The Trustees may designate a chairman of any such
Committee. In the absence of such designation the Committee may elect its own
Chairman.
<PAGE>
Section 2. MEETINGS, QUORUM AND MANNER OF ACTING. The Trustees may (1)
provide for stated meetings of any Committee, (2) specify the manner of calling
and notice required for special meetings of any Committee, (3) specify the
number of members of a Committee required to constitute a quorum and the number
of members of a Committee required to exercise specified powers delegated to
such Committee, (4) authorize the making of decisions to exercise specified
powers by written assent of the requisite number of members of a Committee
without a meeting, and (5) authorize the members of a Committee to meet by means
of a telephone conference circuit.
The Executive Committee shall keep regular minutes of its meetings and
records of decisions taken without a meeting and cause them to be recorded in a
book designated for that purpose and kept in the Office of the Trust.
ARTICLE VI
OFFICERS
Section 1. GENERAL PROVISIONS. The officers of the Trust shall be a
President, a Treasurer and a Secretary, who shall be elected by the Trustees.
The Trustees may elect or appoint such other officers or agents as the business
of the Trust may require, including one or more Vice Presidents, one or more
Assistant Secretaries, and one or more Assistant Treasurers. The Trustees may
delegate to any officer or committee the power to appoint any subordinate
officers or agents.
Section 2. TERM OF OFFICE AND QUALIFICATIONS. Except as otherwise
provided by law, the Declaration or these By-Laws, the
<PAGE>
President, the Treasurer and the Secretary shall each hold office until his or
her successor shall have been duly elected and qualified, and all other officers
shall hold office at the pleasure of the Trustees. The Secretary and Treasurer
may be the same person. A Vice President and the Treasurer or a Vice President
and the Secretary may be the same person, but the offices of Vice President,
Secretary and Treasurer shall not be held by the same person. The President
shall hold no other office. Except as above provided, any two offices may be
held by the same person. Any officer may be but none need be a Trustee or
Shareholder.
Section 3. REMOVAL. The Trustees, at any regular or special meeting of
the Trustees, may remove any officer without cause, by a vote of a majority of
the Trustees then in office. Any officer or agent appointed by an officer or
committee may be removed with or without cause by such appointing officer or
committee.
Section 4. POWERS AND DUTIES OF THE PRESIDENT. The President shall be the
principal executive officer of the Trust. He or she may call meetings of the
Trustees and of any Committee thereof when he or she deems it necessary and
shall preside at all meetings of the Shareholders. Subject to the control of
the Trustees and to the control of any Committees of the Trustees, within their
respective spheres, as provided by the Trustees, the President shall at all
times exercise a general supervision and direction over the affairs of the
Trust. The President shall have the power to employ attorneys and counsel for
the Trust and to employ such subordinate officers, agents, clerks and employees
as he or she may find necessary to transact the business of the Trust. He or
she
<PAGE>
shall also have the power to grant, issue, execute or sign such powers of
attorney, proxies or other documents as may be deemed advisable or necessary in
furtherance of the interests of the Trust. The President shall have such other
powers and duties as from time to time may be conferred upon or assigned to him
or her by the Trustees.
Section 5. POWERS AND DUTIES OF VICE PRESIDENT. In the absence or
disability of the President, the Vice President or, if there be more than one
Vice President, any Vice President designated by the Trustees shall perform all
the duties and may exercise any of the powers of the President, subject to the
control of the Trustees. Each Vice President shall perform such other duties as
may be assigned to him or her from time to time by the Trustees and the
President.
Section 6. POWERS AND DUTIES OF THE TREASURER. The Treasurer shall be the
principal financial and accounting officer of the Trust. The Treasurer shall
deliver all funds of the Trust which may come into his or her hands to such
Custodian as the Trustees may employ pursuant to Article X of these By-Laws. He
or she shall render a statement of condition of the finances of the Trust to the
Trustees as often as they shall require the same and he or she shall in general
perform all the duties incident to the office of Treasurer and such other duties
as from time to time may be assigned to him or her by the Trustees. The
Treasurer shall give a bond for the faithful discharge of his or her duties, if
required so to do by the Trustees, in such sum and with such surety or sureties
as the Trustees shall require.
<PAGE>
Section 7. POWERS AND DUTIES OF THE SECRETARY. The Secretary shall keep
the minutes of all meetings of the Trustees and of the Shareholders in proper
books provided for that purpose; he or she shall have custody of the seal of the
Trust; he or she shall have charge of the Share transfer books, lists and
records unless the same are in the charge of the Transfer Agent. The Secretary
shall attend to the giving and serving of all notices by the Trust in accordance
with the provisions of these By-Laws and as required by law; and subject to
these By-Laws, he or she shall in general perform all duties incident to the
office of Secretary and such other duties as from time to time may be assigned
to him or her by the Trustees.
Section 8. POWERS AND DUTIES OF ASSISTANT TREASURERS. In the absence or
disability of the Treasurer, any Assistant Treasurer designated by the Trustees
shall perform all the duties, and may exercise any of the powers, of the
Treasurer. Each Assistant Treasurer shall give a bond for the faithful
discharge of his or her duties, if required so to do by the Trustees, in such
sum and with such surety or sureties as the Trustees shall require.
Section 9. POWERS AND DUTIES OF ASSISTANT SECRETARIES. In the absence or
disability of the Secretary, any Assistant Secretary designated by the Trustees
shall perform all the duties, and may exercise any of the powers, of the
Secretary. Each Assistant Secretary shall perform such other duties as from
time to time may be assigned to him or her by the Trustees.
Section 10. COMPENSATION OF OFFICERS AND TRUSTEES AND MEMBERS OF THE
ADVISORY BOARD. Subject to any applicable provisions of the
<PAGE>
Declaration, the compensation of the officers and Trustees and members of the
Advisory Board shall be fixed from time to time by the Trustees or, in the case
of officers, by any Committee or officer upon whom such power may be conferred
by the Trustees. No officer shall be prevented from receiving such compensation
as such officer by reason of the fact that he or she is also a Trustee.
ARTICLE VII
FISCAL YEAR
The fiscal year of the Trust shall begin on the first day of September in
each year and shall end on the last day of October in each year, provided,
however, that the Trustees may from time to time change the fiscal year.
ARTICLE VIII
SEAL
The Trustees may adopt a seal which shall be in such form and shall have
such inscription thereon as the Trustees may from time to time prescribe.
ARTICLE IX
WAIVERS OF NOTICE
Whenever any notice whatever is required to be given by law, the
Declaration or these By-Laws, a waiver thereof in writing, signed by the person
or persons entitled to said notice, whether before or after the time stated
therein, shall be deemed equivalent thereto. A notice shall be deemed to have
been telegraphed, cabled or wired for the purposes of these By-Laws when it has
been delivered to a representative of any telegraph, cable or wire company with
instructions that it be telegraphed, cabled or wired.
<PAGE>
ARTICLE X
CUSTODY OF SECURITIES
Section 1. EMPLOYMENT OF A CUSTODIAN. The Trust shall place and at all
times maintain in the custody of a Custodian (including any sub-custodian for
the Custodian) all funds, securities and similar investments included in the
Trust Property. The Custodian (and any sub-custodian) shall be a bank having
not less than $20,000,000 aggregate capital, surplus and undivided profits and
shall be appointed from time to time by the Trustees, who shall fix its
remuneration.
Section 2. ACTION UPON TERMINATION OF CUSTODIAN AGREEMENT. Upon
termination of a Custodian Agreement or inability of the Custodian to continue
to serve, the Trustees shall promptly appoint a successor custodian, but in the
event that no successor custodian can be found who has the required
qualifications and is willing to serve, the Trustees shall call as promptly as
possible a special meeting of the Shareholders to determine whether the Trust
shall function without a custodian or shall be liquidated. If so directed by a
Majority Shareholder Vote, the Custodian shall deliver and pay over all Trust
Property held by it as specified in such vote.
Section 3. PROVISIONS OF CUSTODIAN CONTRACT. The following provisions
shall apply to the employment of a Custodian and to any contract entered into
with the Custodian so employed: The Trustees shall cause to be delivered to the
Custodian all securities included in the Trust Property or to which the Trust
may become entitled, and shall order the same to be delivered by the Custodian
<PAGE>
only in completion of a sale, exchange, transfer, pledge, loan of portfolio
securities to another person, or other disposition thereof, all as the Trustees
may generally or from time to time require or approve or to a successor
Custodian; and the Trustees shall cause all funds included in the Trust Property
or to which it may become entitled to be paid to the Custodian, and shall order
the same disbursed only for investment against delivery of the securities
acquired (including securities acquired under a repurchase agreement), or the
return of cash held as collateral for loans of portfolio securities, or in
payment of expenses, including management compensation, and liabilities of the
Trust, including distributions to Shareholders, or to a successor Custodian.
Notwithstanding anything to the contrary in these By-Laws, upon receipt of
proper instructions, which may be standing instructions, the Custodian may
deliver funds in the following cases. In connection with repurchase agreements,
the Custodian shall transmit prior to receipt on behalf of the Trust of any
securities or other property, funds from the Trust's custodian account to a
special custodian approved by the Trustees of the Trust, which funds shall be
used to pay for securities to be purchased by the Trust subject to the Trust's
obligation to sell and the seller's obligation to repurchase such securities.
In such case, the securities shall be held in the custody of the special
custodian. In connection with the Trust's purchase or sale of financial futures
contracts, the Custodian shall transmit, prior to receipt on behalf of the Trust
of any securities or other property, funds from the Trust's custodian account in
order to furnish to and maintain funds with
<PAGE>
brokers as margin to guarantee the performance of the Trust's futures
obligations in accordance with the applicable requirements of commodities
exchanges and brokers.
Section 4. CENTRAL CERTIFICATE SYSTEM. Subject to applicable rules,
regulations and orders adopted by the Commission, the Trustees may direct the
Custodian to deposit all or any part of the securities owned by the Trust in a
system for the central handling of securities established by a national
securities exchange or a national securities association registered with the
Commission under the Securities Exchange Act of 1934, or such other person as
may be permitted by the Commission, or otherwise in accordance with the 1940
Act, pursuant to which system all securities of any particular class or series
of any issuer deposited within the system are treated as fungible and may be
transferred or pledged by bookkeeping entry without physical delivery of such
securities, provided that all such deposits shall be subject to withdrawal only
upon the order of the Trust.
ARTICLE XI
INDEMNIFICATION
A representative of the Trust shall be indemnified by the Trust with
respect to each proceeding against such representative, except a proceeding
brought by or on behalf of the Trust, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such representative in connection with such proceeding, provided
that such representative acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests
<PAGE>
of the Trust and, with respect to any criminal proceeding, had no reasonable
cause to believe his or her conduct was unlawful. The termination of any
proceeding by judgment, order, settlement, conviction or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
the person did not act in good faith in a manner which he or she reasonably
believed to be in or not opposed to the best interests of the Trust and, with
respect to any criminal proceeding, had reasonable cause to believe that his or
her conduct was unlawful.
A representative of the Trust shall be indemnified by the Trust, with
respect to each proceeding brought by or on behalf of the Trust to obtain
judgment or decree in its favor, against expenses (including attorneys' fees)
actually and reasonably incurred by him or her in connection with the defense or
settlement of such proceeding, if he or she acted in good faith and in a manner
he or she reasonably believed to be in or not opposed to the best interests of
the Trust; except that no indemnification shall be made in respect of any claim,
issue, or matter as to which such representative has been adjudged to be liable
for negligence or misconduct in the performance of his or her duty to the Trust,
unless and only to the extent that the court in which the proceeding was
brought, or a court of equity in the county in which the Trust has its principal
office, determines upon application that, despite the adjudication of liability
but in view of all circumstances of the case, such representative is fairly and
reasonably entitled to indemnity for the expenses which the court considers
proper.
<PAGE>
To the extent that the representative of the Trust has been successful on
the merits or otherwise in defense of any proceeding referred to in the
preceding two paragraphs, or in defense of any claim, issue or matter therein,
the Trust shall indemnify him or her against all expenses (including attorneys'
fees) actually and reasonably incurred by him or her in connection therewith.
Except as provided in the preceding paragraph any indemnification under the
first two paragraphs of this Article XI (unless ordered by a court) shall be
made by the Trust only as authorized in the specific case upon a determination
that indemnification of the representative of the Trust is proper in the
circumstances because he or she has met the applicable standard of conduct set
forth in such paragraphs. The determination shall be made (1) by the Trustees
by a majority vote of a quorum consisting of Trustees who were not parties to
the proceeding, or (2) if a quorum is not obtainable or if a quorum of
disinterested Trustees so directs, by independent legal counsel in a written
opinion, or (3) by a Majority Shareholder Vote.
Expenses (including attorneys' fees) incurred in defending a proceeding may
be paid by the Trust in advance of the final disposition thereof if (1)
authorized by the Trustees in the specific case, and (2) the Trust receives an
undertaking by or on behalf of the representative of the Trust to repay the
advance if it is not ultimately determined that he or she is entitled to be
indemnified by the Trust as authorized in this Article XI.
The indemnification provided by this Article XI shall not be deemed
exclusive of any other rights to which a representative of
<PAGE>
the Trust or other person may be entitled under any agreement, vote of
Shareholders or disinterested Trustees or otherwise, both as to action in his or
her official capacity and as to action in another capacity while holding the
office, and shall continue as to a person who has ceased to be a Trustee,
officer, employee or agent and inure to the benefit of his or her heirs and
personal representatives.
The Trust may purchase and maintain insurance on behalf of any person who
is or was a Trustee, officer, employee or agent of the Trust, or is or was
serving at the request of the Trust as a trustee, director, officer, employee or
agent of another trust, corporation, partnership, joint venture or other
enterprise, against any liability asserted against him or her and incurred by
him or her in any such capacity or arising out of his or her status as such,
regardless of whether the Trust would have the power to indemnify him or her
against the liability under the provisions of this Article XI.
Nothing contained in this Article XI shall be construed to indemnify any
representative of the Trust against any liability to the Trust or to its
Shareholders to which he or she would otherwise be subject by reason of
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office.
As used in this Article XI, "representative of the Trust" means an
individual (1) who is a present or former Trustee, officer, agent or employee of
the Trust or who serves or has served another trust, corporation, partnership,
joint venture or other
<PAGE>
enterprise in one of such capacities at the request of the Trust, and (2) who by
reason of his or her position is, has been or is threatened to be made a party
to a proceeding; and "proceeding" includes any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative.
ARTICLE XII
AMENDMENTS
These By-Laws, or any of them, may be altered, amended or repealed, or new
By-Laws may be adopted by (a) a Majority Shareholder Vote or (b) by the
Trustees, provided, however, that no By-Law may be amended, adopted or repealed
by the Trustees if such amendment, adoption or repeal requires, pursuant to law,
the Declaration or these By-Laws, a vote of the Shareholders.
<PAGE>
EXHIBIT 99.6(a)(iii)
PRUDENTIAL U.S. GOVERNMENT FUND
Form of
Distribution Agreement
(CLASS A SHARES)
Agreement made as of _____________199_, between Prudential U.S.
Government Fund a Massachusetts Business Trust (the Fund) and Prudential Mutual
Fund Distributors, Inc., a Delaware Corporation (the Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the Investment Company Act), as a diversified, open-end,
management investment company and it is in the interest of the Fund to offer its
Class A shares for sale continuously;
WHEREAS, the Distributor is a broker-dealer registered under the
Securities Exchange Act of 1934, as amended, and is engaged in the business of
selling shares of registered investment companies either directly or through
other broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into an agreement
with each other, with respect to the continuous offering of the Fund's Class A
shares from and after the date hereof in order to promote the growth of the Fund
and facilitate the distribution of its Class A shares; and
WHEREAS, upon approval by the Class A shareholders of the Fund it is
contemplated that the Fund will adopt a plan of
<PAGE>
distribution pursuant to Rule 12b-1 under the Investment Company Act (the Plan)
authorizing payments by the Fund to the Distributor with respect to the
distribution of Class A shares of the Fund and the maintenance of Class A
shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. APPOINTMENT OF THE DISTRIBUTOR
The Fund hereby appoints the Distributor as the principal underwriter
and distributor of the Class A shares of the Fund to sell Class A shares to the
public and the Distributor hereby accepts such appointment and agrees to act
hereunder. The Fund hereby agrees during the term of this Agreement to sell
Class A shares of the Fund to the Distributor on the terms and conditions set
forth below.
Section 2. EXCLUSIVE NATURE OF DUTIES
The Distributor shall be the exclusive representative of the Fund to
act as principal underwriter and distributor of the Fund's Class A shares,
except that:
2.1 The exclusive rights granted to the Distributor to purchase Class
A shares from the Fund shall not apply to Class A shares of the Fund issued in
connection with the merger or consolidation of any other investment company or
personal holding company with the Fund or the acquisition by purchase or
otherwise of all (or substantially all) the assets or the outstanding shares of
any such company by the Fund.
2.2 Such exclusive rights shall not apply to Class A shares issued by
the Fund pursuant to reinvestment of dividends or capital gains distributions.
<PAGE>
2.3 Such exclusive rights shall not apply to Class A shares issued by
the Fund pursuant to the reinstatement privilege afforded redeeming
shareholders.
2.4 Such exclusive rights shall not apply to purchases made through
the Fund's transfer and dividend disbursing agent in the manner set forth in the
currently effective Prospectus of the Fund. The term "Prospectus" shall mean
the Prospectus and Statement of Additional Information included as part of the
Fund's Registration Statement, as such Prospectus and Statement of Additional
Information may be amended or supplemented from time to time, and the term
"Registration Statement" shall mean the Registration Statement filed by the Fund
with the Securities and Exchange Commission and effective under the Securities
Act of 1933, as amended (Securities Act), and the Investment Company Act, as
such Registration Statement is amended from time to time.
Section 3. PURCHASE OF CLASS A SHARES FROM THE FUND
3.1 The Distributor shall have the right to buy from the Fund the
Class A shares needed, but not more than the Class A shares needed (except for
clerical errors in transmission) to fill unconditional orders for Class A shares
placed with the Distributor by investors or registered and qualified securities
dealers and other financial institutions (selected dealers). The price which
the Distributor shall pay for the Class A shares so purchased from the Fund
shall be the net asset value, determined as set forth in the Prospectus.
3.2 The Class A shares are to be resold by the Distributor or
selected dealers, as described in Section 6.4
<PAGE>
hereof, to investors at the offering price as set forth in the prospectus.
3.3 The Fund shall have the right to suspend the sale of its Class A
shares at times when redemption is suspended pursuant to the conditions in
Section 4.3 hereof or at such other times as may be determined by the Trustees.
The Fund shall also have the right to suspend the sale of its Class A shares if
a banking moratorium shall have been declared by federal or New York
authorities.
3.4 The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Class A shares
received by the Distributor. Any order may be rejected by the Fund; provided,
however, that the Fund will not arbitrarily or without reasonable cause refuse
to accept or confirm orders for the purchase of Class A shares. The Fund (or
its agent) will confirm orders upon their receipt, will make appropriate book
entries and upon receipt by the Fund (or its agent) of payment therefor, will
deliver deposit receipts for such Class A shares pursuant to the instructions of
the Distributor. Payment shall be made to the Fund in New York Clearing House
funds or federal funds. The Distributor agrees to cause such payment and such
instructions to be delivered promptly to the Fund (or its agent).
Section 4. REPURCHASE OR REDEMPTION OF CLASS A SHARES BY THE FUND
4.1 Any of the outstanding Class A shares may be tendered for
redemption at any time, and the Fund agrees to repurchase or redeem the Class A
shares so tendered in accordance
<PAGE>
with its Articles of Incorporation as amended from time to time, and in
accordance with the applicable provisions of the Prospectus. The price to be
paid to redeem or repurchase the Class A shares shall be equal to the net asset
value determined as set forth in the Prospectus. All payments by the Fund
hereunder shall be made in the manner set forth in Section 4.2 below.
4.2 The Fund shall pay the total amount of the redemption price as
defined in the above paragraph pursuant to the instructions of the Distributor
on or before the seventh calendar day subsequent to its having received the
notice of redemption in proper form. The proceeds of any redemption of Class A
shares shall be paid by the Fund to or for the account of the redeeming
shareholder, in each case in accordance with applicable provisions of the
Prospectus.
4.3 Redemption of Class A shares or payment may be suspended at times
when the New York Stock Exchange is closed for other than customary weekends and
holidays, when trading on said Exchange is restricted, when an emergency exists
as a result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or during any other period when the
Securities and Exchange Commission, by order, so permits.
Section 5. DUTIES OF THE FUND
5.1 Subject to the possible suspension of the sale of Class A shares
as provided herein, the Fund agrees to sell its Class A shares so long as it has
Class A shares available.
<PAGE>
5.2 The Fund shall furnish the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Class A shares, and this
shall include one certified copy, upon request by the Distributor, of all
financial statements prepared for the Fund by independent public accountants.
The Fund shall make available to the Distributor such number of copies of its
Prospectus and annual and interim reports as the Distributor shall reasonably
request.
5.3 The Fund shall take, from time to time, but subject to the
necessary approval of the Trustees and the shareholders, all necessary action to
fix the number of authorized Class A shares and such steps as may be necessary
to register the same under the Securities Act, to the end that there will be
available for sale such number of Class A shares as the Distributor reasonably
may expect to sell. The Fund agrees to file from time to time such amendments,
reports and other documents as may be necessary in order that there will be no
untrue statement of a material fact in the Registration Statement, or necessary
in order that there will be no omission to state a material fact in the
Registration Statement which omission would make the statements therein
misleading.
5.4 The Fund shall use its best efforts to qualify and maintain the
qualification of any appropriate number of its Class A shares for sales under
the securities laws of such states as the Distributor and the Fund may approve;
provided that the Fund shall not be required to amend its Articles of
Incorporation or By-Laws
<PAGE>
to comply with the laws of any state, to maintain an office in any state, to
change the terms of the offering of its Class A shares in any state from the
terms set forth in its Registration Statement, to qualify as a foreign
corporation in any state or to consent to service of process in any state other
than with respect to claims arising out of the offering of its Class A shares.
Any such qualification may be withheld, terminated or withdrawn by the Fund at
any time in its discretion. As provided in Section 9.1 hereof, the expense of
qualification and maintenance of qualification shall be borne by the Fund. The
Distributor shall furnish such information and other material relating to its
affairs and activities as may be required by the Fund in connection with such
qualifications.
Section 6. DUTIES OF THE DISTRIBUTOR
6.1 The Distributor shall devote reasonable time and effort to effect
sales of Class A shares of the Fund, but shall not be obligated to sell any
specific number of Class A shares. Sales of the Class A shares shall be on the
terms described in the Prospectus. The Distributor may enter into like
arrangements with other investment companies. The Distributor shall compensate
the selected dealers as set forth in the Prospectus.
6.2 In selling the Class A shares, the Distributor shall use its best
efforts in all respects duly to conform with the requirements of all federal and
state laws relating to the sale of such securities. Neither the Distributor nor
any selected dealer nor any other person is authorized by the Fund to give any
information or to make any representations, other than those
<PAGE>
contained in the Registration Statement or Prospectus and any sales literature
approved by appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the
confirmation of sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales and the
cancellation of unsettled transactions, as may be necessary to comply with the
requirements of the National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into selected
dealer agreements with registered and qualified securities dealers and other
financial institutions of its choice for the sale of Class A shares, provided
that the Fund shall approve the forms of such agreements. Within the United
States, the Distributor shall offer and sell Class A shares only to such
selected dealers as are members in good standing of the NASD. Class A shares
sold to selected dealers shall be for resale by such dealers only at the
offering price determined as set forth in the Prospectus.
Section 7. PAYMENTS TO THE DISTRIBUTOR
The Distributor shall receive and may retain any portion of any
front-end sales charge which is imposed on sales of Class A shares and not
reallocated to selected dealers as set forth in the Prospectus, subject to the
limitations of Article III, Section 26 of the NASD Rules of Fair Practice.
Payment of these amounts to the Distributor is not contingent upon the adoption
or continuation of the Plan.
<PAGE>
Section 8. PAYMENT OF THE DISTRIBUTOR UNDER THE PLAN
8.1 The Fund shall pay to the Distributor as compensation for
services under the Distribution and Service Plan and this Agreement a fee of .30
of 1% (including an asset-based sales charge of .05 of 1% and a service fee of
.25 of 1%) per annum of the average daily net assets of the Class A shares of
the Fund. Amounts payable under the Plan shall be accrued daily and paid
monthly or at such other intervals as the Trustees may determine. Amounts
payable under the Plan shall be subject to the limitations of Article III,
Section 26 of the NASD Rules of Fair Practice.
8.2 So long as the Plan or any amendment thereto is in effect, the
Distributor shall inform the Trustees of the commissions and account servicing
fees to be paid by the Distributor to account executives of the Distributor and
to broker-dealers and financial institutions which have dealer agreements with
the Distributor. So long as the Plan (or any amendment thereto) is in effect,
at the request of the Trustees or any agent or representative of the Fund, the
Distributor shall provide such additional information as may reasonably be
requested concerning the activities of the Distributor hereunder and the costs
incurred in performing such activities.
8.3 Expenses of distribution with respect to the Class A shares of
the Fund include, among others:
(a) amounts paid to Prudential Securities for performing
services under a selected dealer agreement between
Prudential Securities and the Distributor for sale of Class
A shares of
<PAGE>
the Fund, including sales commissions and trailer commissions paid to,
or on account of, account executives and indirect and overhead costs
associated with distribution activities, including central office and
branch expenses;
(b) amounts paid to Prusec for performing services under a
selected dealer agreement between Prusec and the Distributor
for sale of Class A shares of the Fund, including sales
commissions and trailer commissions paid to, or on account
of, agents and indirect and overhead costs associated with
distribution activities;
(c) sales commissions and trailer commissions paid to, or on
account of, broker-dealers and financial institutions (other
than Prudential Securities and Prusec) which have entered
into selected dealer agreements with the Distributor with
respect to Class A shares of the Fund.
(d) amounts paid to, or an account of, account executives of
Prudential Securities, Prusec, or of other broker-dealers or
financial institutions for personal service and/or the
maintenance of shareholder accounts; and
(e) advertising for the Fund in various forms through any
available medium, including the
<PAGE>
cost of printing and mailing Fund Prospectuses, and periodic financial
reports and sales literature to persons other than current
shareholders of the Fund.
Indirect and overhead costs referred to in clauses (a) and (b) of the
foregoing sentence include (i) lease expenses, (ii) salaries and benefits of
personnel including operations and sales support personnel, (iii) utility
expenses, (iv) communications expenses, (v) sales promotion expenses,
(vi) expenses of postage, stationery and supplies and (vii) general overhead.
Section 9. ALLOCATION OF EXPENSES
9.1 The Fund shall bear all costs and expenses of the continuous
offering of its Class A shares, including fees and disbursements of its counsel
and auditors, in connection with the preparation and filing of any required
Registration Statements and/or Prospectuses under the Investment Company Act or
the Securities Act, and preparing and mailing annual and periodic reports and
proxy materials to shareholders (including but not limited to the expense of
setting in type any such Registration Statements, Prospectuses, annual or
periodic reports or proxy materials). The Fund shall also bear the cost of
expenses of qualification of the Class A shares for sale, and, if necessary or
advisable in connection therewith, of qualifying the Fund as a broker or dealer,
in such states of the United States or other jurisdictions as shall be selected
by the Fund and the Distributor pursuant to Section 5.4 hereof and the cost and
expense payable to each such state for continuing qualification therein until
the Fund
<PAGE>
decides to discontinue such qualification pursuant to Section 5.4 hereof. As
set forth in Section 8 above, the Fund shall also bear the expenses it assumes
pursuant to the Plan with respect to Class A shares, so long as the Plan is in
effect.
Section 10. INDEMNIFICATION
10.1 The Fund agrees to indemnify, defend and hold the Distributor,
its officers and directors and any person who controls the Distributor within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Distributor, its
officers, directors or any such controlling person may incur under the
Securities Act, or under common law or otherwise, arising out of or based upon
any untrue statement of a material fact contained in the Registration Statement
or Prospectus or arising out of or based upon any alleged omission to state a
material fact required to be stated in either thereof or necessary to make the
statements in either thereof not misleading, except insofar as such claims,
demands, liabilities or expenses arise out of or are based upon any such untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with information furnished in writing by the Distributor
to the Fund for use in the Registration Statement or Prospectus; provided,
however, that this indemnity agreement shall not inure to the benefit of any
such officer, director, trustee or controlling person unless a court of
competent jurisdiction shall determine in
<PAGE>
a final decision on the merits, that the person to be indemnified was not liable
by reason of willful misfeasance, bad faith or gross negligence in the
performance of its duties, or by reason of its reckless disregard of its
obligations under this Agreement (disabling conduct), or, in the absence of such
a decision, a reasonable determination, based upon a review of the facts, that
the indemnified person was not liable by reason of disabling conduct, by (a) a
vote of a majority of a quorum of directors or trustees who are neither
"interested persons" of the Fund as defined in Section 2(a)(19) of the
Investment Company Act nor parties to the proceeding, or (b) an independent
legal counsel in a written opinion. The Fund's agreement to indemnify the
Distributor, its officers and directors or trustees and any such controlling
person as aforesaid is expressly conditioned upon the Fund's being promptly
notified of any action brought against the Distributor, its officers or
directors or trustees, or any such controlling person, such notification to be
given by letter or telegram addressed to the Fund at its principal business
office. The Fund agrees promptly to notify the Distributor of the commencement
of any litigation or proceedings against it or any of its officers or directors
in connection with the issue and sale of any Class A shares.
10.2 The Distributor agrees to indemnify, defend and hold the Fund,
its officers and Trustees and any person who controls the Fund, if any, within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of
<PAGE>
investigating or defending against such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Fund, its officers and
Trustees or any such controlling person may incur under the Securities Act or
under common law or otherwise, but only to the extent that such liability or
expense incurred by the Fund, its Trustees or officers or such controlling
person resulting from such claims or demands shall arise out of or be based upon
any alleged untrue statement of a material fact contained in information
furnished in writing by the Distributor to the Fund for use in the Registration
Statement or Prospectus or shall arise out of or be based upon any alleged
omission to state a material fact in connection with such information required
to be stated in the Registration Statement or Prospectus or necessary to make
such information not misleading. The Distributor's agreement to indemnify the
Fund, its officers and Trustees and any such controlling person as aforesaid, is
expressly conditioned upon the Distributor's being promptly notified of any
action brought against the Fund, its officers and Trustees or any such
controlling person, such notification being given to the Distributor at its
principal business office.
Section 11. DURATION AND TERMINATION OF THIS AGREEMENT
11.1 This Agreement shall become effective as of the date first above
written and shall remain in force for two years from the date hereof and
thereafter, but only so long as such continuance is specifically approved at
least annually by (a) the Trustees of the Fund, or by the vote of a majority of
the outstanding voting securities of the Class A shares of the Fund,
<PAGE>
and (b) by the vote of a majority of those Trustees who are not parties to this
Agreement or interested persons of any such parties and who have no direct or
indirect financial interest in this Agreement or in the operation of the Fund's
Plan or in any agreement related thereto (Rule 12b-1 Trustees), cast in person
at a meeting called for the purpose of voting upon such approval.
11.2 This Agreement may be terminated at any time, without the
payment of any penalty, by a majority of the Rule 12b-1 Trustees or by vote of a
majority of the outstanding voting securities of the Class A shares of the Fund,
or by the Distributor, on sixty (60) days' written notice to the other party.
This Agreement shall automatically terminate in the event of its assignment.
11.3 The terms "affiliated person," "assignment," "interested person"
and "vote of a majority of the outstanding voting securities", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 12. AMENDMENTS TO THIS AGREEMENT
This Agreement may be amended by the parties only if such amendment is
specifically approved by (a) the Trustees of the Fund, or by the vote of a
majority of the outstanding voting securities of the Class A shares of the Fund,
and (b) by the vote of a majority of the Rule 12b-1 Trustees cast in person at a
meeting called for the purpose of voting on such amendment.
Section 13. GOVERNING LAW
The provisions of this Agreement shall be construed and
<PAGE>
interpreted in accordance with the laws of the State of New York as at the time
in effect and the applicable provisions of the Investment Company Act. To the
extent that the applicable law of the State of New York, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
Section 14. LIABILITIES OF THE FUND
The name "Prudential U.S. Government Fund" is the designation of the
Trustees under a Declaration of Trust dated ______, 19__ and all persons dealing
with the Fund must look solely to the property of the Fund for the enforcement
of any claims against the Fund, and neither the Trustees, officers, agents of
shareholders assume any personal liability for obligations entered into on
behalf of the Fund.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year above written.
Prudential Mutual Fund
Distributors, Inc.
By: ________________________
________________________
(Title)
Prudential U.S. Government Fund
By: _______________________
(Name)
(Title)
<PAGE>
EXHIBIT 99.6(a)(iv)
PRUDENTIAL U.S. GOVERNMENT FUND
Form of
Distribution Agreement
(Class B Shares)
Agreement made as of ______ __, 199_, between Prudential U.S.
Government Fund, a Massachusetts Business Trust (the Fund) and Prudential
Securities Incorporated, a Delaware Corporation (the Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the Investment Company Act), as a diversified, open-end,
management investment company and it is in the interest of the Fund to offer its
Class B shares for sale continuously;
WHEREAS, the Distributor is a broker-dealer registered under the
Securities Exchange Act of 1934, as amended, and is engaged in the business of
selling shares of registered investment companies either directly or through
other broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into an agreement
with each other, with respect to the continuous offering of the Fund's Class B
shares from and after the date hereof in order to promote the growth of the Fund
and facilitate the distribution of its Class B shares; and
WHEREAS, the Fund has adopted a distribution and service plan pursuant
to Rule 12b-1 under the Investment Company Act (the
<PAGE>
Plan) authorizing payments by the Fund to the Distributor with respect to the
distribution of Class B shares of the Fund and the maintenance of Class B
shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. APPOINTMENT OF THE DISTRIBUTOR
The Fund hereby appoints the Distributor as the principal underwriter
and distributor of the Class B shares of the Fund to sell Class B shares to the
public and the Distributor hereby accepts such appointment and agrees to act
hereunder. The Fund hereby agrees during the term of this Agreement to sell
Class B shares of the Fund to the Distributor on the terms and conditions set
forth below.
Section 2. EXCLUSIVE NATURE OF DUTIES
The Distributor shall be the exclusive representative of the Fund to
act as principal underwriter and distributor of the Fund's Class B shares,
except that:
2.1 The exclusive rights granted to the Distributor to purchase Class
B shares from the Fund shall not apply to Class B shares of the Fund issued in
connection with the merger or consolidation of any other investment company or
personal holding company with the Fund or the acquisition by purchase or
otherwise of all (or substantially all) the assets or the outstanding shares of
any such company by the Fund.
2.2 Such exclusive rights shall not apply to Class B shares issued by
the Fund pursuant to reinvestment of dividends or capital gains distributions.
2.3 Such exclusive rights shall not apply to Class B shares issued by
the Fund pursuant to the reinstatement privilege afforded
<PAGE>
redeeming shareholders.
2.4 Such exclusive rights shall not apply to purchases made through
the Fund's transfer and dividend disbursing agent in the manner set forth in the
currently effective Prospectus of the Fund. The term "Prospectus" shall mean
the Prospectus and Statement of Additional Information included as part of the
Fund's Registration Statement, as such Prospectus and Statement of Additional
Information may be amended or supplemented from time to time, and the term
"Registration Statement" shall mean the Registration Statement filed by the Fund
with the Securities and Exchange Commission and effective under the Securities
Act of 1933, as amended (the Securities Act), and the Investment Company Act, as
such Registration Statement is amended from time to time.
Section 3. PURCHASE OF CLASS B SHARES FROM THE FUND
3.1 The Distributor shall have the right to buy from the Fund the
Class B shares needed, but not more than the Class B shares needed (except for
clerical errors in transmission) to fill unconditional orders for Class B shares
placed with the Distributor by investors or registered and qualified securities
dealers and other financial institutions (selected dealers). The price which
the Distributor shall pay for the Class B shares so purchased from the Fund
shall be the net asset value, determined as set forth in the Prospectus.
3.2 The Class B shares are to be resold by the Distributor or
selected dealers, as described in Section 6.4 hereof, to investors at the
offering price as set forth in the Prospectus.
<PAGE>
3.3 The Fund shall have the right to suspend the sale of its Class B
shares at times when redemption is suspended pursuant to the conditions in
Section 4.3 hereof or at such other times as may be determined by the Trustees.
The Fund shall also have the right to suspend the sale of its Class B shares if
a banking moratorium shall have been declared by federal or New York
authorities.
3.4 The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Class B shares
received by the Distributor. Any order may be rejected by the Fund; provided,
however, that the Fund will not arbitrarily or without reasonable cause refuse
to accept or confirm orders for the purchase of Class B shares. The Fund (or
its agent) will confirm orders upon their receipt, will make appropriate book
entries and upon receipt by the Fund (or its agent) of payment therefor, will
deliver deposit receipts for such Class B shares pursuant to the instructions of
the Distributor. Payment shall be made to the Fund in New York Clearing House
funds or federal funds. The Distributor agrees to cause such payment and such
instructions to be delivered promptly to the Fund (or its agent).
Section 4. REPURCHASE OR REDEMPTION OF CLASS B SHARES BY THE FUND
4.1 Any of the outstanding Class B shares may be tendered for
redemption at any time, and the Fund agrees to repurchase or redeem the Class B
shares so tendered in accordance with its Articles of Incorporation as amended
from time to time, and in accordance with the applicable provisions of the
Prospectus. The price to be paid to redeem or repurchase the Class B shares
shall be equal to the net asset value determined as set forth in the
Prospectus. All payments
<PAGE>
by the Fund hereunder shall be made in the manner set forth in Section 4.2
below.
4.2 The Fund shall pay the total amount of the redemption price as
defined in the above paragraph pursuant to the instructions of the Distributor
on or before the seventh day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of Class B shares
shall be paid by the Fund as follows: (a) any applicable contingent deferred
sales charge shall be paid to the Distributor and (b) the balance shall be paid
to or for the account of the redeeming shareholder, in each case in accordance
with applicable provisions of the Prospectus.
4.3 Redemption of Class B shares or payment may be suspended at times
when the New York Stock Exchange is closed for other than customary weekends and
holidays, when trading on said Exchange is restricted, when an emergency exists
as a result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or during any other period when the
Securities and Exchange Commission, by order, so permits.
Section 5. DUTIES OF THE FUND
5.1 Subject to the possible suspension of the sale of Class B shares
as provided herein, the Fund agrees to sell its Class B shares so long as it has
Class B shares available.
5.2 The Fund shall furnish the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Class B shares, and this
shall include one certified
<PAGE>
copy, upon request by the Distributor, of all financial statements prepared for
the Fund by independent public accountants. The Fund shall make available to
the Distributor such number of copies of its Prospectus and annual and interim
reports as the Distributor shall reasonably request.
5.3 The Fund shall take, from time to time, but subject to the
necessary approval of the Trustees and the shareholders, all necessary action to
fix the number of authorized Class B shares and such steps as may be necessary
to register the same under the Securities Act, to the end that there will be
available for sale such number of Class B shares as the Distributor reasonably
may expect to sell. The Fund agrees to file from time to time such amendments,
reports and other documents as may be necessary in order that there will be no
untrue statement of a material fact in the Registration Statement, or necessary
in order that there will be no omission to state a material fact in the
Registration Statement which omission would make the statements therein
misleading.
5.4 The Fund shall use its best efforts to qualify and maintain the
qualification of any appropriate number of its Class B shares for sales under
the securities laws of such states as the Distributor and the Fund may approve;
provided that the Fund shall not be required to amend its Articles of
Incorporation or By-Laws to comply with the laws of any state, to maintain an
office in any state, to change the terms of the offering of its Class B shares
in any state from the terms set forth in its Registration Statement, to qualify
as a foreign corporation in any state or to consent to service of process in any
state other than with respect to claims arising out of the
<PAGE>
offering of its Class B shares. Any such qualification may be withheld,
terminated or withdrawn by the Fund at any time in its discretion. As provided
in Section 9.1 hereof, the expense of qualification and maintenance of
qualification shall be borne by the Fund. The Distributor shall furnish such
information and other material relating to its affairs and activities as may be
required by the Fund in connection with such qualifications.
Section 6. DUTIES OF THE DISTRIBUTOR
6.1 The Distributor shall devote reasonable time and effort to effect
sales of Class B shares of the Fund, but shall not be obligated to sell any
specific number of Class B shares. Sales of the Class B shares shall be on the
terms described in the Prospectus. The Distributor may enter into like
arrangements with other investment companies. The Distributor shall compensate
the selected dealers as set forth in the Prospectus.
6.2 In selling the Class B shares, the Distributor shall use its best
efforts in all respects duly to conform with the requirements of all federal and
state laws relating to the sale of such securities. Neither the Distributor nor
any selected dealer nor any other person is authorized by the Fund to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the
confirmation of sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales and the
cancellation of unsettled transactions, as may be
<PAGE>
necessary to comply with the requirements of the National Association of
Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into selected
dealer agreements with registered and qualified securities dealers and other
financial institutions of its choice for the sale of Class B shares, provided
that the Fund shall approve the forms of such agreements. Within the United
States, the Distributor shall offer and sell Class B shares only to such
selected dealers as are members in good standing of the NASD. Class B shares
sold to selected dealers shall be for resale by such dealers only at the
offering price determined as set forth in the Prospectus.
Section 7. PAYMENTS TO THE DISTRIBUTOR
The Distributor shall receive and may retain any contingent deferred
sales charge which is imposed with respect to repurchases and redemptions of
Class B shares as set forth in the Prospectus, subject to the limitations of
Article III, Section 26 of the NASD Rules of Fair Practice. Payment of these
amounts to the Distributor is not contingent upon the adoption or continuation
of the Plan.
Section 8. PAYMENT OF THE DISTRIBUTOR UNDER THE PLAN
8.1 The Fund shall pay to the Distributor as compensation for
services under the Distribution and Service Plan and this Agreement a fee of 1%
(including an asset-based sales charge of .75 of 1% and a service fee of .25 of
1%) per annum of the average daily net assets of the Class B shares of the
Fund. Amounts payable under the Plan shall be accrued daily and paid monthly
or at such other intervals as the Trustees may determine. Amounts payable
under the Plan shall be subject to the limitations of Article III, Section 26
of
<PAGE>
the NASD Rules of Fair Practice.
8.2 So long as the Plan or any amendment thereto is in effect, the
Distributor shall inform the Trustees of the commissions (including trailer
commissions) and account servicing fees to be paid by the Distributor to account
executives of the Distributor and to broker-dealers and financial institutions
which have selected dealer agreements with the Distributor. So long as the Plan
(or any amendment thereto) is in effect, at the request of the Trustees or any
agent or representative of the Fund, the Distributor shall provide such
additional information as may reasonably be requested concerning the activities
of the Distributor hereunder and the costs incurred in performing such
activities.
8.3 Expenses of distribution with respect to the Class B shares of
the Fund include, among others:
(a) sales commissions (including trailer commissions) paid to,
or on account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated
with performance of distribution activities, including
central office and branch expenses;
(c) amounts paid to Prusec for performing services under a
selected dealer agreement between Prusec and the Distributor
for sale of Class B shares of the Fund, including sales
commissions and trailer commissions paid to, or on account
of, agents and indirect and overhead costs associated with
<PAGE>
distribution activities;
(d) sales commissions (including trailer commissions) paid to,
or on account of, broker-dealers and financial institutions
(other than Prusec) which have entered into selected dealer
agreements with the Distributor with respect to Class B
shares of the Fund;
(e) amounts paid to, or an account of, account executives of the
Distributor or of other broker-dealers or financial
institutions for personal service and/or the maintenance of
shareholder accounts; and
(f) advertising for the Fund in various forms through any
available medium, including the cost of printing and mailing
Fund Prospectuses, and periodic financial reports and sales
literature to persons other than current shareholders of the
Fund.
Indirect and overhead costs referred to in clauses (b) and (c) of the
foregoing sentence include (i) lease expenses, (ii) salaries and benefits of
personnel including operations and sales support personnel, (iii) utility
expenses, (iv) communications expenses, (v) sales promotion expenses, (vi)
expenses of postage, stationery and supplies and (vii) general overhead.
Section 9. ALLOCATION OF EXPENSES
9.1 The Fund shall bear all costs and expenses of the continuous
offering of its Class B shares, including fees and
<PAGE>
disbursements of its counsel and auditors, in connection with the preparation
and filing of any required Registration Statements and/or Prospectuses under the
Investment Company Act or the Securities Act, and preparing and mailing annual
and periodic reports and proxy materials to shareholders (including but not
limited to the expense of setting in type any such Registration Statements,
Prospectuses, annual or periodic reports or proxy materials). The Fund shall
also bear the cost of expenses of qualification of the Class B shares for sale,
and, if necessary or advisable in connection therewith, of qualifying the Fund
as a broker or dealer, in such states of the United States or other
jurisdictions as shall be selected by the Fund and the Distributor pursuant to
Section 5.4 hereof and the cost and expense payable to each such state for
continuing qualification therein until the Fund decides to discontinue such
qualification pursuant to Section 5.4 hereof. As set forth in Section 8 above,
the Fund shall also bear the expenses it assumes pursuant to the Plan with
respect to Class B shares, so long as the Plan is in effect.
Section 10. INDEMNIFICATION
10.1 The Fund agrees to indemnify, defend and hold the Distributor,
its officers and Trustees and any person who controls the Distributor within the
meaning of Section 15 of the Securities Act, free and harmless from and against
any and all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which the Distributor, its officers,
Trustees or any such controlling person may incur under the Securities Act, or
under common law or otherwise, arising out of or based upon
<PAGE>
any untrue statement of a material fact contained in the Registration Statement
or Prospectus or arising out of or based upon any alleged omission to state a
material fact required to be stated in either thereof or necessary to make the
statements in either thereof not misleading, except insofar as such claims,
demands, liabilities or expenses arise out of or are based upon any such untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with information furnished in writing by the Distributor
to the Fund for use in the Registration Statement or Prospectus; provided,
however, that this indemnity agreement shall not inure to the benefit of any
such officer, Director or controlling person unless a court of competent
jurisdiction shall determine in a final decision on the merits, that the person
to be indemnified was not liable by reason of willful misfeasance, bad faith or
gross negligence in the performance of its duties, or by reason of its reckless
disregard of its obligations under this Agreement (disabling conduct), or, in
the absence of such a decision, a reasonable determination, based upon a review
of the facts, that the indemnified person was not liable by reason of disabling
conduct, by (a) a vote of a majority of a quorum of Trustees who are neither
"interested persons" of the Fund as defined in Section 2(a)(19) of the
Investment Company Act nor parties to the proceeding, or (b) an independent
legal counsel in a written opinion. The Fund's agreement to indemnify the
Distributor, its officers and Trustees and any such controlling person as
aforesaid is expressly conditioned upon the Fund's being promptly notified of
any action brought against the Distributor, its officers or Trustees, or any
such controlling person, such notification to be
<PAGE>
given in writing addressed to the Fund at its principal business office. The
Fund agrees promptly to notify the Distributor of the commencement of any
litigation or proceedings against it or any of its officers or Trustees in
connection with the issue and sale of any Class B shares.
10.2 The Distributor agrees to indemnify, defend and hold the Fund,
its officers and Trustees and any person who controls the Fund, if any, within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending against such claims, demands or liabilities
and any counsel fees incurred in connection therewith) which the Fund, its
officers and Trustees or any such controlling person may incur under the
Securities Act or under common law or otherwise, but only to the extent that
such liability or expense incurred by the Fund, its Trustees or officers or such
controlling person resulting from such claims or demands shall arise out of or
be based upon any alleged untrue statement of a material fact contained in
information furnished in writing by the Distributor to the Fund for use in the
Registration Statement or Prospectus or shall arise out of or be based upon any
alleged omission to state a material fact in connection with such information
required to be stated in the Registration Statement or Prospectus or necessary
to make such information not misleading. The Distributor's agreement to
indemnify the Fund, its officers and Trustees and any such controlling person as
aforesaid, is expressly conditioned upon the Distributor's being promptly
notified of any action brought against the Fund, its officers and Trustees or
any such
<PAGE>
controlling person, such notification to be given to the Distributor in writing
at its principal business office.
Section 11. DURATION AND TERMINATION OF THIS AGREEMENT
11.1 This Agreement shall become effective as of the date first above
written and shall remain in force for two years from the date hereof and
thereafter, but only so long as such continuance is specifically approved at
least annually by (a) the Trustees of the Fund, or by the vote of a majority of
the outstanding voting securities of the Class B shares of the Fund, and (b) by
the vote of a majority of those Trustees who are not parties to this Agreement
or interested persons of any such parties and who have no direct or indirect
financial interest in this Agreement or in the operation of the Fund's Plan or
in any agreement related thereto (Rule 12b-1 Trustees), cast in person at a
meeting called for the purpose of voting upon such approval.
11.2 This Agreement may be terminated at any time, without the
payment of any penalty, by a majority of the Rule 12b-1 Trustees or by vote of a
majority of the outstanding voting securities of the Class B shares of the Fund,
or by the Distributor, on sixty (60) days' written notice to the other party.
This Agreement shall automatically terminate in the event of its assignment.
11.3 The terms "affiliated person," "assignment," "interested person"
and "vote of a majority of the outstanding voting securities," when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
<PAGE>
Section 12. AMENDMENTS TO THIS AGREEMENT
This Agreement may be amended by the parties only if such amendment is
specifically approved by (a) the Trustees of the Fund, or by the vote of a
majority of the outstanding voting securities of the Class B shares of the Fund,
and (b) by the vote of a majority of the Rule 12b-1 Trustees cast in person at a
meeting called for the purpose of voting on such amendment.
Section 13. GOVERNING LAW
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the extent that the
applicable law of the State of New York, or any of the provisions herein,
conflict with the applicable provisions of the Investment Company Act, the
latter shall control.
Section 14. LIABILITIES OF THE FUND
The name "Prudential U.S. Government Fund" is the designation of the
Trustees under a Declaration of Trust dated ______, 19__ and all persons dealing
with the Fund must look solely to the property of the Fund for the enforcement
of any claims against the Fund, and neither the Trustees, officers, agents of
shareholders assume any personal liability for obligations entered into on
behalf of the Fund.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year above written.
Prudential Securities
Incorporated
By: ________________________
________________________
(Title)
Prudential U.S. Government Fund
By: _______________________
(Name)
(Title)
<PAGE>
EXHIBIT 99.6(a)(v)
PRUDENTIAL U.S. GOVERNMENT FUND
Form of
Distribution Agreement
(CLASS C SHARES)
Agreement made as of ______ __, 199_, between Prudential U. S.
Government Fund, a Massachusetts Business Trust (the Fund) and Prudential
Securities Incorporated, a Delaware Corporation (the Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the Investment Company Act), as a diversified, open-end,
management investment company and it is in the interest of the Fund to offer its
Class C shares for sale continuously;
WHEREAS, the Distributor is a broker-dealer registered under the
Securities Exchange Act of 1934, as amended, and is engaged in the business of
selling shares of registered investment companies either directly or through
other broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into an agreement
with each other, with respect to the continuous offering of the Fund's Class C
shares from and after the date hereof in order to promote the growth of the Fund
and facilitate the distribution of its Class C shares; and
WHEREAS, the Fund has adopted a distribution and service plan pursuant
to Rule 12b-1 under the Investment Company Act (the Plan) authorizing payments
by the Fund to the Distributor with respect to the distribution of Class C
shares of the Fund and the maintenance of Class C shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. APPOINTMENT OF THE DISTRIBUTOR
The Fund hereby appoints the Distributor as the principal underwriter
and distributor of the Class C shares of the Fund to sell Class C shares to the
public and the Distributor hereby accepts such appointment and agrees to act
hereunder. The Fund hereby agrees during the term of this Agreement to sell
Class C shares of the Fund to the Distributor on the terms and conditions set
forth below.
Section 2. EXCLUSIVE NATURE OF DUTIES
The Distributor shall be the exclusive representative of the Fund to
act as principal underwriter and distributor of the Fund's Class C shares,
except that:
2.1 The exclusive rights granted to the Distributor to purchase Class
C shares from the Fund shall not apply to Class C shares of the Fund issued in
connection with the merger or consolidation of any other investment company or
personal holding
<PAGE>
company with the Fund or the acquisition by purchase or otherwise of all (or
substantially all) the assets or the outstanding shares of any such company by
the Fund.
2.2 Such exclusive rights shall not apply to Class C shares issued by
the Fund pursuant to reinvestment of dividends or capital gains distributions.
2.3 Such exclusive rights shall not apply to Class C shares issued by
the Fund pursuant to the reinstatement privilege afforded redeeming
shareholders.
2.4 Such exclusive rights shall not apply to purchases made through
the Fund's transfer and dividend disbursing agent in the manner set forth in the
currently effective Prospectus of the Fund. The term "Prospectus" shall mean
the Prospectus and Statement of Additional Information included as part of the
Fund's Registration Statement, as such Prospectus and Statement of Additional
Information may be amended or supplemented from time to time, and the term
"Registration Statement" shall mean the Registration Statement filed by the Fund
with the Securities and Exchange Commission and effective under the Securities
Act of 1933, as amended (the Securities Act), and the Investment Company Act, as
such Registration Statement is amended from time to time.
Section 3. PURCHASE OF CLASS C SHARES FROM THE FUND
3.1 The Distributor shall have the right to buy from the Fund the
Class C shares needed, but not more than the Class C shares needed (except for
clerical errors in transmission) to fill unconditional orders for Class C shares
placed with the Distributor by investors or registered and qualified securities
dealers and other financial institutions (selected dealers). The price which
the Distributor shall pay for the Class C shares so purchased from the Fund
shall be the net asset value, determined as set forth in the Prospectus.
3.2 The Class C shares are to be resold by the Distributor or
selected dealers, as described in Section 6.4 hereof, to investors at the
offering price as set forth in the Prospectus.
3.3 The Fund shall have the right to suspend the sale of its Class C
shares at times when redemption is suspended pursuant to the conditions in
Section 4.3 hereof or at such other times as may be determined by the Trustees.
The Fund shall also have the right to suspend the sale of its Class C shares if
a banking moratorium shall have been declared by federal or New York
authorities.
3.4 The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Class C shares
received by the Distributor. Any order may be rejected by the Fund; provided,
however, that the Fund will not arbitrarily or without reasonable cause refuse
to accept or confirm orders for the purchase of Class C shares. The Fund (or
its agent) will confirm orders upon their receipt, will make appropriate book
entries and upon receipt by the Fund (or its agent) of payment therefor, will
deliver deposit receipts for such Class C shares pursuant to the instructions of
the Distributor. Payment shall be
<PAGE>
made to the Fund in New York Clearing House funds or federal funds. The
Distributor agrees to cause such payment and such instructions to be delivered
promptly to the Fund (or its agent).
Section 4. REPURCHASE OR REDEMPTION OF CLASS C SHARES BY THE FUND
4.1 Any of the outstanding Class C shares may be tendered for
redemption at any time, and the Fund agrees to repurchase or redeem the Class C
shares so tendered in accordance with its Articles of Incorporation as amended
from time to time, and in accordance with the applicable provisions of the
Prospectus. The price to be paid to redeem or repurchase the Class C shares
shall be equal to the net asset value determined as set forth in the
Prospectus. All payments by the Fund hereunder shall be made in the manner set
forth in Section 4.2 below.
4.2 The Fund shall pay the total amount of the redemption price as
defined in the above paragraph pursuant to the instructions of the Distributor
on or before the seventh day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of Class C shares
shall be paid by the Fund as follows: (a) any applicable contingent deferred
sales charge shall be paid to the Distributor and (b) the balance shall be paid
to or for the account of the redeeming shareholder, in each case in accordance
with applicable provisions of the Prospectus.
4.3 Redemption of Class C shares or payment may be suspended at times
when the New York Stock Exchange is closed for other than customary weekends and
holidays, when trading on said Exchange is restricted, when an emergency exists
as a result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or during any other period when the
Securities and Exchange Commission, by order, so permits.
Section 5. DUTIES OF THE FUND
5.1 Subject to the possible suspension of the sale of Class C shares
as provided herein, the Fund agrees to sell its Class C shares so long as it has
Class C shares available.
5.2 The Fund shall furnish the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Class C shares, and this
shall include one certified copy, upon request by the Distributor, of all
financial statements prepared for the Fund by independent public accountants.
The Fund shall make available to the Distributor such number of copies of its
Prospectus and annual and interim reports as the Distributor shall reasonably
request.
5.3 The Fund shall take, from time to time, but subject to the
necessary approval of the Trustees and the shareholders, all necessary action to
fix the number of authorized Class C shares and such steps as may be necessary
to register the same under the Securities Act, to the end that there will be
available for sale such number of Class C shares as the Distributor reasonably
may expect to sell. The Fund agrees to file from time to time such amendments,
<PAGE>
reports and other documents as may be necessary in order that there will be no
untrue statement of a material fact in the Registration Statement, or necessary
in order that there will be no omission to state a material fact in the
Registration Statement which omission would make the statements therein
misleading.
5.4 The Fund shall use its best efforts to qualify and maintain the
qualification of any appropriate number of its Class C shares for sales under
the securities laws of such states as the Distributor and the Fund may approve;
provided that the Fund shall not be required to amend its Articles of
Incorporation or By-Laws to comply with the laws of any state, to maintain an
office in any state, to change the terms of the offering of its Class C shares
in any state from the terms set forth in its Registration Statement, to qualify
as a foreign corporation in any state or to consent to service of process in any
state other than with respect to claims arising out of the offering of its Class
C shares. Any such qualification may be withheld, terminated or withdrawn by
the Fund at any time in its discretion. As provided in Section 9.1 hereof, the
expense of qualification and maintenance of qualification shall be borne by the
Fund. The Distributor shall furnish such information and other material
relating to its affairs and activities as may be required by the Fund in
connection with such qualifications.
Section 6. DUTIES OF THE DISTRIBUTOR
6.1 The Distributor shall devote reasonable time and effort to effect
sales of Class C shares of the Fund, but shall not be obligated to sell any
specific number of Class C shares. Sales of the Class C shares shall be on the
terms described in the Prospectus. The Distributor may enter into like
arrangements with other investment companies. The Distributor shall compensate
the selected dealers as set forth in the Prospectus.
6.2 In selling the Class C shares, the Distributor shall use its best
efforts in all respects duly to conform with the requirements of all federal and
state laws relating to the sale of such securities. Neither the Distributor nor
any selected dealer nor any other person is authorized by the Fund to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the
confirmation of sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales and the
cancellation of unsettled transactions, as may be necessary to comply with the
requirements of the National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into selected
dealer agreements with registered and qualified securities dealers and other
financial institutions of its choice for the sale of Class C shares, provided
that the Fund shall approve the forms of such agreements. Within the United
States, the Distributor shall offer and sell Class C shares only to such
selected dealers as are members in good standing of the NASD. Class C shares
sold to selected dealers shall be for resale by such dealers only at the
offering price
<PAGE>
determined as set forth in the Prospectus.
Section 7. PAYMENTS TO THE DISTRIBUTOR
The Distributor shall receive and may retain any contingent deferred
sales charge which is imposed with respect to repurchases and redemptions of
Class C shares as set forth in the Prospectus, subject to the limitations of
Article III, Section 26 of the NASD Rules of Fair Practice. Payment of these
amounts to the Distributor is not contingent upon the adoption or continuation
of the Plan.
Section 8. PAYMENT OF THE DISTRIBUTOR UNDER THE PLAN
8.1 The Fund shall pay to the Distributor as compensation for
services under the Distribution and Service Plan and this Agreement a fee of 1%
(including an asset-based sales charge of .75 of 1% and a service fee of .25 of
1%) per annum of the average daily net assets of the Class C shares of the
Fund. Amounts payable under the Plan shall be accrued daily and paid monthly
or at such other intervals as the Trustees may determine. Amounts payable
under the Plan shall be subject to the limitations of Article III, Section 26
of the NASD Rules of Fair Practice.
8.2 So long as the Plan or any amendment thereto is in effect, the
Distributor shall inform the Trustees of the commissions (including trailer
commissions) and account servicing fees to be paid by the Distributor to account
executives of the Distributor and to broker-dealers and financial institutions
which have selected dealer agreements with the Distributor. So long as the Plan
(or any amendment thereto) is in effect, at the request of the Trustees or any
agent or representative of the Fund, the Distributor shall provide such
additional information as may reasonably be requested concerning the activities
of the Distributor hereunder and the costs incurred in performing such
activities.
8.3 Expenses of distribution with respect to the Class C shares of
the Fund include, among others:
(a) sales commissions (including trailer commissions) paid to,
or on account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated
with performance of distribution activities, including
central office and branch expenses;
(c) amounts paid to Prusec for performing services under a
selected dealer agreement between Prusec and the Distributor
for sale of Class C shares of the Fund, including sales
commissions and trailer commissions paid to, or on account
of, agents and indirect and overhead costs associated with
distribution activities;
(d) sales commissions (including trailer commissions) paid to,
or on account of, broker-dealers and financial institutions
(other than Prusec) which
<PAGE>
have entered into selected dealer agreements with the Distributor with
respect to Class C shares of the Fund;
(e) amounts paid to, or an account of, account executives of the
Distributor or of other broker-dealers or financial
institutions for personal service and/or the maintenance of
shareholder accounts; and
(f) advertising for the Fund in various forms through any
available medium, including the cost of printing and mailing
Fund Prospectuses, and periodic financial reports and sales
literature to persons other than current shareholders of the
Fund.
Indirect and overhead costs referred to in clauses (b) and (c) of the
foregoing sentence include (i) lease expenses, (ii) salaries and benefits of
personnel including operations and sales support personnel, (iii) utility
expenses, (iv) communications expenses, (v) sales promotion expenses, (vi)
expenses of postage, stationery and supplies and (vii) general overhead.
Section 9. ALLOCATION OF EXPENSES
9.1 The Fund shall bear all costs and expenses of the continuous
offering of its Class C shares, including fees and disbursements of its counsel
and auditors, in connection with the preparation and filing of any required
Registration Statements and/or Prospectuses under the Investment Company Act or
the Securities Act, and preparing and mailing annual and periodic reports and
proxy materials to shareholders (including but not limited to the expense of
setting in type any such Registration Statements, Prospectuses, annual or
periodic reports or proxy materials). The Fund shall also bear the cost of
expenses of qualification of the Class C shares for sale, and, if necessary or
advisable in connection therewith, of qualifying the Fund as a broker or dealer,
in such states of the United States or other jurisdictions as shall be selected
by the Fund and the Distributor pursuant to Section 5.4 hereof and the cost and
expense payable to each such state for continuing qualification therein until
the Fund decides to discontinue such qualification pursuant to Section 5.4
hereof. As set forth in Section 8 above, the Fund shall also bear the expenses
it assumes pursuant to the Plan with respect to Class C shares, so long as the
Plan is in effect.
Section 10. INDEMNIFICATION
10.1 The Fund agrees to indemnify, defend and hold the Distributor,
its officers and Trustees and any person who controls the Distributor within the
meaning of Section 15 of the Securities Act, free and harmless from and against
any and all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which the Distributor, its officers,
Trustees or any such controlling person may incur under the Securities Act, or
under common law or otherwise, arising out of or based upon any untrue statement
of a material fact contained in the Registration
<PAGE>
Statement or Prospectus or arising out of or based upon any alleged omission to
state a material fact required to be stated in either thereof or necessary to
make the statements in either thereof not misleading, except insofar as such
claims, demands, liabilities or expenses arise out of or are based upon any such
untrue statement or omission or alleged untrue statement or omission made in
reliance upon and in conformity with information furnished in writing by the
Distributor to the Fund for use in the Registration Statement or Prospectus;
provided, however, that this indemnity agreement shall not inure to the benefit
of any such officer, Director or controlling person unless a court of competent
jurisdiction shall determine in a final decision on the merits, that the person
to be indemnified was not liable by reason of willful misfeasance, bad faith or
gross negligence in the performance of its duties, or by reason of its reckless
disregard of its obligations under this Agreement (disabling conduct), or, in
the absence of such a decision, a reasonable determination, based upon a review
of the facts, that the indemnified person was not liable by reason of disabling
conduct, by (a) a vote of a majority of a quorum of Trustees who are neither
"interested persons" of the Fund as defined in Section 2(a)(19) of the
Investment Company Act nor parties to the proceeding, or (b) an independent
legal counsel in a written opinion. The Fund's agreement to indemnify the
Distributor, its officers and Trustees and any such controlling person as
aforesaid is expressly conditioned upon the Fund's being promptly notified of
any action brought against the Distributor, its officers or Trustees, or any
such controlling person, such notification to be given in writing addressed to
the Fund at its principal business office. The Fund agrees promptly to notify
the Distributor of the commencement of any litigation or proceedings against it
or any of its officers or Trustees in connection with the issue and sale of any
Class C shares.
10.2 The Distributor agrees to indemnify, defend and hold the Fund,
its officers and Trustees and any person who controls the Fund, if any, within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending against such claims, demands or liabilities
and any counsel fees incurred in connection therewith) which the Fund, its
officers and Trustees or any such controlling person may incur under the
Securities Act or under common law or otherwise, but only to the extent that
such liability or expense incurred by the Fund, its Trustees or officers or such
controlling person resulting from such claims or demands shall arise out of or
be based upon any alleged untrue statement of a material fact contained in
information furnished in writing by the Distributor to the Fund for use in the
Registration Statement or Prospectus or shall arise out of or be based upon any
alleged omission to state a material fact in connection with such information
required to be stated in the Registration Statement or Prospectus or necessary
to make such information not misleading. The Distributor's agreement to
indemnify the Fund, its officers and Trustees and any such controlling person as
aforesaid, is expressly conditioned upon the Distributor's being promptly
notified of any action brought against the Fund, its officers and Trustees or
any such controlling person, such notification to be given to the Distributor in
writing at its principal business office.
<PAGE>
Section 11. DURATION AND TERMINATION OF THIS AGREEMENT
11.1 This Agreement shall become effective as of the date first above
written and shall remain in force for two years from the date hereof and
thereafter, but only so long as such continuance is specifically approved at
least annually by (a) the Trustees of the Fund, or by the vote of a majority of
the outstanding voting securities of the Class C shares of the Fund, and (b) by
the vote of a majority of those Trustees who are not parties to this Agreement
or interested persons of any such parties and who have no direct or indirect
financial interest in this Agreement or in the operation of the Fund's Plan or
in any agreement related thereto (Rule 12b-1 Trustees), cast in person at a
meeting called for the purpose of voting upon such approval.
11.2 This Agreement may be terminated at any time, without the
payment of any penalty, by a majority of the Rule 12b-1 Trustees or by vote of a
majority of the outstanding voting securities of the Class C shares of the Fund,
or by the Distributor, on sixty (60) days' written notice to the other party.
This Agreement shall automatically terminate in the event of its assignment.
11.3 The terms "affiliated person," "assignment," "interested person"
and "vote of a majority of the outstanding voting securities," when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 12. AMENDMENTS TO THIS AGREEMENT
This Agreement may be amended by the parties only if such amendment is
specifically approved by (a) the Trustees of the Fund, or by the vote of a
majority of the outstanding voting securities of the Class C shares of the Fund,
and (b) by the vote of a majority of the Rule 12b-1 Trustees cast in person at a
meeting called for the purpose of voting on such amendment.
Section 13. GOVERNING LAW
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the extent that the
applicable law of the State of New York, or any of the provisions herein,
conflict with the applicable provisions of the Investment Company Act, the
latter shall control.
Section 14. LIABILITIES OF THE FUND
The name "Prudential U.S. Government Fund" is the designation of the
Trustees under a Declaration of Trust dated ______, 19__ and all persons dealing
with the Fund must look solely to the property of the Fund for the enforcement
of any claims against the Fund, and neither the Trustees, officers, agents of
shareholders assume any personal liability for obligations entered into on
behalf of the Fund.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year above written.
Prudential Securities
Incorporated
By: ________________________
________________________
(Title)
Prudential U.S. Government Fund
By: _______________________
(Name)
(Title)
<PAGE>
EXHIBIT 99.11
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Post-Effective Amendment No. 13 to Registration
Statement No. 33-01332 of Prudential U.S. Government Fund of our report dated
December 15, 1993, appearing in the Statement of Additional Information, which
is a part of such Registration Statement, and to the references to us under the
headings "Financial Highlights" in the Prospectus, which is a part of such
Registration Statement, and "Custodian, Transfer and Dividend Disbursing Agent
and Independent Accountants" in the Statement of Additional Information.
Deloitte & Touche
New York, New York
April 29, 1994
<PAGE>
EXHIBIT 99.15(b)(i)
PRUDENTIAL U.S. GOVERNMENT FUND
DISTRIBUTION AND SERVICE PLAN
(CLASS A SHARES)
INTRODUCTION
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Article III, Section 26 of
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. (NASD) has been adopted by Prudential U.S. Government Fund (the Fund) and
by Prudential Mutual Fund Distributors, Inc., the Fund's distributor (the
Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class A shares issued by the Fund
(Class A shares). Under the Plan, the Fund intends to pay to the Distributor, as
compensation for its services, a distribution and service fee with respect to
Class A shares.
A majority of the Trustees of the Fund, including a majority of those
Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of this Plan or any agreements related to it (the Rule 12b-1
Trustees), have determined by votes cast in person at a meeting called for the
purpose of voting on this Plan that there is a reasonable likelihood that
adoption of this Plan will benefit the Fund and its shareholders. Expenditures
under this Plan by the Fund for Distribution Activities (defined below) are
primarily intended to result in the sale of Class A shares of the Fund within
the meaning of paragraph (a)(2) of Rule 12b-1 promulgated under the Investment
Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
THE PLAN
The material aspects of the Plan are as follows:
1. DISTRIBUTION ACTIVITIES
The Fund shall engage the Distributor to distribute Class A shares of
the Fund and to service shareholder accounts using all of the facilities of
the distribution networks of Prudential Securities Incorporated (Prudential
Securities) and Pruco Securities Corporation (Prusec), including sales
personnel and branch office and central support systems, and also using
such other qualified broker-dealers and financial institutions as the
Distributor may select. Services provided and activities undertaken to
distribute Class A shares of the Fund are referred to herein as
"Distribution Activities."
<PAGE>
2. PAYMENT OF SERVICE FEE
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of
.25 of 1% per annum of the average daily net assets of the Class A shares
(service fee). The Fund shall calculate and accrue daily amounts payable by
the Class A shares of the Fund hereunder and shall pay such amounts monthly
or at such other intervals as the Trustees may determine.
3. PAYMENT FOR DISTRIBUTION ACTIVITIES
The Fund shall pay to the Distributor as compensation for its services
a distribution fee, together with the service fee (described in Section 2
hereof), of .30 of 1% per annum of the average daily net assets of the
Class A shares of the Fund for the performance of Distribution Activities.
The Fund shall calculate and accrue daily amounts payable by the Class A
shares of the Fund hereunder and shall pay such amounts monthly or at such
other intervals as the Trustees may determine. Amounts payable under the
Plan shall be subject to the limitations of Article III, Section 26 of the
NASD Rules of Fair Practice.
Amounts paid to the Distributor by the Class A shares of the Fund
will not be used to pay the distribution expenses incurred with
respect to any other class of shares of the Fund except that
distribution expenses attributable to the Fund as a whole will be
allocated to the Class A shares according to the ratio of the sales of
Class A shares to the total sales of the Fund's shares over the Fund's
fiscal year or such other allocation method approved by the Trustees.
The allocation of distribution expenses among classes will be subject
to the review of the Trustees.
The Distributor shall spend such amounts as it deems appropriate
on Distribution Activities which include, among others:
(a) amounts paid to Prudential Securities for performing services under a
selected dealer agreement between Prudential Securities and the Distributor for
sale of Class A shares of the Fund, including sales commissions and trailer
commissions paid to, or on account of, account executives and indirect and
overhead costs associated with Distribution Activities, including central office
and branch expenses;
(b) amounts paid to Prusec for performing services under a selected dealer
agreement between Prusec and the Distributor for sale of Class A shares of the
Fund, including sales commissions, trailer commissions paid to, or on account
of, agents and indirect and overhead costs associated with Distribution
Activities;
(c) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund prospectuses, statements
of additional information and periodic financial reports and sales literature to
persons other than current shareholders of the Fund; and
<PAGE>
(d) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and financial institutions (other than Prudential
Securities and Prusec) which have entered into selected dealer agreements with
the Distributor with respect to Class A shares of the Fund.
4. QUARTERLY REPORTS; ADDITIONAL INFORMATION
An appropriate officer of the Fund will provide to the Trustees of the
Fund for review, at least quarterly, a written report specifying in
reasonable detail the amounts expended for Distribution Activities
(including payment of the service fee) and the purposes for which such
expenditures were made in compliance with the requirements of Rule 12b-1.
The Distributor will provide to the Trustees of the Fund such additional
information as the Trustees shall from time to time reasonably request,
including information about Distribution Activities undertaken or to be
undertaken by the Distributor.
The Distributor will inform the Trustees of the Fund of the
commissions and account servicing fees to be paid by the Distributor
to account executives of the Distributor and to broker-dealers and
financial institutions which have selected dealer agreements with the
Distributor.
5. EFFECTIVENESS; CONTINUATION
The Plan shall not take effect until it has been approved by a vote of
a majority of the outstanding voting securities (as defined in the
Investment Company Act) of the Class A shares of the Fund.
If approved by a vote of a majority of the outstanding voting
securities of the Class A shares of the Fund, the Plan shall, unless
earlier terminated in accordance with its terms, continue in full
force and effect thereafter for so long as such continuance is
specifically approved at least annually by a majority of the Trustees
of the Fund and a majority of the Rule 12b-1 Trustees by votes cast in
person at a meeting called for the purpose of voting on the
continuation of the Plan.
6. TERMINATION
This Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Trustees, or by vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Class A shares
of the Fund.
7. AMENDMENTS
The Plan may not be amended to change the combined service and
distribution fees to be paid as provided for in Sections 2 and 3 hereof so
as to increase materially the amounts payable under this Plan unless such
amendment shall be approved by the vote of a majority of the outstanding
voting securities (as defined in the Investment Company Act) of the Class A
shares of
<PAGE>
the Fund. All material amendments of the Plan shall be approved by a
majority of the Trustees of the Fund and a majority of the Rule 12b-1
Trustees by votes cast in person at a meeting called for the purpose of
voting on the Plan.
8. RULE 12B-1 TRUSTEES
While the Plan is in effect, the selection and nomination of the
Rule 12b-1 Trustees shall be committed to the discretion of the Rule 12b-1
Trustees.
9. RECORDS
The Fund shall preserve copies of the Plan and any related agreements
and all reports made pursuant to Section 4 hereof, for a period of not less
than six years from the date of effectiveness of the Plan, such agreements
or reports, and for at least the first two years in an easily accessible
place.
10. ENFORCEMENT OF CLAIMS
The name "Prudential U.S. Government Fund" is the designation of the
Trustees under a Declaration of Trust dated September 22, 1986 and all
persons dealing with the Fund must look solely to the property of the Fund
for the enforcement of any claims against the Fund, and neither the
Trustees, officers, agents nor shareholders assume any personal liability
for obligations entered into on behalf of the Fund.
Dated:
<PAGE>
EXHIBIT 99.15(b)(ii)
PRUDENTIAL U.S GOVERNMENT FUND
DISTRIBUTION AND SERVICE PLAN
(CLASS B SHARES)
INTRODUCTION
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Article III, Section 26 of
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. (NASD) has been adopted by Prudential U.S. Government Fund (the Fund) and
by Prudential Securities Incorporated (Prudential Securities), the Fund's
distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class B shares issued by the Fund
(Class B shares). Under the Plan, the Fund wishes to pay to the Distributor, as
compensation for its services, a distribution and service fee with respect to
Class B shares.
A majority of the Trustees of the Fund including a majority who are not
"interested persons" of the Fund (as defined in the Investment Company Act) and
who have no direct or indirect financial interest in the operation of this Plan
or any agreements related to it (the Rule 12b-1 Trustees), have determined by
votes cast in person at a meeting called for the purpose of voting on this Plan
that there is a reasonable likelihood that adoption of this Plan will benefit
the Fund and its shareholders. Expenditures under this Plan by the Fund for
Distribution Activities (defined below) are primarily intended to result in the
sale of Class B shares of the Fund within the meaning of paragraph (a) (2) of
Rule 12b-1 promulgated under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
THE PLAN
The material aspects of the Plan are as follows:
1. DISTRIBUTION ACTIVITIES
The Fund shall engage the Distributor to distribute Class B shares of
the Fund and to service shareholder accounts using all of the facilities of
the Prudential Securities distribution network including sales personnel
and branch office and central support systems, and also using such other
qualified broker-dealers and financial institutions as the Distributor may
select, including Pruco Securities Corporation (Prusec). Services provided
and activities undertaken to distribute Class B shares
<PAGE>
of the Fund are referred to herein as "Distribution Activities."
2. PAYMENT OF SERVICE FEE
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of
.25 of 1% per annum of the average daily net assets of the Class B shares
(service fee). The Fund shall calculate and accrue daily amounts payable by
the Class B shares of the Fund hereunder and shall pay such amounts monthly
or at such other intervals as the Trustees may determine.
3. PAYMENT FOR DISTRIBUTION ACTIVITIES
The Fund shall pay to the Distributor as compensation for its services
a distribution fee of .75 of 1% per annum of the average daily net assets
of the Class B shares of the Fund for the performance of Distribution
Activities. The Fund shall calculate and accrue daily amounts payable by
the Class B shares of the Fund hereunder and shall pay such amounts monthly
or at such other intervals as the Trustees may determine. Amounts payable
under the Plan shall be subject to the limitations of Article III,
Section 26 of the NASD Rules of Fair Practice.
Amounts paid to the Distributor by the Class B shares of the Fund
will not be used to pay the distribution expenses incurred with
respect to any other class of shares of the Fund except that
distribution expenses attributable to the Fund as a whole will be
allocated to the Class B shares according to the ratio of the sale of
Class B shares to the total sales of the Fund's shares over the Fund's
fiscal year or such other allocation method approved by the Trustees.
The allocation of distribution expenses among classes will be subject
to the review of the Trustees.
The Distributor shall spend such amounts as it deems appropriate
on Distribution Activities which include, among others:
(a) sales commissions (including trailer commissions) paid to, or on
account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of Distribution Activities including central office and branch
expenses;
(c) amounts paid to Prusec for performing services under a selected dealer
agreement between Prusec and the Distributor for sale of Class B shares of the
Fund, including sales commissions, trailer commissions paid to, or on account
of, agents and indirect and overhead costs associated with Distribution
Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund prospectuses, statements
of additional information and periodic financial reports and sales literature to
persons other than current shareholders of the Fund; and
<PAGE>
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and other financial institutions (other than Prusec)
which have entered into selected dealer agreements with the Distributor with
respect to Class B shares of the Fund.
4. QUARTERLY REPORTS; ADDITIONAL INFORMATION
An appropriate officer of the Fund will provide to the Trustees of the
Fund for review, at least quarterly, a written report specifying in
reasonable detail the amounts expended for Distribution Activities
(including payment of the service fee) and the purposes for which such
expenditures were made in compliance with the requirements of Rule 12b-1.
The Distributor will provide to the Trustees of the Fund such additional
information as they shall from time to time reasonably request, including
information about Distribution Activities undertaken or to be undertaken by
the Distributor.
The Distributor will inform the Trustees of the Fund of the
commissions and account servicing fees to be paid by the Distributor
to account executives of the Distributor and to broker-dealers and
other financial institutions which have selected dealer agreements
with the Distributor.
5. EFFECTIVENESS; CONTINUATION
The Plan shall not take effect until it has been approved by a vote of
a majority of the outstanding voting securities (as defined in the
Investment Company Act) of the Class B shares of the Fund.
If approved by a vote of a majority of the outstanding voting
securities of the Class B shares of the Fund, the Plan shall, unless
earlier terminated in accordance with its terms, continue in full
force and effect thereafter for so long as such continuance is
specifically approved at least annually by a majority of the Trustees
of the Fund and a majority of the Rule 12b-1 Trustees by votes cast in
person at a meeting called for the purpose of voting on the
continuation of the Plan.
6. TERMINATION
This Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Trustees, or by vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Class B shares
of the Fund.
7. AMENDMENTS
The Plan may not be amended to change the combined service and
distribution fees to be paid as provided for in Sections 2 and 3 hereof so
as to increase materially the amounts payable under this Plan unless such
amendment shall be approved by the vote of a majority of the outstanding
voting securities (as defined in the Investment Company Act) of the Class B
shares of the Fund. All material amendments of the Plan shall be approved
<PAGE>
by a majority of the Trustees of the Fund and a majority of the Rule 12b-1
Trustees by votes cast in person at a meeting called for the purpose of
voting on the Plan.
8. RULE 12B-1 TRUSTEES
While the Plan is in effect, the selection and nomination of the
Rule 12b-1 Trustees shall be committed to the discretion of the Rule 12b-1
Trustees.
9. RECORDS
The Fund shall preserve copies of the Plan and any related agreements
and all reports made pursuant to Section 4 hereof, for a period of not less
than six years from the date of effectiveness of the Plan, such agreements
or reports, and for at least the first two years in an easily accessible
place.
10. ENFORCEMENT OF CLAIMS
The name "Prudential U.S. Government Trust" is the designation of the
Trustees under a Declaration of Trust dated September 22, 1986 and all
persons dealing with the Fund must look solely to the property of the Fund
for the enforcement of any claims against the Fund, and neither the -
Trustees, officers, agents nor shareholders assume any personal liability
for obligations entered into on behalf of the Fund.
Dated:
<PAGE>
EXHIBIT 99.15(b)(iii)
PRUDENTIAL U.S. GOVERNMENT FUND
DISTRIBUTION AND SERVICE PLAN
(CLASS C SHARES)
INTRODUCTION
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Article III, Section 26 of
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. (NASD) has been adopted by Prudential U.S. Government Fund (the Fund) and
by Prudential Securities Incorporated (Prudential Securities), the Fund's
distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class C shares issued by the Fund
(Class C shares). Under the Plan, the Fund wishes to pay to the Distributor, as
compensation for its services, a distribution and service fee with respect to
Class C shares.
A majority of the Board of Directors of the Fund, including a majority who
are not "interested persons" of the Fund (as defined in the Investment Company
Act) and who have no direct or indirect financial interest in the operation of
this Plan or any agreements related to it (the Rule 12b-1 Directors), have
determined by votes cast in person at a meeting called for the purpose of voting
on this Plan that there is a reasonable likelihood that adoption of this Plan
will benefit the Fund and its shareholders. Expenditures under this Plan by the
Fund for Distribution Activities (defined below) are primarily intended to
result in the sale of Class C shares of the Fund within the meaning of paragraph
(a)(2) of Rule 12b-1 promulgated under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
THE PLAN
The material aspects of the Plan are as follows:
1. DISTRIBUTION ACTIVITIES
The Fund shall engage the Distributor to distribute Class C shares of
the Fund and to service shareholder accounts using all of the facilities of
the Prudential Securities distribution network including sales personnel
and branch office and central support systems, and also using such other
qualified broker-dealers and financial institutions as the Distributor may
select, including Pruco Securities Corporation (Prusec). Services provided
and activities undertaken to distribute Class C shares
<PAGE>
of the Fund are referred to herein as "Distribution Activities."
2. PAYMENT OF SERVICE FEE
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of
.25 of 1% per annum of the average daily net assets of the Class C shares
(service fee). The Fund shall calculate and accrue daily amounts payable by
the Class C shares of the Fund hereunder and shall pay such amounts monthly
or at such other intervals as the Board of Directors may determine.
3. PAYMENT FOR DISTRIBUTION ACTIVITIES
The Fund shall pay to the Distributor as compensation for its services
a distribution fee of .75 of 1% per annum of the average daily net assets
of the Class C shares for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class C shares
of the Fund hereunder and shall pay such amounts monthly or at such other
intervals as the Board of Directors may determine. Amounts payable under
the Plan shall be subject to the limitations of Article III, Section 26 of
the NASD Rules of Fair Practice.
Amounts paid to the Distributor by the Class C shares of the Fund
will not be used to pay the distribution expenses incurred with
respect to any other class of shares of the Fund except that
distribution expenses attributable to the Fund as a whole will be
allocated to the Class C shares according to the ratio of the sale of
Class C shares to the total sales of the Fund's shares over the Fund's
fiscal year or such other allocation method approved by the Board of
Directors. The allocation of distribution expenses among classes will
be subject to the review of the Board of Directors.
The Distributor shall spend such amounts as it deems appropriate
on Distribution Activities which include, among others:
(a) sales commissions (including trailer commissions) paid to, or on
account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of Distribution Activities including central office and branch
expenses;
(c) amounts paid to Prusec for performing services under a selected dealer
agreement between Prusec and the Distributor for sale of Class C shares of the
Fund, including sales commissions and trailer commissions paid to, or on account
of, agents and indirect and overhead costs associated with Distribution
Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund prospectuses, statements
of additional information and periodic
<PAGE>
financial reports and sales literature to persons other than current
shareholders of the Fund; and
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and other financial institutions (other than Prusec)
which have entered into selected dealer agreements with the Distributor with
respect to Class C shares of the Fund.
4. QUARTERLY REPORTS; ADDITIONAL INFORMATION
An appropriate officer of the Fund will provide to the Board of
Directors of the Fund for review, at least quarterly, a written report
specifying in reasonable detail the amounts expended for Distribution
Activities (including payment of the service fee) and the purposes for
which such expenditures were made in compliance with the requirements of
the Rule 12b-1. The Distributor will provide to the Board of Directors of
the Fund such additional information as they shall from time to time
reasonably request, including information about Distribution Activities
undertaken or to be undertaken by the Distributor.
The Distributor will inform the Board of Directors of the Fund of
the commissions and account servicing fees to be paid by the
Distributor to account executives of the Distributor and to
broker-dealers and other financial institutions which have selected
dealer agreements with the Distributor.
5. EFFECTIVENESS; CONTINUATION
The Plan shall not take effect until it has been approved by a vote of
a majority of the outstanding voting securities (as defined in the
Investment Company Act) of the Class C shares of the Fund.
If approved by a vote of a majority of the outstanding voting
securities of the Class C shares of the Fund, the Plan shall, unless
earlier terminated in accordance with its terms, continue in full
force and effect thereafter for so long as such continuance is
specifically approved at least annually by a majority of the Board of
Directors of the Fund and a majority of the Rule 12b-1 Directors by
votes cast in person at a meeting called for the purpose of voting on
the continuation of the Plan.
6. TERMINATION
This Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Directors, or by vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Class C shares
of the Fund.
7. AMENDMENTS
The Plan may not be amended to change the combined service and
distribution fees to be paid as provided for in Sections 2 and 3 hereof so
as to increase materially the amounts payable
<PAGE>
under this Plan unless such amendment shall be approved by the vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class C shares of the Fund. All material amendments of
the Plan shall be approved by a majority of the Board of Directors of the
Fund and a majority of the Rule 12b-1 Directors by votes cast in person at
a meeting called for the purpose of voting on the Plan.
8. RULE 12B-1 DIRECTORS
While the Plan is in effect, the selection and nomination of the
Rule 12b-1 Directors shall be committed to the discretion of the Rule 12b-1
Directors.
9. RECORDS
The Fund shall preserve copies of the Plan and any related agreements
and all reports made pursuant to Section 4 hereof, for a period of not less
than six years from the date of effectiveness of the Plan, such agreements
or reports, and for at least the first two years in an easily accessible
place.
10. ENFORCEMENT OF CLAIMS
The name "Prudential U.S. Government Trust" is the designation of the
Trustees under a Declaration of Trust dated September 22, 1986 and all
persons dealing with the Fund must look solely to the property of the Fund
for the enforcement of any claims against the Fund, and neither the
Trustees, officers, agents nor shareholders assume any personal liability
for obligations entered into on behalf of the Fund.
Dated:
