<PAGE>
As filed with the Securities and Exchange Commission
on January 3, 1995
Registration No. 33-01332
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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. 15 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 18 /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):
/X/ immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)
/ / on (date) pursuant to paragraph (a)
/ / 75 days after filing pursuant to paragraph
(a)(ii)
/ / on (date) pursuant to paragraph (a)(ii) of Rule
485.
If appropriate, check the following box:
/ / this post-effective amendment designates a new
effective date for a previously filed
post-effective amendment.
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE OFFERING REGISTRATION
BEING REGISTERED REGISTERED PER SHARE* PRICE** FEE
<S> <C> <C> <C> <C>
Shares of beneficial interest,
par value $.01 per share Indefinite*** N/A N/A N/A
Shares of beneficial interest,
par value $.01 per share 6,819,674 $9.56 $289,997.98 $100
<FN>
* Computed under Rule 457(d) on the basis of the offering price per share on
the close of business on December 23, 1994.
** Registrant elects to calculate the maximum aggregate offering price
pursuant to Rule 24e-2. 6,789,340 shares were redeemed during the fiscal
year ended October 31, 1994. None of such shares was used for reductions
pursuant to paragraph (c) of Rule 24f-2 or paragraph (a) of Rule 24e-2
during the current fiscal year ended October 31, 1994. 6,789,340 shares
redeemed during the Registrant's previous fiscal year are being used for
reduction for this amendment.
*** Registrant has registered an indefinite number of shares under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company
Act of 1940. The Rule 24f-2 Notice for the Registrant's most recent fiscal
year ended October 31, 1994 will be filed on or before December 30, 1994.
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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
Securities.............................. Not Applicable
Item 16. Investment Advisory and Other
Services................................ Manager; Distributor; Custodian,
Transfer and Dividend Disbursing Agent
and Independent Accountants
Item 17. Brokerage Allocation and Other
Practices............................... Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities...... Not Applicable
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered................ Purchase and Redemption of Fund Shares;
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 JANUARY 3, 1995
- --------------------------------------------------------------------------------
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." There is no assurance that the Fund's investment objective will be
achieved. 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 should know before investing. Additional information about
the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated January 3, 1995, 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). There can be no assurance that the Fund's objective
will be achieved. See "How the Fund Invests--Investment Objective and Policies"
at page 8.
RISK FACTORS AND SPECIAL CHARACTERISTICS
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 8. The Fund may also engage
in various hedging and income enhancement strategies, including derivatives and
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 10.
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 November 30, 1994, PMF served as
manager or administrator to 68 investment companies, including 38 mutual funds,
with aggregate assets of approximately $47 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 18.
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 paid an annual distribution and service fee
which is currently being charged at the 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 paid an annual
distribution and service fee which is currently being charged at the rate of .85
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 19.
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 25 and "Shareholder Guide--Shareholder Services"
at page 33.
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 22 and "Shareholder Guide--How to Buy Shares of the Fund" at page 25.
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 distribution-related
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 26.
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 28.
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 23.
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........................... .44% .44% .44%
----- ----- -----
Total Fund Operating Expenses............ 1.09% 1.79% 1.69%
----- ----- -----
----- ----- -----
- ------------------
</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................................................ 51 73 98 168
Class B................................................ 68 86 107 183
Class C**.............................................. 27 53 92 200
You would pay the following expenses on the same
investment, assuming no redemption:
Class A................................................ 51 73 98 168
Class B................................................ 18 56 97 183
Class C**.............................................. 17 53 92 200
The above example with respect to Class B shares is based on restated data for the Fund's fiscal year ended
October 31, 1994. 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 entire fiscal year ended October 31, 1994.
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 entire fiscal year ended October
31, 1994.
+ 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
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 fees 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 .85 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, 1995.
See "How the Fund is Managed--Distributor." Total operating expenses
without such limitations would be 1.24% for Class A shares, 1.94% for Class
B shares and 1.94% for Class C shares.
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
(CLASS A SHARES)
The following financial highlights have been audited by Deloitte & Touche LLP,
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 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.
<TABLE>
<CAPTION>
CLASS A
----------------------------------------- JANUARY 22,
1990@
YEAR ENDED OCTOBER 31, THROUGH
----------------------------------------- OCTOBER 31,
1994 1993 1992 1991 1990
-------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 10.59 $ 9.69 $ 9.49 $ 8.97 $ 9.31
-------- ------- ------- ------- -----------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income......... .61 .64 .68 .66 .55
Net realized and unrealized
gain (loss)
on investment transactions... (1.43) .90 .20 .52 (.34)
-------- ------- ------- ------- -----------
Total from investment
operations................... (.82) 1.54 .88 1.18 .21
-------- ------- ------- ------- -----------
LESS DISTRIBUTIONS:
Dividends from net investment
income....................... (.61) (.64) (.68) (.66) (.55)
-------- ------- ------- ------- -----------
Net asset value, end of
period....................... 9.16 $10.59 $ 9.69 $ 9.49 $ 8.97
-------- ------- ------- ------- -----------
-------- ------- ------- ------- -----------
TOTAL RETURN#................. (7.74)% 16.43% 9.39% 13.72% 2.16%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $6,776 $6,849 $5,024 $2,574 $1,617
Average net assets (000)...... $7,093 $6,339 $3,769 $2,158 $918
Ratios to average net assets:
Expenses, including
distribution fees.......... 1.09% .96% .94% 1.24% 1.08%*
Expenses, excluding
distribution fees.......... .94% .81% .79% 1.09% .94%*
Net investment income....... 6.35% 6.35% 6.92% 7.24% 7.16%*
Portfolio turnover............ 40% 66% 66% 236% 608%
<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.
* Annualized.
</TABLE>
5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
(CLASS B SHARES)
The following financial highlights have been audited by Deloitte & Touche LLP,
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 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.
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------------------------------- NOVEMBER 7,
1986++
YEAR ENDED OCTOBER 31, THROUGH
-------------------------------------------------------------------------- OCTOBER 31,
1994 1993 1992 1991 1990 1989+++ 1988++ 1987
-------- -------- -------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 10.60 $ 9.70 $ 9.50 $ 8.97 $ 9.54 $ 9.05 $ 9.04 $10.00
-------- -------- -------- -------- -------- -------- -------- -----------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income......... .53 .55 .59 .59 .62 .64 .66+ .65+
Net realized and unrealized
gain (loss)
on investment transactions... (1.44) .90 .20 .53 (.57) .52 .13 (.85)
-------- -------- -------- -------- -------- -------- -------- -----------
Total from investment
operations................... (.91) 1.45 .79 1.12 .05 1.16 .79 (.20)
-------- -------- -------- -------- -------- -------- -------- -----------
LESS DISTRIBUTIONS:
Dividends from net investment
income....................... (.53) (.55) (.59) (.59) (.62) (.64) (.66) (.65)
Distributions from net
realized gains............... -- -- -- -- -- -- -- (.11)
Distributions from paid-in
capital...................... -- -- -- -- -- (.03) (.12) --
-------- -------- -------- -------- -------- -------- -------- -----------
Total distributions........... (.53) (.55) (.59) (.59) (.62) (.67) (.78) (.76)
-------- -------- -------- -------- -------- -------- -------- -----------
Net asset value, end of
period....................... $ 9.16 $ 10.60 $ 9.70 $ 9.50 $ 8.97 $ 9.54 $ 9.05 $ 9.04
-------- -------- -------- -------- -------- -------- -------- -----------
-------- -------- -------- -------- -------- -------- -------- -----------
TOTAL RETURN#................. (8.58)% 15.44% 8.46% 12.86% .64% 13.53% 8.79% (2.21)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $124,094 $166,907 $155,143 $158,790 $172,521 $169,825 $169,261 $213,078
Average net assets (000)...... $146,123 $162,107 $154,502 $168,421 $174,276 $156,322 $191,342 $184,510
Ratios to average net assets:
Expenses, including
distribution fees.......... 1.75% 1.81% 1.79% 2.09% 1.99% 2.05% 1.76%+ 1.13%+*
Expenses, excluding
distribution fees.......... .94% .81% .79% 1.09% .99% 1.06% .75%+ .23%+*
Net investment income....... 5.69% 5.50% 6.07% 6.39% 6.89% 6.95% 7.36%+ 6.76%+*
Portfolio turnover............ 40% 66% 66% 236% 608% 392% 73% 64%
<FN>
- -----------------
# 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>
6
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIOD)
(CLASS C SHARES)
The following financial highlights have been audited by Deloitte & Touche
LLP, 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 C share of
common stock outstanding, total return, ratios to average net assets and other
supplemental data for the period indicated. The information is based on data
contained in the financial statements.
<TABLE>
<CAPTION>
AUGUST 1,
1994* THROUGH
OCTOBER 30,
1994
--------------
<S> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period.............................. $ 9.58
------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss)......... .15
Net realized and unrealized gain
(loss) on investment transactions... (.42)
------
Total from investment operations... (.27)
------
LESS DISTRIBUTIONS
Dividends from net investment
income.............................. (.15)
------
Net asset value, end of period....... $ 9.16
------
------
TOTAL RETURN +:...................... (3.03)%
RATIOS/SUPPLEMENTAL DATA++:
Net assets, end of year (000)........ $ 46
Average net assets (000)............. $ 23
Ratios to average net assets:#
Expenses, including distribution
fees.............................. 1.82%*
Expenses, excluding distribution
fees.............................. 1.07%*
Net investment income (loss)....... 6.25%*
Portfolio turnover................... 39%
<FN>
------------------
*Commencement of offering of Class C shares.
**Annualized.
+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.
#Because of the event referred to in * and the timing of such, the ratios
for Class C shares are not necessarily comparable to that of Class A and
Class B shares and are not necessarily indicative of future ratios.
</TABLE>
7
<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. THESE GUARANTEES APPLY ONLY TO THE PAYMENT OF PRINCIPAL AND
INTEREST ON THESE SECURITIES AND DO NOT EXTEND TO THE SECURITIES' YIELD OR
VALUE, WHICH ARE LIKELY TO VARY 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. 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. See "Investment
Objectives and Policies" in the Statement of Additional Information.
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.
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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.
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
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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 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 Fund has
no limitations with respect to the maturities of portfolio securities in which
it may invest. 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.
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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.
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.
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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 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.
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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 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
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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.
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
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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.
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.
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.
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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 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.
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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 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), and privately placed commercial paper
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.
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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 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, 1994 and October 31, 1993, the turnover rates
of the Fund's portfolio were 40% 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%.
A high portfolio turnover rate (over 100%) 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, 1994, the Fund's total expenses as a
percentage of average net assets for the Fund's Class A, Class B and Class C
shares were 1.09%, 1.75% and 1.82%, respectively. See "Financial Highlights."
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, 1994, the Fund paid management fees to PMF
of .50% of the Fund's average net assets.
As of November 30, 1994, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 30 closed-end investment companies with aggregate assets of
approximately $47 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 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
representatives of 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
ACTIVITIES 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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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, 1995.
For the fiscal year ended October 31, 1994, PMFD received payments of $10,639
under the Class A Plan. 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, 1994, PMFD also received
approximately $72,400 in initial sales charges.
UNDER THE CLASS B AND CLASS C PLANS, THE FUND MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES 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 .85 of 1% of the average daily net assets of the Class B shares,
and under the Class C Plan to .75 of 1% of the average daily net assets of the
Class C shares for the fiscal year ending October 31, 1995. Prudential
Securities also receives contingent deferred sales charges from certain
redeeming shareholders. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges."
For the fiscal year ended October 31, 1994, Prudential Securities incurred
distribution expenses of approximately $1,190,900 under the Class B Plan and
received $1,155,906 from the Fund under the Class B Plan, representing .81 of 1%
of average daily net assets. In addition, Prudential Securities received
approximately $446,200 in contingent deferred sales charges from redemptions of
Class B shares during this period.
For the period August 1, 1994 (commencement of operations of Class C shares)
through October 31, 1994, Prudential Securities incurred distribution expenses
of approximately $220 under the Class C Plan and received $42 from the Fund
under the Class C Plan. Prudential Securities did not receive any contingent
deferred sales charges from redemptions of Class C shares during this period.
For fiscal year ended October 31, 1994, the Fund paid distribution expenses of
.15%, .81% and .75% of the average daily net assets of the Class A, Class B and
Class C shares, respectively. The Fund records all payments made under the Plans
as expenses in the calculation of net investment income. Prior to August 1,
1994, the Class A and Class B Plans operated as "reimbursement type" plans and,
in the case of Class B, provided for the reimbursement of distribution expenses
incurred in current and prior years. See "Distributor" in the Statement of
Additional Information.
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 out of its own resources 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.
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The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the NASD), governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers fo the partnership interests. PSI's settlement with the
state securities regulators included an agreement to pay a penalty of $500,000
per jurisdiction. PSI consented to a censure and to the payment of a $5,000,000
fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the compliant. If on the other hand, during the course of
the three year period, PSI violated the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank & Trust Company, an
independent custodian, are separate and distinct from PSI.
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.
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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 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., Morningstar Publications, 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."
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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
Any dividends out of net taxable investment income, together with
distributions of short-term gains (i.e., the excess of net short-term capital
gains over net long-term capital losses) distributed to shareholders, will be
taxable as ordinary income to the shareholder whether or not reinvested. Any net
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
long-term capital gains 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 the same as
the maximum tax rate for ordinary income.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of Class
B or Class C shares for Class A shares constitutes a taxable event for federal
income tax purposes. However, such opinions are 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 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, 1994, the Fund has a capital loss
carryforward for federal income tax purposes of approximately $11,054,800.
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."
23
<PAGE>
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 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.
24
<PAGE>
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. The minimum initial investment requirement is
waived for purchases of Class A shares effected through an exchange of Class B
shares of The BlackRock Government Income Trust. 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."
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 into the Fund) 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.
25
<PAGE>
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 .30 of 1% (Currently Initial sales charge waived or reduced
the public offering price being charged at a rate for certain purchases
of .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 .85 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 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.
26
<PAGE>
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 a maximum 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.
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% 4.17% 3.75%
$50,000 to $99,999 3.50 3.83 3.25
$100,000 to $249,999 2.75 2.83 2.50
$250,000 to $499,999 2.00 2.04 1.90
$500,000 to $999,999 1.50 1.52 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. Reduced 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
27
<PAGE>
acquired pursuant to the exchange privilege) may be aggregated to determine the
applicable reduction. See "Purchase and Redemption of Fund Shares--Reduction and
Waiver of Initial Sales Charges--Class A Shares" in the Statement of Additional
Information.
BENEFIT PLANS. 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 participants. In the case of Benefit Plans whose
accounts are held directly with the Transfer Agent or Prudential Securities and
for which the Transfer Agent or Prudential Securities 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. After a Benefit Plan qualifies to purchase Class A
shares at NAV, all subsequent purchases will be made at NAV.
OTHER WAIVERS. 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
acquired 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.
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.
28
<PAGE>
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. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. 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. 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
29
<PAGE>
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 Class B or Class C 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 acquired
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--Class B Shares" 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
CDSC 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. See "How
to Exchange Your Shares."
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>
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
30
<PAGE>
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: (i) in the case of a
tax-deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59 1/2; and (iii) 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 (I.E.,
following voluntary or involuntary termination of employment or following
retirement). Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan, unless such
redemptions otherwise qualify for a waiver as described above. 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 and provide the Transfer Agent with such supporting documentation as
it may deem appropriate. The waiver will be granted subject to confirmation of
your entitlement. See "Purchase and Redemption of Fund Shares--Waiver of the
Contingent Deferred Sales Charge--Class B Shares" in the Statement of Additional
Information.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased prior to August 1, 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. It is currently anticipated that
conversions will occur during the months of February, May, August and November
commencing in or about February 1995. Conversions will be effected at relative
net asset value without the imposition of any additional sales charge.
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 purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A
31
<PAGE>
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. The
conversion feature described above will not be implemented and, consequently,
the first conversion of Class B shares will not occur before February, 1995, but
as soon thereafter as practicable. 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.
No sales charge will be imposed at the time of the exchange. Any applicable CDSC
payable upon the redemption of shares 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. 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.
32
<PAGE>
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.
SPECIAL EXCHANGE PRIVILEGE. Commencing in or about February 1995, a special
exchange privilege is available for shareholders who qualify to purchase Class A
shares at NAV. See "Alternative Purchase Plan--Class A Shares--Reduction and
Waiver of Initial Sales Charges" above. Under this exchange privilege, amounts
representing any Class B and Class C shares (which are not subject to a CDSC)
held in such a shareholders' account will be automatically exchanged for Class A
shares on a quarterly basis, unless the shareholder elects otherwise. It is
currently anticipated that this exchange will occur quarterly in February, May,
August and November. Eligibility for this exchange privilege will be calculated
on the business day prior to the date of the exchange. Amounts representing
Class B or Class C shares which are not subject to a CDSC include the following:
(1) amounts representing Class B or Class C shares acquired pursuant to the
automatic reinvestment of dividends and distributions, (2) amounts representing
the increase in the net asset value above the total amount of payments for the
purchase of Class B or Class C shares and (3) amounts representing Class B or
Class C shares held beyond the applicable CDSC period. Class B and Class C
shareholders must notify the Transfer Agent either directly or through
Prudential Securities or Prusec that they are eligible for this special exchange
privilege.
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.
- 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
33
<PAGE>
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec 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.
34
<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 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
Hawaii Income 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 Europe Growth Fund, Inc.
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
Risk Factors and Special Characteristics........................... 2
FUND EXPENSES........................................................ 4
FINANCIAL HIGHLIGHTS................................................. 5
HOW THE FUND INVESTS................................................. 8
Investment Objective and Policies.................................. 8
Other Investments.................................................. 10
Other Investment Information....................................... 17
Investment Restrictions............................................ 18
HOW THE FUND IS MANAGED.............................................. 18
Manager............................................................ 18
Distributor........................................................ 19
Portfolio Transactions............................................. 21
Custodian and Transfer and Dividend Disbursing Agent............... 21
HOW THE FUND VALUES ITS SHARES....................................... 22
HOW THE FUND CALCULATES PERFORMANCE.................................. 22
TAXES, DIVIDENDS AND DISTRIBUTIONS................................... 23
GENERAL INFORMATION.................................................. 24
Description of Shares.............................................. 24
Additional Information............................................. 25
SHAREHOLDER GUIDE.................................................... 25
How to Buy Shares of the Fund...................................... 25
Alternative Purchase Plan.......................................... 26
How to Sell Your Shares............................................ 28
Conversion Feature--Class B Shares................................. 31
How to Exchange Your Shares........................................ 32
Shareholder Services............................................... 33
THE PRUDENTIAL MUTUAL FUND FAMILY.................................... A-1
</TABLE>
-------------------------------------------
130A 440134B
Class A: 743914202
CUSIP Nos.: Class B: 743914103
Class C: 743914301
PRUDENTIAL
U.S. GOVERNMENT
FUND
- -------------------
[LOGO]
<PAGE>
PROSPECTUS
DECEMBER __,
1994
<PAGE>
PRUDENTIAL U.S. GOVERNMENT FUND
STATEMENT OF ADDITIONAL INFORMATION
DATED JANUARY 3, 1995
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. There can be no assurance that the Fund's investment
objective will be achieved.
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 January 3, 1995, 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 8
Investment Restrictions.......................................................................... B-8 18
Trustees and Officers............................................................................ B-10 18
Manager.......................................................................................... B-12 18
Distributor...................................................................................... B-14 19
Portfolio Transactions and Brokerage............................................................. B-16 21
Purchase and Redemption of Fund Shares........................................................... B-17 25
Shareholder Investment Account................................................................... B-20 33
Net Asset Value.................................................................................. B-23 22
Performance Information.......................................................................... B-24 22
Taxes............................................................................................ B-25 23
Organization and Capitalization.................................................................. B-28 24
Custodian, Transfer and Dividend Disbursing Agent and Independent Accountants.................... B-28 21
Financial Statements............................................................................. B-29 --
Independent Auditors' Report..................................................................... B-38 --
Appendix......................................................................................... --
</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. There can be no assurance that the Fund's investment
objective will be achieved.
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, as amended (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.
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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.
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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
investment 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 the 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.
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<PAGE>
ILLIQUID SECURITIES
The Fund may not invest more than 15% of its net assets in repurchase
agreements which have a maturity of longer than seven days or in other illiquid
securities, including securities that are illiquid by virtue of the absence of a
readily available market or legal or contractual restrictions on resale.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (Securities Act),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The investment adviser anticipates that the
market for certain restricted securities such as institutional commercial paper
and foreign securities will expand further as a result of this regulation and
the development of automated systems for the trading, clearance and settlement
of unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc. (the
NASD).
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The investment adviser will monitor
the liquidity of such restricted securities subject to the supervision of the
Trustees. In reaching liquidity decisions, the investment adviser will consider,
INTER ALIA, the following factors: (1) the frequency of trades and quotes for
the security; (2) the number of dealers wishing to purchase or sell the security
and the number of other potential purchasers; (3) dealer undertakings to make a
market in the security and (4) the nature of the security and the nature of the
marketplace trades (E.G., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of the transfer). In addition, in order
for commercial paper that is issued in reliance on Section 4(2) of the
Securities Act to be considered liquid, (i) it must be rated in one of the two
highest rating categories by at least two nationally recognized statistical
rating organizations (NRSRO), or if only one NRSRO rates the securities, by that
NRSRO, or, if unrated, be of comparable quality in the view of the investment
adviser; and (ii) it must not be "traded flat" (I.E., without accrued interest)
or in default as to principal or interest. Repurchase agreements subject to
demand are deemed to have a maturity equal to the notice period.
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. A "majority of the Fund's
outstanding voting securities," when used in this Statement of Additional
Information, means the lesser of (i) 67% of the voting shares represented at a
meeting at which more than 50% of the outstanding voting shares are present in
person or represented by proxy or (ii) more than 50% of the outstanding voting
shares.
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.
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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.
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).
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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.
c/o Prudential Mutual Fund (investments) since 1980; Director of Innovative Capital
Management, Inc. Management Inc., The Asia Pacific Fund, Inc. and The Greater
One Seaport Plaza China Fund, Inc.
New York, NY
*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 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.
Sidney R. Knafel Trustee Managing Partner of SRK Management Company (investments) since
c/o Prudential Mutual Fund 1981; Chairman of Insight Communications Company, L.P. and
Management, Inc. Microbiological Associates, Inc.; Director of Cellular
One Seaport Plaza Communications, Inc., Cellular Communications International,
New York, NY Inc., Cellular Communications of Puerto Rico Inc., General
American Investors Company, Inc., IGENE Biotechnology, Inc.,
International CableTel 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 Fund (telecommunications) since 1981; Director of Contel Cellular,
Management, Inc. Inc., M/A-COM, Inc., Storage Technology Corporation, TIE
One Seaport Plaza communications, Inc. and Tribune Company; Trustee of Manhattan
New York, NY College.
<FN>
- ------------
* Interested director, as defined in the Investment Company Act, by reason of
his affiliation with Prudential Securities or PMF.
</TABLE>
B-10
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS WITH FUND DURING PAST FIVE YEARS
- --------------------------- ----------------------- -----------------------------------------------------------------
<S> <C> <C>
*Lawrence C. McQuade President and Trustee Vice Chairman of PMF (since 1988) and Managing Director,
One Seaport Plaza Investment Banking of Prudential Securities (1988-1991);
New York, NY Director, BUNZL, P.L.C. (since June 1991); Director, Czech and
Slovak American Enterprise Fund (since October 1994), 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 (since October
One Seaport Plaza 1993), PMF; Executive Vice President, Director and Member of the
New York, NY Operating Committee (since October 1993), Prudential Securities;
Director (since October 1993) of Prudential Securities Group,
Inc. (PSG). Vice President, The Prudential Investment
Corporation (since July 1994). Formerly Senior Executive Vice
President and Director of Kemper Financial Services, 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 1983).
c/o Prudential Mutual Fund
Management, Inc.
One Seaport Plaza
New York, NY
Robert F. Gunia Vice President Director (since January 1989), Chief Administrative Officer
One Seaport Plaza (since August 1990) and Executive Vice President, Treasurer and
New York, NY 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 Counsel (since
One Seaport Plaza June 1987) and First Vice President (June 1987-December 1990) of
New York, NY PMF; Senior Vice President and Senior Counsel of Prudential
Securities (since July 1992); formerly Vice President and
Associate General Counsel of Prudential Securities.
<FN>
- ------------
* Interested director, as defined in the Investment Company Act, by reason of
his affiliation with Prudential Securities or PMF.
</TABLE>
B-11
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS WITH FUND DURING PAST FIVE YEARS
- --------------------------- ----------------------- -----------------------------------------------------------------
<S> <C> <C>
Susan C. Cote Treasurer and Principal Senior Vice President (since January 1989) and First Vice
One Seaport Plaza Financial and President (June 1987-December 1988) of PMF; Senior Vice
New York, NY Accounting Officer President (since January 1992) and Vice President (January
1986-December 1991) of Prudential Securities.
</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 December 2, 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.
As of December 2, 1994, the only beneficial owners, directly or indirectly,
of more than 5% of the outstanding shares of the Prudential U.S. Government Fund
were Prudential Securities C/F, Irving Lublin IRA Rollover, 11423 Fairoak Dr,
Silver Spring, MD 20902-3136, who held 1,524 Class C shares (24.1%); Claire J.
De Simone & Janet R. De Simone Ten Com, 207-03 36th Ave, Bayside, NY 11361-1327,
who held 1,912 Class C shares (30.2%); James F. Thomas, 2268 Compass Point Ln,
Reston, VA 22091-4517, who held 558 Class C shares (8.8%); Stephen W. Mullins &
Deborah L. Mullins, 1132 Mulberry Circle, Charleston, WV 25314-2142, who held
853 Class C shares (13.5%); and Davy L. Truax & David R. Brown, 309 Horizon,
Monroe, IN 47303, who held 648 Class C shares (10.2%).
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 December 2, 1994, Prudential Securities was the record holder for
other beneficial owners of 352,889 Class A shares (or 47% of the outstanding
Class A shares), 8,182,519 Class B shares (or 61% of the outstanding Class B
shares) and 3,994 Class C shares (or 63% of the outstanding Class C 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 "Prudential Mutual Funds." See "How the Fund is Managed--Manager" in the
Prospectus. As of November 30, 1994 PMF managed and/or administered open-end and
closed-end management investment companies with assets of approximately $47
billion and, according to the Investment Company Institute, as of April 30,
1994, 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.
B-12
<PAGE>
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, 1994. 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' 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 a majority 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 6, 1994 and by
shareholders of the Fund on February 25, 1988.
For the fiscal years ended October 31, 1994, 1993 and 1992, PMF earned
management fees of $766,090, $842,229 and $791,342, 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.
B-13
<PAGE>
The Subadvisory Agreement was last approved by the Trustees, including a
majority 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 6,
1994 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 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 6, 1994. 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 July 19, 1994.
The Class C Plan was approved by the sole shareholder of Class C shares on
August 1, 1994.
CLASS A PLAN. For the fiscal year ended October 31, 1994 PMFD received
payments of $10,639 under the Class A Plan. 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, 1994, PMFD also
received approximately $72,400 in initial sales charges.
CLASS B PLAN. For the fiscal year ended October 31, 1994, Prudential
Securities received $1,155,906 from the Fund under the Class B Plan and spent
approximately $1,190,900 in distributing the Fund's Class B shares. It is
estimated that of this amount approximately $31,200 (2.6%) was spent on printing
and mailing of prospectuses to other than current shareholders; $304,000
B-14
<PAGE>
approximately (25.5%) on compensation to Prusec, Prudential Securities, an
affiliated broker-dealer, for commissions to its representatives 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 $855,700 (71.9%) on the aggregate of (i) payments of commissions and account
servicing fees to its financial advisers ($422,800 or 35.5%) and (ii) an
allocation on account of overhead and other branch office distribution-related
expenses ($432,900 or 36.4%). 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,
1994, Prudential Securities received approximately $446,200 in contingent
deferred sales charges.
CLASS C PLAN. For the period August 1, 1994 (inception of Class C shares)
through October 31, 1994, Prudential Securities received $42 from the Fund under
the Class C Plan and spent approximately $220 in distributing the Fund's Class C
Shares. 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. For the period August 1, 1994 (inception of Class C shares)
through October 31, 1994, Prudential Securities received $42 in contingent
deferred sales charges.
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 6, 1994.
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. 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.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators in 51 jurisdictions and the NASD to resolve
allegations that PSI sold interests in more than 700 limited partnerships (and a
limited number of other types of securities) from January 1, 1980 through
December 31, 1990, in violation of securities laws to persons for whom such
securities were not suitable in light of the individuals' financial condition or
investment objectives. It was also alleged that the safety, potential returns
and liquidity of the investments had been misrepresented. The limited
partnerships principally involved
B-15
<PAGE>
real estate, oil and gas producing properties and aircraft leasing ventures. The
SEC Order (i) included findings that PSI's conduct violated the federal
securities laws and that an order issued by the SEC in 1986 requiring PSI to
adopt, implement and maintain certain supervisory procedures had not been
complied with; (ii) directed PSI to cease and desist from violating the federal
securities laws and imposed a $10 million civil penalty; and (iii) required PSI
to adopt certain remedial measures including the establishment of a Compliance
Committee of its Board of Directors. Pursuant to the terms of the SEC
settlement, PSI established a settlement fund in the amount of $330,000,000 and
procedures, overseen by a court approved Claims Administrator, to resolve
legitimate claims for compensatory damages by purchasers of the partnership
interests. PSI has agreed to provide additional funds, if necessary, for that
purpose. PSI's settlement with the state securities regulators included an
agreement to pay a penalty of $500,000 per jurisdiction. PSI consented to a
censure and to the payment of a $5,000,000 fine in settling the NASD action. In
settling the above referenced matters, PSI neither admitted nor denied the
allegations asserted against it.
On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a
Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and other
improper conduct resulting in pecuniary losses and other harm to investors
residing in Texas with respect to purchases and sales of limited partnership
interests during the period of January 1, 1980 through December 31, 1990.
Without admitting or denying the allegations, PSI consented to a reprimand,
agreed to cease and desist from future violations, and to provide voluntary
donations to the State of Texas in the aggregate amount of $1,500,000. The firm
agreed to suspend the creation of new customer accounts, the general
solicitation of new accounts, and the offer for sale of securities in or from
PSI's North Dallas office to new customers during a period of twenty consecutive
business days, and agreed that its other Texas offices would be subject to the
same restrictions for a period of five consecutive business days. PSI also
agreed to institute training programs for its securities salesmen in Texas.
On October 27, 1994, Prudential Securities Group, Inc. and PSI entered into
agreements with the United States Attorney deferring prosecution (provided PSI
complies with the terms of the agreement for three years) for any alleged
criminal activity related to the sale of certain limited partnership programs
from 1983 to 1990. In connection with these agreements, PSI agreed to add the
sum of $330,000,000 to the Fund established by the SEC and executed a
stipulation providing for a reversion of such funds to the United States Postal
Inspection Service. PSI further agreed to obtain a mutually acceptable outside
director to sit on the Board of Directors of PSG and the Compliance Committee of
PSI. The new director will also serve as an independent "ombudsman" whom PSI
employees can call anonymously with complaints about ethics and compliance.
Prudential Securities shall report any allegations or instances of criminal
conduct and material improprieties to the new director. The new director will
submit compliance reports which shall identify all such allegations or instances
of criminal conduct and material improprieties every three months for a
three-year period.
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
B-16
<PAGE>
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.
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 noninterested 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, 1994, 1993 and 1992, 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
B-17
<PAGE>
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, 1994, 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.................. $ 9.16
Maximum sales charge (4% of offering price)............................. .38
---------
Offering price to public................................................ $ 9.54
---------
---------
CLASS B
Net asset value, offering price and redemption price per Class B
share*................................................................ $ 9.16
---------
---------
CLASS C
Net asset value, offering price and redemption price per Class C
share*................................................................ $ 9.16
---------
---------
<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>
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--Alternative Purchase Plan" 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 any
retirement or 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
B-18
<PAGE>
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), including retirement and group plans, 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 of Intent will be held by the Transfer Agent in the name of the
purchaser, except in the case of retirement and group plans where the employer
or plan sponsor will be responsible for paying any applicable sales charge. 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, except in
the case of retirement and group plans.
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 (or the employer or
plan sponsor in the case of any retirement or group plan) 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. Investors electing to
purchase Class A shares of the Fund pursuant to a Letter of Intent should
carefully read such Letter of Intent.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
The contingent deferred sales charge is waived under circumstances described
in the Prospectus. See "Shareholder Guide--How to Sell Your Shares--Waiver of
Contingent Deferred Sales Charges--Class B Shares" in the Prospectus. In
connection with these waivers, the Transfer Agent will require you to submit the
supporting documentation set forth below.
<TABLE>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
<S> <C>
Death A copy of the shareholder's death certificate or, in the case
of a trust, a copy of the grantor's death certificate, plus a
copy of the trust agreement identifying the grantor.
Disability--An individual will be considered A copy of the Social Security Administration award letter or a
disabled if he or she is unable to engage in letter from a physician on the physician's letterhead stating
any substantial gainful activity by reason of that the shareholder (or, in the case of a trust, the grantor)
any medically determinable physical or mental is permanently disabled. The letter must also indicate the date
impairment which can be expected to result in of disability.
death or to be of long-continued and
indefinite duration.
Distribution from an IRA or 403(b) Custodial A copy of the distribution form from the custodial firm
Account indicating (i) the date of birth of the shareholder and (ii)
that the shareholder is over age 59 1/2 and is taking a normal
distribution--signed by the shareholder.
Distribution from Retirement Plan A letter signed by the plan administrator/trustee indicating
the reason for the distribution.
Excess Contributions A letter from the shareholder (for an IRA) or the plan
administrator/ trustee on company letterhead indicating the
amount of the excess and whether or not taxes have been paid.
</TABLE>
The Transfer Agent reserves the right to request such additional documents as it
may deem appropriate.
B-19
<PAGE>
QUANTITY DISCOUNT--CLASS B SHARES PURCHASED PRIOR TO AUGUST 1, 1994
The CDSC is reduced on redemptions of Class B shares of the Fund purchased
prior to August 1, 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. 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 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.
B-20
<PAGE>
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.
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)
B-21
<PAGE>
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."
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.
B-22
<PAGE>
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 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.
B-23
<PAGE>
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.
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, 1994 for the Fund's Class
A, Class B and Class C shares was 6.67%, 6.24% and 6.36%, respectively.
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.
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 October 31, 1994 and for the period from January 22, 1990 (commencement of
operations) to October 31, 1994 was -11.49% and 5.81%, respectively. The average
annual total return for Class B shares for the one and five year periods ended
on October 31, 1994 and for the period from November 7, 1986 (commencement of
operations) to October 31, 1994 was -13.57%, 5.23% and 5.82%, respectively.
Without the fee waiver and expense subsidy the average annual total return with
respect to the Class B shares for the period since inception would have been
5.74%. The average annual total return for Class C shares for the since
inception period ended October 31, 1994 was -4.03.
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.
B-24
<PAGE>
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, 1994 and for the period from January 22, 1990 (commencement of
operations) to October 31, 1994 was -7.80% and 36.41%, respectively. The
aggregate total return for Class B shares for the one and five year periods
ended on October 31, 1994 and for the period November 7, 1986 (commencement of
operations) to October 31, 1994 was -8.57%, 30.06% and 57.08%, respectively. The
aggregate total return for Class C shares for the since inception period ended
October 31, 1994 was -3.03%.
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)
[LOGO]
(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
B-25
<PAGE>
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.
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, 1994 of approximately $11,054,800 of which $1,017,200 expires in
1997, $8,301,600 expires in 1998 and $1,736,000 expires in 2002. 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
B-26
<PAGE>
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 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
B-27
<PAGE>
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 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, 1994, the Fund incurred fees of approximately
$236,000 for the services of PMFS.
Deloitte & Touche LLP, Two World Financial Center, New York, New York 10281,
serves as the Fund's independent accountants and in that capacity audits the
Fund's annual financial statements.
B-28
<PAGE>
PRUDENTIAL U.S. GOVERNMENT FUND PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1994
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--94.9%
U. S. TREASURY SECURITIES--20.4%
U.S. Treasury Bonds,
$ 2,500 10.75%, 8/15/05................ $ 3,017,175
6,400 12.00%, 8/15/13................ 8,475,008
6,000 11.25%, 2/15/15................ 7,873,140
U.S. Treasury Notes,
2,000 6.75%, 5/31/97................. 1,986,880
2,400 6.875%, 8/31/99................ 2,342,616
3,000 7.75%, 2/15/01................. 3,024,360
------------
Total U. S. Treasury Securities
(cost $29,002,553)............. 26,719,179
------------
U. S. GOVERNMENT AGENCIES--19.1%
Federal National Mortgage
Assoc.,
40,000 Zero Coupon, 7/05/14........... 7,662,400
Resolution Funding Corp.,
16,400 Zero coupon, 10/15/15.......... 2,894,600
13,500 8.875%, 7/15/20................ 14,436,495
------------
Total U. S. Government Agencies
(cost $25,067,556)............. 24,993,495
------------
MORTGAGE-RELATED SECURITIES--29.7%
Federal Home Loan Mortgage
Corp.,
1,500 7.50%, 9/15/05, (CMO).......... 1,455,465
Federal National Mortgage
Assoc.,
2,132 8.50%, 3/25/09, (CMO).......... 2,143,121
3,000 8.95%, 12/25/18, (CMO)......... 3,040,313
5,000 6.50%, 7/25/20, (CMO).......... 4,529,650
2,831 11.00%, 11/01/20............... 3,099,577
17,453 7.00%, 11/01/23 - 5/01/24...... 15,898,854
Government National Mortgage
Assoc.,
3,000 8.50%, 4/15/21 - 8/15/21....... 2,963,419
Nomura Asset Securities Corp.,
$ 3,000 Ser. 94, Class A,
7.53%, 3/15/18............... $ 2,880,937
Shugard Securities Trust, Ser.
A1,
3,000 8.24%, 6/15/01................. 2,927,813
------------
Total Mortgage-Related
Securities
(cost $40,451,943)............. 38,939,149
------------
CORPORATE BONDS--19.1%
DOMESTIC--16.1%
Coles Myer Finance,
2,000 6.47%, 2/18/04................. 1,744,100
(Financial services)
Comsat Corp.,
3,000 8.125%, 4/01/04................ 2,926,860
(Telecommunications)
Dean Witter Discover & Co.,
1,500 6.00%, 3/01/98................. 1,424,430
(Financial services)
Ford Motor Credit Co.,,
2,000 6.25%, 2/26/98................. 1,913,920
(Financial services)
Georgia Power Co.,
2,000 4.75%, 3/01/96................. 1,946,160
(Electric utility)
NationsBank Corp.,
2,500 6.625%, 1/15/98................ 2,419,625
(Financial services)
Republic N.Y. Corp.,
2,000 9.70%, 2/01/09................. 2,177,300
(Financial services)
Star Bank,
1,500 6.375%, 3/01/04................ 1,305,540
(Financial services)
USLIFE Corp.,
2,000 6.375%, 6/15/00................ 1,837,640
(Financial services)
</TABLE>
See Notes to Financial Statements.
B-29
<PAGE>
PRUDENTIAL U.S. GOVERNMENT FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
<C> <S> <C>
CORPORATE BONDS (CONT'D.)
Zeneca Wilmington, Inc.,
$ 2,000 6.30%, 6/15/03................. $ 1,757,800
(Pharmaceuticals)
Zurich Reinsurance Centre
Holdings, Inc.,
2,000 7.125%, 10/15/23............... 1,588,080
(Financial services)
------------
Total Domestic Corporate Bonds
(cost $23,495,685)............. 21,041,455
------------
YANKEE--3.0%
Australia & New Zealand Banking
Group,
3,000* 6.25%, 2/01/04................. 2,563,380
(Financial services)
Svenska Handelsbanken,
1,500* 8.125%, 8/15/07................ 1,422,390
(Financial services)
------------
Total Yankee Corporate Bonds
(cost $4,604,085).............. 3,985,770
------------
Total Corporate Bonds
(cost $28,099,770)............. 25,027,225
------------
FOREIGN GOVERNMENT BONDS--2.8%
Province of Quebec,
$ 2,000* 9.125%, 3/01/00................ $ 2,079,540
Republic of Italy,
2,000* 6.875%, 9/27/23................ 1,562,560
------------
Total Foreign Government Bonds
(cost $4,185,700).............. 3,642,100
------------
ASSET BACKED SECURITIES--3.8%
Chase Manhattan Credit Card
Trust,
5,000 7.40%, 5/15/00
(cost $4,993,900).............. 5,001,550
------------
Total Long-Term Investments
(cost $131,801,422)............ 124,322,698
------------
SHORT-TERM INVESTMENT
TIME DEPOSIT--1.7%
Mitsubishi Bank, Ltd.,
2,175 4.875%, 11/01/94,
(cost $2,175,000).............. 2,175,000
------------
TOTAL INVESTMENTS--96.6%
(cost $133,976,422; Note 4).... 126,497,698
Other assets in excess of
liabilities--3.4%.............. 4,418,747
------------
NET ASSETS--100%............... $130,916,445
------------
------------
<FN>
- ---------------
CMO--Collateralized Mortgage Obligations.
* U.S. dollar denominated.
</TABLE>
See Notes to Financial Statements.
B-30
<PAGE>
PRUDENTIAL U.S. GOVERNMENT FUND
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
ASSETS OCTOBER 31, 1994
----------------
<S> <C>
Investments, at value (cost $133,976,422).................................................... $126,497,698
Cash......................................................................................... 68,454
Receivable for investments sold.............................................................. 3,539,834
Interest receivable.......................................................................... 1,593,897
Receivable for Fund shares sold.............................................................. 217,859
Other assets................................................................................. 3,794
----------------
Total assets............................................................................... 131,921,536
----------------
LIABILITIES
Payable for Fund shares reacquired........................................................... 551,895
Dividends payable............................................................................ 188,990
Accrued expenses............................................................................. 115,755
Distribution fee payable..................................................................... 91,937
Management fee payable....................................................................... 56,514
----------------
Total liabilities.......................................................................... 1,005,091
----------------
NET ASSETS................................................................................... $130,916,445
----------------
----------------
Net assets were comprised of:
Shares of beneficial interest, at par...................................................... $ 142,882
Paid-in capital in excess of par........................................................... 149,307,128
----------------
149,450,010
Accumulated net realized losses on investments............................................. (11,054,841)
Net unrealized depreciation on investments................................................. (7,478,724)
----------------
NET ASSETS AT OCTOBER 31, 1994............................................................... $130,916,445
----------------
----------------
Class A:
Net asset value and redemption price per share
($6,776,351 / 739,850 shares of beneficial interest issued and outstanding).............. $9.16
Maximum sales charge (4.0% of offering price).............................................. .38
----------------
Maximum offering price to public........................................................... $9.54
----------------
----------------
Class B:
Net asset value, offering price and redemption price per share
($124,094,356 / 13,543,333 shares of beneficial interest issued and outstanding)......... $9.16
----------------
----------------
Class C:
Net asset value, offering price and redemption price per share
($45,738 / 4,992 shares of beneficial interest issued and outstanding)................... $9.16
----------------
----------------
</TABLE>
See Notes to Financial Statements.
B-31
<PAGE>
PRUDENTIAL U.S. GOVERNMENT FUND
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
NET INVESTMENT INCOME 1994
------------
<S> <C>
Income
Interest and discount earned.......... $ 11,339,097
------------
Expenses
Distribution fee--Class A............. 10,639
Distribution fee--Class B............. 1,155,906
Distribution fee--Class C............. 42
Management fee........................ 766,090
Transfer agent's fees and expenses.... 295,000
Shareholder reports................... 138,000
Custodian's fees and expenses......... 100,000
Trustees' fees........................ 54,000
Registration fees..................... 51,000
Audit fee............................. 30,000
Legal fees............................ 25,000
Miscellaneous......................... 8,182
------------
Total expenses...................... 2,633,859
------------
Net investment income................... 8,705,238
------------
NET REALIZED AND UNREALIZED LOSS
ON INVESTMENTS
Net realized loss on investment
transactions.......................... (1,123,882)
Net change in unrealized
appreciation/depreciation on
investments......................... (21,394,608)
------------
Net loss on investments................. (22,518,490)
------------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS......................... $(13,813,252)
------------
------------
See Notes to Financial Statements.
</TABLE>
PRUDENTIAL U.S. GOVERNMENT FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
INCREASE (DECREASE) ----------------------------
IN NET ASSETS 1994 1993
------------ ------------
<S> <C> <C>
Operations
Net investment income..... $ 8,705,238 $ 9,312,413
Net realized gain (loss)
on investments.......... (1,123,882) 6,101,139
Net change in unrealized
appreciation/depreciation
on investments.......... (21,394,608) 8,892,501
------------ ------------
Net increase (decrease) in
net assets
resulting from
operations.............. (13,813,252) 24,306,053
------------ ------------
Dividends to shareholders
from net investment income
(Note1)...................
Class A................. (450,567) (402,303)
Class B................. (8,254,322) (8,910,110)
Class C................. (349) --
------------ ------------
(8,705,238) (9,312,413)
------------ ------------
Fund share transactions
(Note 5)
Net proceeds from shares
subscribed.............. 39,812,693 83,709,350
Net asset value of shares
issued in reinvestment
of dividends............ 5,677,995 6,045,712
Cost of shares
reacquired.............. (65,811,259) (91,160,162)
------------ ------------
Net decrease in net assets
from Fund share
transactions............ (20,320,571) (1,405,100)
------------ ------------
Total increase (decrease)... (42,839,061) 13,588,540
Net Assets
Beginning of year........... 173,755,506 160,166,966
------------ ------------
End of year................. $130,916,445 $173,755,506
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements.
B-32
<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 The following is a summary
POLICIES of significant accounting poli-
cies 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.
In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian or designated subcustodians, as the case may be under
triparty repurchase agreements, take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral. If
the seller defaults, and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
DOLLAR ROLLS: The Fund enters into dollar rolls in which the Fund sells
securities for delivery in the current month and simultaneously contracts to
repurchase somewhat similar securities on a specified future date. During the
roll period the Fund forgoes principal and interest paid on the securities. The
Fund is compensated by the interest earned on the cash proceeds of the initial
sale and by the lower repurchase price at the future date.
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 carryforwards, 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.
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.
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
B-33
<PAGE>
distributor of the Class A shares of the Fund, and with Prudential Securities
Incorporated (``PSI''), which acts as distributor of the Class B and Class C
shares of the Fund (collectively the ``Distributors''). The Fund compensates the
Distributors for distributing and servicing the Fund's Class A, Class B and C
shares, pursuant to plans of distribution, (the ``Class A, B and C Plans'')
regardless of expenses actually incurred by them. The distribution fees are
accrued daily and payable monthly.
On July 19, 1994, shareholders of the Fund approved amendments to the Class A
and Class B distribution Plans under which the distribution plans became
compensation plans, effective August 1, 1994. Prior thereto, the distribution
plans were reimbursement plans under which PMFD and PSI were reimbursed for
expenses actually incurred by them up to the amount permitted under the Class A
and Class B Plans, respectively. The Fund is not obligated to pay any prior or
future excess distribution costs (costs incurred by the Distributors in excess
of distribution fees paid by the Fund and contingent deferred sales charges
received by the Distributors). The rate of the distribution fees charged to
Class A and Class B shares of the Fund did not change under the amended plans of
distriubution. The Fund began offering Class C shares on August 1, 1994.
Pursuant to the Class A , B and C Plans, the Fund compensates the
Distributors for distribution-related activities at an annual rate of up to .30
of 1%, 1% and 1%, of the average daily net assets of the Class A, B and C
shares, respectively. Such expenses under the Plans were .15 of 1%, .81 of 1%
and .75 of 1% of the average daily net assets of Class A, B and C shares,
respectively, for the fiscal year ended October 31, 1994. Such expenses under
the Class B Plan were assessed at varying rates ranging from zero to 1% of
average net assets during the year ended, October 31, 1994. Currently, the Class
B Plan distribution expenses are .85 of 1% of the average daily net assets.
PMFD has advised the Fund that it has received approximately $72,400 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended October 31, 1994. From these fees, PMFD paid such sales charges to
PSI and Pruco Securities Corporation, affiliated broker-dealers, which in turn
paid commissions to sales persons and incurred other distribution costs.
PSI has advised the Fund that for the fiscal year ended October 31, 1994, it
received approximately $446,200 in contingent deferred sales charges imposed
upon certain redemptions by Class B shareholders.
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 Prudential Mutual Fund Ser-
TRANSACTIONS vices, Inc. (``PMFS''), a
WITH AFFILIATES wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the year ended October 31, 1994, the Fund incurred fees of approximately
$236,000 for the services of PMFS. As of October 31, 1994, approximately $20,000
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 Purchases and sales of invest-
SECURITIES ment securities, other than
short-term investments, for the year ended October
31, 1994 were $58,601,142 and $70,890,556, respectively.
The federal income tax basis of the Fund's investments at October 31, 1994
was substantially the same as the basis for financial statement reporting
purposes and, accordingly, net unrealized depreciation of investments for
federal income tax purposes was $7,478,724 (gross unrealized
appreciation-$631,041; gross unrealized depreciation-$8,109,765).
For federal income tax purposes, the Fund has a capital loss carryforward as
of October 31, 1994 of approximately $11,054,800 of which $1,017,200 expires in
1997, $8,301,600 expires in 1998 and $1,736,000 expires in 2002. 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 Class A,
Class B and Class C shares.
Class A shares are sold with a front-end sales charge of up to 4.0%. 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. Class C shares are
sold with a contingent deferred sales charge of 1% during the first year. Class
B shares will automatically convert to Class A shares on a quarterly basis
approximately seven years after purchase commencing in or about February 1995.
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 years ended October 31, 1994 and 1993 were as follows:
B-34
<PAGE>
<TABLE>
<CAPTION>
Class A SHARES AMOUNT
- -------------------------------- -------------- ------------
<S> <C> <C>
Year ended October 31, 1994:
Shares sold..................... 359,574 $ 3,519,655
Shares issued in reinvestment of
dividends..................... 31,480 306,085
Shares reacquired............... (297,934) (2,879,593)
-------------- ------------
Net increase in shares
outstanding................... 93,120 $ 946,147
-------------- ------------
-------------- ------------
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
-------------- ------------
-------------- ------------
<CAPTION>
Class B
- --------------------------------
<S> <C> <C>
Year ended October 31, 1994:
Shares sold..................... 3,633,315 $ 36,246,363
Shares issued in reinvestment of
dividends..................... 550,260 5,371,630
Shares reacquired............... (6,392,542) (62,931,666)
-------------- ------------
Net decrease in shares
outstanding................... (2,208,967) $(21,313,673)
-------------- ------------
-------------- ------------
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)
-------------- ------------
-------------- ------------
<CAPTION>
Class C
- --------------------------------
<S> <C> <C>
August 1, 1994* through
October 31, 1994:
Shares sold..................... 4,962 $ 46,675
Shares issued in reinvestment of
dividends..................... 30 280
-------------- ------------
Net increase in shares
outstanding................... 4,992 $ 46,955
-------------- ------------
-------------- ------------
<FN>
- ---------------
* Commencement of Class C operations.
</TABLE>
B-35
<PAGE>
PRUDENTIAL U.S. GOVERNMENT FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
---------------------------------------------------- ------------------------------------------------------ ----------
JANUARY 22, AUGUST 1,
1990@ 1994(D)
YEAR ENDED OCTOBER 31, THROUGH YEAR ENDED OCTOBER 31, THROUGH
------------------------------------- OCTOBER 31, ------------------------------------------------------ AUGUST 31,
1994 1993 1992 1991 1990 1994 1993 1992 1991 1990 1994
---------- ------ ------ ------ ------------ ---------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER
SHARE
OPERATING
PERFORMANCE:
Net
asset
value,
beginning
of
period... $10.59 $ 9.69 $ 9.49 $ 8.97 $ 9.31 $ 10.60 $ 9.70 $ 9.50 $ 8.97 $ 9.54 $ 9.58
------ ------ ----- ------ ------ ------- ------ ------ ------ ------ ------
INCOME
FROM
INVESTMENT
OPERATIONS
Net
investment
income... .61 .64 .68 .66 .55 .53 .55 .59 .59 .62 .15
Net
realized
and
unrealized
gain (loss)
on
investment
trans-
actions... (1.43) .90 .20 .52 (.34) (1.44) .90 .20 .53 (.57) (.42)
------- ------ ------ ------ ------ ------- ------ ------ ------ ------ -------
Total
from
investment
opera-
tions... (.82) 1.54 .88 1.18 .21 (.91) 1.45 .79 1.12 .05 (.27)
------ ------ ------ ------ ------ ------- ------ ------ ------ ------ -------
LESS
DISTRIBUTIONS
Dividends
from net
investment
income... (.61) (.64) (.68) (.66) (.55) (.53) (.55) (.59) (.59) (.62) (.15)
------ ------ ------ ------ ------ ------- ------- ------ ------ ------ -------
Net
asset
value,
end of
period.. $9.16 $10.59 $ 9.69 $9.49 $8.97 $9.16 $10.60 $ 9.70 $9.50 $ 8.97 $ 9.16
------- ------ ------ ------ ------ ------- ------- ------ ------- ------- -------
------- ------ ------ ------ ------ ------- ------- ------ ------- ------- -------
TOTAL
RETURN#... (7.80)% 16.43% 9.39% 13.72% 2.16% (8.57)% 15.44% 8.46% 12.86% .64% (3.03)%
RATIOS/
SUPPLEMENTAL
DATA:
Net assets,
end of
period
(000).. $6,776 $6,849 $5,024 $2,574 $1,617 $ 124,094 $166,907 $155,143 $158,790 $172,521 $ 46
Average
net
assets
(000)... $7,093 $6,339 $3,769 $2,158 $ 918 $ 146,123 $162,107 $154,502 $168,421 $174,276 $ 23
Ratios to
average
net assets:
(D)(D)
Expenses,
including
distribution
fees... 1.09% .96% .94% 1.24% 1.08%* 1.75% 1.81% 1.79% 2.09% 1.99% 1.82%*
Expenses,
excluding
distribution
fees... .94% .81% .79% 1.09% .94%* .94% .81% .79% 1.09% .99% 1.07%*
Net
investment
income.. 6.35% 6.35% 6.92% 7.24% 7.16%* 5.65% 5.50% 6.07% 6.39% 6.89% 6.25%*
Portfolio
turnover.. 39% 66% 66% 236% 608% 39% 66% 66% 236% 608% 39%
<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.
(D) Commencement of offering of Class C shares.
(D)(D) Because of the event referred to in (D) and the timing of such, the ratios for the Class A and Class B
shares are not necessarily comparable to that of Class C shares and are not indicative of future ratios.
</TABLE>
See Notes to Financial Statements.
B-36
<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, 1994, 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, 1994 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, 1994, 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 LLP
New York, New York
December 16, 1994
B-37
<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 RATINGS GROUP
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, 1994.
Statement of Assets and Liabilities at October 31, 1994.
Statement of Operations for the year ended October 31, 1994.
Statement of Changes in Net Assets for the years ended October 31,
1994 and 1993.
Notes to Financial Statements.
Financial Highlights.
(B) EXHIBITS:
1. (a) Restated Declaration of Trust.*
2. Amended and Restated By-Laws of the Registrant, incorporated by
reference to Exhibit 2 to Post-Effective Amendment No. 13 to the
Registration Statement on Form N-1A (File No. 33-01332) filed via
EDGAR.
4. Instruments Defining Rights of Shareholders, incorporated by
reference to Exhibit 4 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)_Distribution Agreement for Class A shares.*
(b)_Distribution Agreement for Class B shares.*
(c)_Distribution Agreement for Class C shares.*
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).
C-1
<PAGE>
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc. Incorporated by reference to
Exhibit No. 9 to the Registration Statement on Form N-1A,
Post-Effective Amendment No. 2 (File No. 33-01332).
10. Opinion of Shereff, Friedman, Hoffman & Goodman, LLP. *
11. Consent of Independent Accountants.*
12. Not Applicable.
13. (a) Purchase Agreement. Incorporated by reference to Exhibit No. 13
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)_Distribution and Service Plan for Class A shares.*
(b)_Distribution and Service Plan for Class B shares.*
(c)_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).
27. Financial Data Schedule.*
- --------------
*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 December 2, 1994 there were 2,435, 12,301 and 31 record holders of Class
A, Class B and Class C 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
C-2
<PAGE>
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.
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 on March 30, 1994).
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; Senior Vice
President and President, Prudential Securities Incorporated (Prudential
Director of Securities)
Marketing
John D. Brookmeyer, Jr. Director Senior Vice President, The Prudential Insurance Company of America
Two Gateway Center (Prudential)
Newark, NJ 07102
Susan C. Cote Senior Vice Senior Vice President, PMF; Senior Vice President, Prudential
President Securities
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 Financial and Administrative
President, Chief Officer, Treasurer and Director, PMF; Senior Vice President,
Financial and Prudential Securities Inc.
Administrative
Officer, Treasurer
and Director
</TABLE>
C-3
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PMF PRINCIPAL OCCUPATIONS
- ----------------------- -------------------- --------------------------------------------------------------------
<S> <C> <C>
Eugene B. Heimberg Director Senior Vice President, Prudential; President, Director and Chief
Prudential Plaza Investment Officer, PIC
Newark, NJ 07102
Lawrence C. McQuade Vice Chairman Vice Chairman, PMF
Leland B. Paton Director Executive Vice President, Director and member of the Operating
Committee, 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; Vice President, PIC
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>
(b) The Prudential Investment Corporation (PIC)
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.
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 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ----------------------- -------------------- --------------------------------------------------------------------
<S> <C> <C>
Martin A. Berkowitz Senior Vice Senior Vice President and Chief Financial Officer and Compliance
President and Chief Officer, PIC; Vice President, Prudential
Financial and
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
Theresa A. Hamacher Vice President Second Vice President, Prudential; Vice President, PIC
Eugene B. Heimberg President, Director President and Chief Investment Officer, PIC; Senior Vice President,
and Chief Investment Prudential
Officer
Garnett L. Keith, Jr. Director Vice Chairman and Director, Prudential; Director, PIC
William P . Link Senior Vice Executive Vice President, Prudential; Senior Vice President, PIC
Four Gateway Center President
Newark, NJ 07102
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ----------------------- -------------------- --------------------------------------------------------------------
<S> <C> <C>
Richard A. Redeker Vice President President, Chief Executive Officer and Director, PMF; Executive Vice
President, Director and member of Operating Committee, Prudential
Securities; Director, PSG
Arthur F. Ryan Director Chairman of the Board and Chief Executive Officer, Prudential;
Director, PIC; Chairman of the Board and Director, PSG
James W. Stevens Executive Vice Executive Vice President, Prudential; Executive Vice President, PIC;
Four Gateway Center President Director, PSG
Newark, NJ 07102
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, for Class B and
Class C shares of Prudential Adjustable Rate Securities Fund, Inc., for Class B
and Class C shares of Prudential Allocation Fund, Prudential California
Municipal Fund (California Income Series and California Series), Prudential
Equity Fund, Inc., Prudential Equity Income Fund, Prudential Europe Growth Fund,
Inc., Prudential Global Fund, Inc., Prudential Global Genesis Fund, Inc.,
Prudential Global Natural Resources Fund, Inc., Prudential GNMA Fund, Inc.,
Prudential Government Income Fund, Inc., Prudential Growth Opportunity Fund,
Inc., Prudential High Yield Fund, Inc., 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 and New Jersey Money Market Series), Prudential National
Municipals Fund, Inc., Prudential Pacific Growth Fund, Inc., Prudential
Short-Term Global Income Fund, Inc., Prudential Strategist Fund, Inc.,
Prudential Structured Maturity Fund, Inc., Prudential U.S. Government Fund,
Prudential Utility Fund, Inc., Global Utility Fund, Inc., Nicholas-Applegate
Fund, Inc. (Nicholas-Applegate Growth Equity Fund) and The BlackRock Government
Income Trust. Prudential Securities is also a depositor for the following unit
investment trusts:
Corporate Investment Trust Fund
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), 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 and New Jersey Money Market
Series), Prudential Institutional Liquidity Portfolio, Inc., Prudential-Bache
Special Money Market Fund, Inc., (d/b/a Prudential Special Money Market 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., Prudential California Municipal Fund (California Income Series and
California Series), Prudential Equity Fund, Inc., Prudential Equity Income Fund,
Prudential Europe Growth Fund, Inc., Prudential Global Fund, Inc., Prudential
Global Genesis Fund, Inc., Prudential Global Natural Resources Fund, Inc.,
Prudential GNMA Fund, Inc., Prudential Government Income Fund, Inc., Prudential
Growth Opportunity Fund, Inc., Prudential High Yield Fund, Inc., 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, Hawaii Income Series,
Maryland Series, Massachusetts Series, Michigan Series, Minnesota Series, New
Jersey Series, North Carolina Series, Ohio Series and Pennsylvania Series),
Prudential National Municipals Fund, Inc., Prudential Pacific Growth Fund, Inc.,
Prudential Short-Term Global
C-5
<PAGE>
Income Fund, Inc., Prudential Strategist Fund, Inc., Prudential Structured
Maturity Fund, Inc., Prudential U.S. Government Fund and Prudential Utility
Fund, Inc., Global Utility Fund, Inc., Nicholas-Applegate Fund, Inc.
(Nicholas-Applegate Growth Equity Fund) and The BlackRock Government Income
Trust.
(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
George A. Murray...... Executive Vice President and Director None
John P . Murray....... Executive Vice President and Director of None
Risk Management
Leland B. Paton....... Executive Vice President and Director None
Vincent T. Pica, II... Director, Member of Operating Committee None
and Executive Vice President
Richard A. Redeker.... Director Trustee
Hardwick Simmons...... Chief Executive Officer, President and None
Director
Lee B. Spencer Jr..... General Counsel, Executive Vice None
President and Director
</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.
C-6
<PAGE>
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, One Heritage Drive, North Quincy,
Massachusetts, The Prudential Investment Corporation, Prudential Plaza, 745
Broad Street, Newark, New Jersey 07102, the Registrant, One Seaport Plaza, New
York, New York 10292, and Prudential Mutual Fund Services, Inc., Raritan Plaza
One, Edison, New Jersey 08837. 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
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 certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and 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 29th day of December, 1994.
PRUDENTIAL U.S. GOVERNMENT FUND
/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 Trustee
- -----------------------------------
LAWRENCE C. MCQUADE
/s/ Stephen C. Eyre Trustee December 29,
- ----------------------------------- 1994
STEPHEN C. EYRE
/s/ Delayne D. Gold Trustee December 29,
- ----------------------------------- 1994
DELAYNE D. GOLD
/s/ Don G. Hoff Trustee December 29,
- ----------------------------------- 1994
DON G. HOFF
/s/ Harry A. Jacobs, Jr. Trustee December 29,
- ----------------------------------- 1994
HARRY A. JACOBS, JR.
/s/ Sidney R. Knafel Trustee December 29,
- ----------------------------------- 1994
SIDNEY R. KNAFEL
Trustee December 29,
- ----------------------------------- 1994
ROBERT E. LABLANC
/s/ Thomas A. Owens, Jr. Trustee December 29,
- ----------------------------------- 1994
THOMAS A. OWENS, JR.
/s/ Richard A. Redeker Trustee December 29,
- ----------------------------------- 1994
RICHARD A. REDEKER
/s/ Clay T. Whitehead Trustee December 29,
- ----------------------------------- 1994
CLAY T. WHITEHEAD
/s/ Susan C. Cote Treasurer and Principal Financial December 29,
- ----------------------------------- and Accounting Officer 1994
SUSAN C. COTE
</TABLE>
<PAGE>
PRUDENTIAL U.S. GOVERNMENT FUND
EXHIBIT INDEX
1. Restated Declaration of Trust.*
2. Amended and Restated By-Laws of the Registrant incorporated by reference to
Exhibit 2 to Post-Effective Amendment No. 13 to the Registration Statement
on Form N-1A (File No. 33-01332 filed via EDGAR).
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 for Class A shares.*
(ii) Distribution Agreement for Class B shares.*
(iii) Distribution 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, LLP.*
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 for Class A shares.*
(ii) Distribution and Service Plan for Class B shares.*
(iii) 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).
27._ Financial Data Schedule.*
- ------------------------
* Filed herewith.
<PAGE>
EXHIBIT 1
AMENDED AND RESTATED
DECLARATION OF TRUST
OF
PRUDENTIAL U.S. GOVERNMENT FUND
Dated September 27, 1994
WHEREAS, Section 9.3 of the Declaration of Trust of Prudential U.S.
Government Fund, dated September 22, 1986, as amended to date, provides that the
said Declaration of Trust may be amended for certain purposes by an instrument
in writing signed by a majority of the Trustees, and Section 11.1 thereof
provides that the said Declaration of Trust and all amendments thereto may be
restated as a single instrument if executed by a majority of the Trustees;
NOW, THEREFORE, the said Declaration of Trust, as amended to date, is
hereby restated in its entirety to read as follows:
WITNESSETH
WHEREAS, this Trust has been formed for the investment and reinvestment of
funds contributed thereto; and
WHEREAS, the beneficial interest in the Trust Property is and shall be
divided into transferable shares of beneficial interest;
NOW, THEREFORE, the Trustees hereby declare that they will hold in trust
all money and property contributed to the trust fund to manage and dispose of
the same for the beneficial interest issued hereunder and subject to the
provisions hereof, to wit:
ARTICLE I
NAME AND DEFINITIONS
SECTION 1.1 NAME. The name of the trust created hereby is the
Prudential U.S. Government Fund.
SECTION 1.2 DEFINITIONS. Wherever they are used herein, the
following terms have the following respective meanings:
(a) "Administrator" means the party, other than the Trust, to the
contract described in Section 4.2 hereof.
(b) "By-Laws" means the By-Laws referred to in Section 3.9 hereof,
as from time to time amended.
(c) The terms "Commission," "Affiliated Person" and "Interested
Person" have the meanings given them in the 1940 Act, as defined herein, except
as otherwise defined by the Trustees in conjunction with the establishment of
any series of Shares.
(d) "Code" means the Internal Revenue Code of 1954, as amended.
<PAGE>
(e) "Custodian" means any Person other than the Trust who has
custody of any Trust Property as required by Section 17(f) of the 1940 Act, but
does not include a system for the central handling of securities described in
Section 17(f).
(f) "Declaration" means this Declaration of Trust as amended from
time to time. Reference in this Declaration of Trust to "Declaration,"
"hereof," "herein" and "hereunder" shall be deemed to refer to this Declaration
rather than to the article or section in which such words appear.
(g) "Distributor" means the party, other than the Trust, to the
contract described in Section 4.3 hereof.
(h) "Fundamental Policies" means the investment objective and
investment restrictions set forth in the Prospectus and designated as
fundamental policies therein.
(i) "Investment Adviser" means the party, other than the Trust, to
the contract described in Section 4.1 hereof.
(j) "Majority Shareholder Vote" means the vote of the holders of a
majority of Shares which shall consist of: (i) a majority of Shares represented
in person or by proxy and entitled to vote at a meeting of Shareholders at which
a quorum, as determined in accordance with the By-Laws, is present; (ii) a
majority of Shares issued and outstanding and entitled to vote when action is
taken by written consent of Shareholders; or (iii) a "majority of the
outstanding voting securities," as that phrase is defined in the 1940 Act, when
action is taken by Shareholders with respect to approval of an investment
advisory or management contract or an underwriting or distribution agreement or
continuance thereof.
(k) "1940 Act" means the Investment Company Act of 1940 and the
rules and regulations thereunder, as amended from time to time.
(l) "Person" means and includes individuals, corporations,
partnerships, trusts, associations, joint ventures and other entities, whether
or not legal entities, and governments and agencies and political subdivisions
thereof.
(m) "Prospectus" means the prospectus (including the statement of
additional information to the extent incorporated by reference therein)
constituting part of the Registration Statement of the Trust under the
Securities Act of 1933, as amended, as such prospectus may be amended or
supplemented and filed with the Commission from time to time.
-2-
<PAGE>
(n) "Shareholder" means a record owner of outstanding Shares.
(o) "Shares" shall mean the equal proportionate transferable units
of interest into which the beneficial interest in any series of the Trust shall
be dividend from time to time and includes fractions of Shares as well as whole
Shares. As provided in Article VI hereof, a series of the Trust may be divided
into separate classes of Shares; all references to Share shall be deemed to be
Shares of any or all series or of a single class of a series or all classes of a
series as the context may require.
(p) "Transfer Agent" means the party, other than the Trust, to the
contract described in Section 4.5 hereof.
(q) "Trust" means the Prudential U.S. Government Fund.
(r) "Trust Property" means any and all property, real or personal,
tangible or intangible, which is owned or held by or for the account of the
Trust or the Trustees.
(s) "Trustees" mean the person or persons who have signed the
Declaration, so long as he or they shall continue in office in accordance with
the terms hereof, and all other persons who may from time to time be duly
elected, qualified and serving as Trustees in accordance with the provisions
hereof, and reference herein to a Trustee or the Trustees shall refer to such
person or persons in their capacity as trustees hereunder.
ARTICLE II
TRUSTEES
SECTION 2.1 NUMBER OF TRUSTEES. The number of Trustees shall
initially be one and thereafter shall be such number as shall be fixed from time
to time by a written instrument signed by a majority of the Trustees; provided,
however, that at all times after the Prospectus of the Trust first becomes
effective, the number of Trustees shall in no event be less than three (3) nor
more than fifteen (15).
SECTION 2.2 ELECTION AND TERM. The Trustees shall be elected by a
Majority Shareholder Vote at the first meeting of Shareholders following the
public offering of Shares of the Trust. The Trustees shall have the power to
set and alter the terms of office of the Trustees, and they may at any time
lengthen or lessen their own terms or make their terms of unlimited duration,
subject to the resignation and removal provisions of Section 2.3 hereof. Except
in the event of resignation or removals pursuant to Section 2.3 hereof, each
Trustee shall hold office until such time as less than a majority of the
Trustees holding office have been elected by
-3-
<PAGE>
Shareholders. In such event the Trustees then in office will call a
Shareholders' meeting for the election of Trustees. Subject to Section 16(c) of
the 1940 Act, no Trustee shall continue to hold office after the holders of
record of not less than two-thirds of the outstanding shares of the Trust have
declared that such Trustee be removed from office either by declaration in
writing filed with the Custodian or by votes cast in person or by proxy at a
meeting called for the purpose. The Trustees shall promptly call a meeting of
the Shareholders for the purpose of voting upon the question of removal of any
Trustee or Trustees when requested in writing to do so by the record holders of
not less than 10 percent of the outstanding shares. Except for the foregoing
circumstances, the Trustees shall continue to hold office and may appoint
successor Trustees.
SECTION 2.3 RESIGNATION AND REMOVAL. Any Trustee may resign his
trust (without need for prior or subsequent accounting) by an instrument in
writing signed by him and delivered to the other Trustees and such resignation
shall be effective upon such delivery, or at a later date according to the terms
of the instrument. Any of the Trustees may be removed (provided that the
aggregate number of Trustees after such removal shall not be less than the
number required by Section 2.1 hereof) with cause, by the action of two-thirds
of the remaining Trustees. Upon the resignation or removal of a Trustee, or his
otherwise ceasing to be a Trustee, he shall execute and deliver such documents
as the remaining Trustees shall require for the purpose of conveying to the
Trust or the remaining Trustees any Trust Property or property of any series of
the Trust held in the name of the resigning or removed Trustee. Upon the
incapacity or death of any Trustee, his legal representative shall execute and
deliver on his behalf such documents as the remaining Trustees shall require as
provided in the preceding sentence.
SECTION 2.4 VACANCIES. The term of office of a Trustee shall
terminate and a vacancy shall occur in the event of the death, resignation,
removal, bankruptcy, adjudicated incompetence or other incapacity to perform the
duties of the office of a Trustee. No such vacancy shall operate to annul the
Declaration or to revoke any existing agency created pursuant to the terms of
the Declaration. In the case of an existing vacancy, including a vacancy
existing by reason of an increase in the number of Trustees, subject to the
provisions of Section 16(a) of the 1940 Act, the remaining Trustees or, prior to
the public offering of Shares of the Trust, if only one Trustee shall then
remain in office, the remaining Trustee shall fill such vacancy by the
appointment of such other person as they or he, in their or his discretion,
shall see fit, made by a written instrument signed by a majority of the
remaining Trustees or by the remaining Trustee, as the case may be. Any such
appointment shall not become effective, however, until the person named in the
written
-4-
<PAGE>
instrument of appointment shall have accepted in writing such appointment and
agreed in writing to be bound by the terms of the Declaration. An appointment
of a Trustee may be made in anticipation of a vacancy to occur at a later date
by reason of retirement, resignation or increase in the number of Trustees,
provided that such appointment shall not become effective prior to such
retirement, resignation or increase in the number of Trustees. Whenever a
vacancy in the number of Trustees shall occur, until such vacancy is filled as
provided in this Section 2.4, the Trustees in office, regardless of their
number, shall have all the powers granted to the Trustees and shall discharge
all the duties imposed upon the Trustees by the Declaration. A written
instrument certifying the existence of such vacancy signed by a majority of the
Trustees shall be conclusive evidence of the existence of such vacancy.
SECTION 2.5 DELEGATION OF POWER TO OTHER TRUSTEES. Any Trustee may,
by power of attorney, delegate his power for a period not exceeding six (6)
months at any one time to any other Trustee or Trustees; provided that in no
case shall less than two (2) Trustees personally exercise the powers granted to
the Trustees under the Declaration except as herein otherwise expressly
provided.
ARTICLE III
POWERS OF TRUSTEES
SECTION 3.1 GENERAL. The Trustees shall have exclusive and absolute
control over the property and business of the Trust and of any series of the
Trust to the same extent as if the Trustees were the sole owners of such
property and business in their own right, but with such powers of delegation as
may be permitted by the Declaration. The Trustees shall have power to conduct
the business of the Trust and carry on its operations in any and all of its
branches and maintain offices both within and without The Commonwealth of
Massachusetts, in any and all states of the United States of America, in the
District of Columbia, and in any and all commonwealths, territories,
dependencies, colonies, possessions, agencies or instrumentalities of the United
States of America and of foreign governments, and to do all such other things
and execute all such instruments as they deem necessary, proper or desirable in
order to promote the interests of the Trust although such things are not herein
specifically mentioned. Any determination as to what is in the interests of the
Trust made by the Trustees in good faith shall be conclusive. In constructing
the provisions of the Declaration, the presumption shall be in favor of a grant
of power to the Trustees.
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<PAGE>
The enumeration of any specific power herein shall not be construed as
limiting the aforesaid powers. Such powers of the Trustees may be exercised
without order of or resort to any court.
SECTION 3.2 INVESTMENTS. The Trustees shall have the power to:
(a) conduct, operate and carry on the business of an investment
company;
(b) subscribe for, invest in, reinvest in, purchase or otherwise
acquire, hold, pledge, sell, assign, transfer, exchange, distribute, lend or
otherwise deal in or dispose of negotiable or non-negotiable instruments,
obligations, evidences of indebtedness, certificates of deposit or indebtedness,
commercial paper, repurchase agreements, reverse repurchase agreements, options,
futures and other securities of any kind, including, without limitation, those
issues, guaranteed or sponsored by any and all Persons including, without
limitation, states, territories and possessions of the United States, the
District of Columbia and any of the political subdivisions, agencies or
instrumentalities thereof, and by the United States government or its agencies
or instrumentalities, or international instrumentalities, or by any bank or
savings institution, or by any corporation or organization organized under the
laws of the United States or of any state, territory or possession thereof, and
of corporations or organizations organized under foreign laws, or in "when
issued" contracts for any such securities, or retain assets of the Trust or any
series thereof in cash and from time to time change the investments of the
assets of the Trust or any series thereof; and to exercise any and all rights,
powers and privileges of ownership or interest in respect of any and all such
investments of every kind and description, including, without limitation, the
right to consent and otherwise act with respect thereto, with power to designate
one or more persons, firms, associations or corporations to exercise any of said
rights, powers and privileges in respect of any of said instruments; and the
Trustees shall be deemed to have the foregoing powers with respect to any
additional securities in which the Trust or any series of the Trust may invest
should the Fundamental Policies be amended.
The Trustees shall not be limited to investing in obligations maturing
before the possible termination of the Trust, nor shall the Trustees be limited
by any law limiting the investments which may be made by fiduciaries.
SECTION 3.3 LEGAL TITLE. Legal title to all of the Trust Property
shall be vested in the Trustees as joint tenants except that the Trustees shall
have power to cause legal title to any Trust Property to be held by or in the
name of one or more of the Trustees, or in the name of the Trust or any series
of the Trust,
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or in the name of any other Person as nominee, on such terms as the Trustees may
determine, provided that the interest of the Trust therein is appropriately
protected. The right, title and interest of the Trustees in the Trust Property
shall vest automatically in each Person who may hereafter become a Trustee.
Upon the resignation, removal or death of a Trustee he shall automatically cease
to have any right, title or interest in any of the Trust Property, and the
right, title and interest of such Trustee in all such property shall vest
automatically in the remaining Trustees. Such vesting and cessation of title
shall be effective without the requirement that conveyancing documents be
executed and delivered.
SECTION 3.4 ISSUANCE AND REPURCHASE OF SECURITIES. The Trustees
shall have the power to issue, sell, repurchase, redeem, retire, cancel,
acquire, hold, resell, reissue, dispose of, transfer and otherwise deal in
Shares and, subject to the provisions set forth in Articles VII, VIII and IX and
Section 6.9 hereof, to apply to any such repurchase, redemption, retirement,
cancellation or acquisition of Shares any funds or property of the particular
series of the Trust with respect to which such Shares are issued, whether
capital or surplus or otherwise, to the full extent now or hereafter permitted
by laws of The Commonwealth of Massachusetts governing business corporations.
SECTION 3.5 BORROWING MONEY; LENDING TRUST ASSETS. The Trustees
shall have power to borrow money or otherwise obtain credit and to secure the
same by mortgaging, pledging or otherwise subjecting as security the assets of
the Trust, to endorse, guarantee or undertake the performance of any obligation,
contract or engagement of any other Person and to lend Trust assets.
SECTION 3.6 DELEGATION; COMMITTEES. The Trustees shall have power,
consistent with their continuing exclusive authority over the management of the
Trust and the Trust Property, to delegate from time to time to such of their
number or to officers, employees or agents of the Trust the doing of such things
and the execution of such instruments either in the name of the Trust or any
series of the Trust or the names of the Trustees or otherwise as the Trustees
may deem expedient.
SECTION 3.7 COLLECTION AND PAYMENT. The Trustees shall have power to
collect all property due to the Trust; to pay all claims, including taxes,
against the Trust Property; to prosecute, defend, compromise or abandon any
claims relating to the Trust Property; to foreclose any security interest
securing any obligations, by virtue of which any property is owed to the Trust;
and to enter into releases, agreements and other instruments.
SECTION 3.8 EXPENSES. The Trustees shall have the power to incur and
pay any expenses which in the opinion of the Trustees are necessary or
incidental to carry out any of the purposes of the
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Declaration and to pay reasonable compensation from the funds of the Trust to
themselves as Trustees. The Trustees shall fix the compensation of all
officers, employees and Trustees.
SECTION 3.9 MANNER OF ACTING; BY-LAWS. Except as otherwise provided
herein or in the By-Laws or by any provision of law, any action to be taken by
the Trustees may be taken by a majority of the Trustees present at a meeting of
Trustees (a quorum being present), including any meeting held by means of a
conference telephone circuit or similar communications equipment by means of
which all persons participating in the meeting can hear each other, or by
written consent of all the Trustees. The Trustees may adopt By-Laws not
inconsistent with this Declaration to provide for the conduct of the business of
the Trust and may amend or repeal such By-Laws to the extent such power is not
reserved to the Shareholders.
SECTION 3.10 MISCELLANEOUS POWERS. Subject to Section 6.9 hereof,
the Trustees shall have the power to: (a) employ or contract with such Persons
as the Trustees may deem desirable for the transaction of the business of the
Trust or any series thereof; (b) enter into joint ventures, partnerships and any
other combinations or associations; (c) remove Trustees or fill vacancies in or
add to their number, elect and remove such officers and appoint and terminate
such agents or employees as they consider appropriate, and appoint from their
own number or otherwise, and terminate, any one or more committees which may
exercise some or all of the power and authority of the Trustees as the Trustees
may determine; (d) purchase, and pay for out of Trust Property or the property
of the appropriate series of the Trust, insurance policies insuring the
Shareholders, Trustees, officers, employees, agents, investment advisers,
distributors, selected dealers or independent contractors of the Trust against
all claims arising by reason of holding any such position or by reason of any
action taken or omitted to be taken by any such Person in such capacity, whether
or not constituting negligence, or whether or not the Trust would have the power
to indemnify such Person against such liability; (e) establish pension,
profit-sharing, Share purchase and other retirement, incentive and benefit plans
for any Trustees, officers, employees and agents of the Trust; (f) to the extent
permitted by law, indemnify any person with whom the Trust or any series thereof
has dealings, including the Investment Adviser, Administrator, Distributor,
Custodian, Transfer Agent and selected dealers, to such extent as the Trustees
shall determine; (g) guarantee indebtedness or contractual obligations of
others; (h) determine and change the fiscal year of the Trust or any series
thereof and the method by which its accounts shall be kept; (i) adopt a seal for
the Trust, but the absence of such seal shall not impair the validity of any
instrument executed on behalf of the Trust; (j) aid by further investment any
corporation, company, trust, association or firm, any obligation of or interest
in which is included in the
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Trust Property or in the affairs of which the Trustees have any direct or
indirect interest; to do all acts and things designed to protect, preserve,
improve or enhance the value of such obligation or interest; to guarantee or
become surety on any or all of the contracts, stocks, bonds, notes, debentures
and other obligations of any such corporation, company, trust, association or
firm; (k) enter into a plan of distribution and any related agreements whereby
the Trust may finance directly or indirectly any activity which is primarily
intended to result in sale of Shares; and (1) in general, carry on any other
business in connection with or incidental to any of the foregoing powers, to do
everything necessary, suitable or proper for the accomplishment of any purpose
or the attainment of any object or the furtherance of any power hereinbefore set
forth, either alone or in association with others, and to do every other act or
thing incidental or appurtenant to or growing out of or connected with the
aforesaid business or purposes, objects or powers.
The foregoing clauses shall be construed both as objects and powers, and
the foregoing enumeration of specific powers shall not be held to limit or
restrict in any manner the general powers of the Trustees.
The Trustees shall not be limited to investing in obligations maturing
before the possible termination of the Trust, nor shall the Trustees be limited
by any law limiting the investments which may be made by fiduciaries.
SECTION 3.11 PRINCIPAL TRANSACTIONS. Except in transactions
permitted by the 1940 Act or any order of exemption issued by the Commission, or
effected to implement the provisions of any agreement to which the Trust is a
party, the Trustees shall not, on behalf of the Trust, buy any securities (other
than Shares) from or sell any securities (other than Shares) to, or lend any
assets of the Trust or any series thereof to, any Trustee or officer of the
Trust or any firm of which any such Trustee or officer is a member acting as
principal, or have any such dealings with the Investment Adviser, Administrator,
Custodian, Distributor or Transfer Agent or with any Affiliated Person of such
Person; but the Trust or a series thereof may employ any such Person, or firm or
company in which such Person is an Interested Person, as broker, legal counsel,
registrar, transfer agent, dividend disbursing agent or custodian upon customary
terms.
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ARTICLE IV
INVESTMENT ADVISER, ADMINISTRATOR, DISTRIBUTOR, CUSTODIAN
AND TRANSFER AGENT
SECTION 4.1 INVESTMENT ADVISER. Subject to approval by a Majority
Shareholder Vote, the Trustees may in their discretion from time to time enter
into an investment advisory or management contract or contracts whereby the
other party to such contract shall undertake to furnish the Trust or any series
thereof such management, investment advisory, administration, accounting, legal,
statistical and research facilities and services, promotional activities and
such other facilities and services, if any, as the Trustees shall from time to
time consider desirable, all upon such terms and conditions as the Trustees may
in their discretion determine. Notwithstanding any provisions of the
Declaration, the Trustees may authorize the Investment Adviser (subject to such
general or specific instructions as the Trustees may from time to time adopt) to
effect purchases, sales, loans or exchanges of portfolio securities of the Trust
or any series thereof on behalf of the Trustees or may authorize any officer,
employee or Trustee to effect such purchases, sales, loans or exchanges pursuant
to recommendations of the Investment Adviser, all without further action by the
Trustees. Any such purchases, sales, loans and exchanges shall be deemed to
have been authorized by all of the Trustees. The Trustees may, in their sole
discretion, call a meeting of Shareholders in order to submit to a vote of
Shareholders at such meeting the approval of continuance of any such investment
advisory or management contract.
SECTION 4.2 ADMINISTRATOR. The Trustees may in their discretion from
time to time enter into an administrative services contract or contracts whereby
the other party or parties to such contract or contracts shall undertake to
furnish administrative services. The contract or contracts shall have such
terms and conditions as the Trustees may in their discretion determine are not
inconsistent with the Declaration. Such services may be provided by one or more
Persons.
SECTION 4.3 DISTRIBUTOR. The Trustees may in their discretion from
time to time enter into a contract providing for the sale of Shares of the Trust
or applicable series thereof at not less than the net asset value per Share (as
described in Article VIII hereof) and pursuant to which the Trust or series
thereof may either agree to sell the Shares to the other party to the contract
or appoint such other party its sales agent for such Shares. In either case,
the contract shall be on such terms and conditions as the Trustees may in their
discretion determine is not inconsistent with the provisions of this Article IV,
including, without limitation, the provision for the repurchase or sale of
shares of
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the Trust by such other party as principal or as agent of the Trust.
SECTION 4.4 CUSTODIAN. The Trustees shall employ at all times a
custodian or custodians, meeting the qualifications for custodians of portfolio
securities under the 1940 Act, as custodian with respect to the Trust and may
from time to time enter into a custodian contract or contracts whereby the other
party or parties to such contract or contracts shall undertake to furnish
custodial services. The contract or contracts shall have such terms and
conditions as the Trustees may in their discretion determine are not
inconsistent with the Declaration. Such services may be provided by one or more
Persons.
SECTION 4.5 TRANSFER AGENT. The Trustees may in their discretion
from time to time enter into a transfer agency and shareholder service contract
whereby the other party to such contract shall undertake to furnish transfer
agency and shareholder services to the Trust. The contract shall have such
terms and conditions as the Trustees may in their discretion determine that are
not inconsistent with the Declaration. Such services may be provided by one or
more Persons.
SECTION 4.6 PARTIES TO CONTRACT. Any contract of the character
described in Section 4.1, 4.2, 4.3, 4.4 or 4.5 of this Article IV and any other
contract may be entered into with any Person, although one or more of the
Trustees or officers of the Trust may be an officer, director, trustee,
shareholder or member of such other party to the contract, and no such contract
shall be invalidated or rendered voidable by reason of the existence of any such
relationship; nor shall any Person holding such relationship be liable merely by
reason of such relationship for any loss or expense to the Trust under or by
reason of said contract or accountable for any profit realized directly or
indirectly therefrom, provided that the contract when entered into was not
inconsistent with the provisions of this Article IV. The same Person may be the
other party to any contracts entered into pursuant to Sections 4.1, 4.2, 4.3,
4.4 and 4.5 above or otherwise, and any individual may be financially interested
or otherwise affiliated with Persons who are parties to any or all of the
contracts referred to in this Section 4.6.
ARTICLE V
LIMITATION OF LIABILITY OF
SHAREHOLDERS, TRUSTEES AND OTHERS
SECTION 5.1 NO PERSONAL LIABILITY OF SHAREHOLDERS, TRUSTEES, ETC. No
Shareholder shall be subject to any personal liability whatsoever to any Person
in connection with Trust Property, or the acts, obligations or affairs of the
Trust. No Trustee, officer,
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employee or agent of the Trust shall be subject to any personal liability
whatsoever to any Person, other than the Trust or its Shareholders, in
connection with Trust Property or the affairs of the Trust, save only that
arising from bad faith, willful misfeasance, gross negligence or reckless
disregard of his duty to such Person; and all such Persons shall look solely to
the Trust Property or the property of one or more specific series of the Trust,
for satisfaction of claims of any nature arising in connection with the affairs
of the Trust. If any Shareholder, Trustee, officer, employee or agent, as such,
of the Trust is made a party to any suit or proceeding to enforce any such
liability, he shall not, on account thereof, be held to any personal liability.
The Trust shall indemnify and hold each Shareholder harmless from and against
all claims by reason of his being or having been a Shareholder, and shall
reimburse the Shareholder for all legal and other expenses reasonably incurred
by him in connection with any such claim or liability, provided that any such
expenses shall be paid solely out of the Trust Property or the property of one
or more series thereof. Indemnification and reimbursement required by the
preceding sentence shall be made only out of assets of the one or more series
whose shares were held by said Shareholder at the time the act or event occurred
which gave rise to the claim against or liability of said Shareholder. The
rights accruing to a Shareholder under this Section 5.1 shall not exclude any
other right to which the Shareholder may be lawfully entitled, nor shall
anything herein contained restrict the right of the Trust to indemnify or
reimburse a Shareholder in any appropriate situation even though not
specifically provided herein.
SECTION 5.2 NON-LIABILITY OF TRUSTEES, ETC. No Trustee, officer,
employee or agent of the Trust shall be liable to the Trust, its Shareholders or
to any Shareholder, Trustee, officer, employee or agent thereof for any action
or failure to act (including without limitation the failure to compel in any way
any former or acting Trustee to redress any breach of trust) except for his own
bad faith, willful misfeasance, gross negligence or reckless disregard of his
duties.
SECTION 5.3 INDEMNIFICATION.
(a) The Trustees shall provide for indemnification by the Trust or
by one or more series thereof if the claim arises from conduct with respect to
only such series of every person who is, or has been, a Trustee or officer of
the Trust against all liability and against all expenses reasonably incurred or
paid by him in connection with any claim, action, suit or proceeding in which he
becomes involved as a party or otherwise by virtue of his being or having been a
Trustee or officer and against amounts paid or incurred by him in the settlement
thereof, in such manner as the Trustees may provide from time to time in the
By-Laws.
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(b) The words "claim," "action," "suit" or "proceeding" shall
apply to all claims, actions, suits or proceedings (civil, criminal or other,
including appeals), actual or threatened; and the words "liability" and
"expenses" shall include, without limitation, attorneys' fees, costs, judgments,
amounts paid in settlement, fines, penalties and other liabilities.
SECTION 5.4 NO BOND REQUIRED OF TRUSTEES. No Trustee shall be
obligated to give any bond or other security for performance of any of his
duties hereunder.
SECTION 5.5 NO DUTY OF INVESTIGATION; NOTICE IN TRUST INSTRUMENTS;
INSURANCE. No purchaser, lender, transfer agent or other Person dealing with
the Trustees or any officer, employee or agent of the Trust or any series
thereof shall be bound to make any inquiry concerning the validity of any
transaction purporting to be made by the Trustees or by said officer, employee
or agent or be liable for the application of money or property paid, loaned or
delivered to or on the order of the Trustees or of said officer, employee or
agent. Every obligation, contract, instrument, certificate, Share, other
security of the Trust or any series thereof or undertaking, and every other act
or thing whatsoever executed in connection with the Trust or any series thereof,
shall be conclusively presumed to have been executed or done by the executors
thereof only in their capacity as Trustees under the Declaration or in their
capacity as officers, employees or agents of the Trust or any series thereof.
Every written obligation, contract, instrument, certificate, Share, other
security of the Trust or a series thereof or undertaking made or issued by the
Trustees shall recite that the same is executed or made by them not
individually, but as Trustees under the Declaration, and that the obligations of
any such instrument are not binding upon any of the Trustees or Shareholders,
individually, but bind only the Trust Property or a series thereof, and may
contain any further recital which they or he may deem appropriate, but the
omission of such recital shall not operate to bind the Trustees or Shareholders
individually. The Trustees shall at all times maintain insurance for the
protection of the Trust Property and any property of a series thereof, its
Shareholders, Trustees, officers, employees and agents in such amount as the
Trustees shall deem adequate to cover possible tort liability, and such other
insurance as the Trustees in their sole judgment shall deem advisable.
SECTION 5.6 RELIANCE ON EXPERTS, ETC. Each Trustee and officer or
employee of the Trust or any series thereof shall, in the performance of his
duties, be fully and completely justified and protected with regard to any act
or any failure to act resulting from reliance in good faith upon the books of
account or other records of the Trust or any series thereof, upon an opinion of
counsel or upon reports made to the Trust or any series thereof by any of its
officers or employees or by the Investment Adviser,
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Administrator, Distributor, Custodian, Transfer Agent, selected dealers,
accountants, appraisers or other experts or consultants selected with reasonable
care by the Trustees, officers or employees of the Trust or any series thereof,
regardless of whether such counsel or expert may also be a Trustee.
ARTICLE VI
SHARES OF BENEFICIAL INTEREST
SECTION 6.1 BENEFICIAL INTEREST. The interest of the beneficiaries
hereunder shall be divided into transferable shares of beneficial interest with
$.01 par value. The number of such shares of beneficial interest authorized
hereunder is unlimited. All Shares issued hereunder including, without
limitation, Shares issued in connection with a dividend in Shares or a split in
Shares, shall be fully paid and nonassessable.
SECTION 6.2 RIGHTS OF SHAREHOLDERS. The ownership of the Trust
Property and the right to conduct any business hereinbefore described are vested
exclusively in the Trustees, and the Shareholders shall have no interest therein
other than the beneficial interest conferred by their Shares, and they shall
have no right to call for any partition or division of any property, profits,
rights or interests of the Trust nor can they be called upon to assume any
losses of the Trusts or suffer an assessment of any kind by virtue of their
ownership of Shares. The Shares shall be personal property giving only the
rights specifically set forth in the Declaration. The Shares shall not entitle
the holder to preference, preemptive, appraisal, conversion or exchange rights,
except as the Trustees may determine.
SECTION 6.3 TRUST ONLY. It is the intention of the Trustees to
create only the relationship of Trustee and beneficiary between the Trustees and
each Shareholder from time to time. It is not the intention of the Trustees to
create a general partnership, limited partnership, joint stock association,
corporation, bailment or any form of legal relationship other than a trust.
Nothing in the Declaration shall be construed to make the Shareholders, either
by themselves or with the Trustees, partners or members of a joint stock
association.
SECTION 6.4 ISSUANCE OF SHARES. The Trustees, in their discretion
may, from time to time without vote of the Shareholders, issue Shares, in
addition to the then issued and outstanding Shares and Shares held in the
treasury, to such party or parties and for such amount and type of
consideration, including cash or property, at such time or times (including,
without limitation, each business day) and on such terms as the Trustees may
deem best, and may in such manner acquire other assets (including the
acquisition of assets subject to, and in connection with, the assumption of
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liabilities) and businesses. In connection with any issuance of Shares, the
Trustees may issue fractional Shares. Reductions in the number of outstanding
Shares may be made pursuant to the provisions of Section 8.3. Contributions to
the Trust may be accepted for, and Shares shall be redeemed as, whole Shares
and/or fractions of a Share as described in the Prospectus.
SECTION 6.5 REGISTER OF SHARES. A register shall be kept at the
principal office of the Trust or at an office of the Transfer Agent which shall
contain the names and addresses of the Shareholders and the number of Shares
held by each of them and a record of all transfers thereof. Such register may
be in written form or any other form capable of being converted into written
form within a reasonable time for visual inspection. Such register shall be
conclusive as to who are the holders of the Shares and who shall be entitled to
receive dividends or distributions or otherwise to exercise or enjoy the rights
of Shareholders. No Shareholder shall be entitled to receive payment of any
dividend or distribution, nor to have notice given to him as herein or in the
By-Laws provided, until he has given his address to the Transfer Agent or such
other officer or agent of the Trustees as shall keep the said register for entry
thereon. It is not contemplated that certificates will be issued for the
Shares; however, the Trustees, in their discretion, may authorize the issuance
of Share certificates and promulgate appropriate rules and regulations as to
their use.
SECTION 6.6 TRANSFER OF SHARES. Shares shall be transferable on the
records of the Trust only by the record holder thereof or by his agent thereunto
duly authorized in writing, upon delivery to the Trustees or the Transfer Agent
of a duly executed instrument of transfer, together with such evidence of the
genuineness of each such execution and authorization and of other matters as may
reasonably be required. Upon this delivery the transfer shall be recorded on
the register of the Trust. Until this record is made, the Shareholder of record
shall be deemed to be the holder of the Shares for all purposes hereunder and
neither the Trustees nor any Transfer Agent or registrar nor any officer,
employee or agent of the Trust shall be affected by any notice of the proposed
transfer.
Any person becoming entitled to any Shares in consequence of the death,
bankruptcy or incompetence of any Shareholder, or otherwise by operation of law,
shall be recorded on the register of Shares as the holder of such Shares upon
production of the proper evidence thereof to the Trustees or the Transfer Agent,
but until such record is made, the Shareholder or record shall be deemed to be
the holder of such Shares for al purposes hereunder and neither the Trustees nor
any Transfer Agent or registrar nor any officer or agent of the Trust shall be
affected by any notice of such death, bankruptcy or incompetence, or other
operation of law, except as
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may otherwise be provided by the laws of The Commonwealth of Massachusetts.
SECTION 6.7 NOTICES. Any and all notices to which any Shareholder
may be entitled and any and all communications shall be deemed duly served or
given if mailed, postage prepaid, addressed to any Shareholder of record at his
last known address as recorded on the register of the Trust.
SECTION 6.8 VOTING POWERS. The Shareholders shall have power to vote
(i) for the election of Trustees as provided in Section 2.2; (ii) with respect
to any advisory or management contract of a series as provided in Section 4.1;
(iii) with respect to the amendment of this Declaration as provided in Section
9.3; (iv) with respect to such additional matters relating to the Trust as may
be required or authorized by the 1940 Act, the laws of the Commonwealth of
Massachusetts or other applicable law or by this Declaration or the By-Laws of
the Trust; and (v) with respect to such additional matters relating to the Trust
as may be properly submitted for Shareholder approval. If the Shares of a
series shall be divided into classes as provided in Section 6.9 hereof, the
Shares of each class shall have identical voting rights except that the
Trustees, in their discretion, may provide a class of a series with exclusive
voting rights with respect to matters related to expenses being borne solely by
such class.
SECTION 6.9 SERIES DESIGNATION. The Trustees, in their discretion
from time to time, may authorize the division of Shares into two or more series,
each series relating to a separate portfolio of investments. The different
series shall be established and designated, and the variations in the relative
rights and preferences as between the different series shall be fixed and
determined, by the Trustees; provided that all Shares shall be identical except
that there may be variations between different series as to purchase price,
determination of net asset value, the price, terms and manner of redemption,
special and relative rights as to dividends and no liquidation, conversion
rights, and conditions under which the several series shall have separate voting
rights.
The Trustees, in their discretion without a vote of the Shareholders, may
divide the Shares of any series into classes. In such event, each class of a
series shall represent interests in the Trust Property of a series and have
identical voting, dividend, liquidation and other rights and the same terms and
conditions except that expenses related directly or indirectly to the
distribution of the Shares of a class of a series may be borne solely by such
class (as shall be determined by the Trustees) and, as provided in Section 6.8 ,
a class of a series may have exclusive voting rights with respect to matters
relating to the expenses being borne solely by such class. The bearing of such
expenses
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solely by a class of Shares shall be approximately reflected (in the manner
determined by the Trustees) in the net asset value, dividend and liquidation
rights of the Shares of such class. The division of the Shares of a series into
classes and the terms and conditions pursuant to which the Shares of the classes
of a series will be issued must be made in compliance with the 1940 Act. No
division of Shares of a series into classes shall result in the creation of a
class of Shares having a preference as to dividends or distributions or a
preference in the event of any liquidation, termination or winding up of the
Trust.
If the Trustees shall divide the Shares into two or more series, the
following provisions shall be applicable;
(a) The number of Shares of each series and of each class of a
series that may be issued shall be unlimited. The Trustees may classify or
reclassify any unissued Shares or any Shares previously issued and reacquired of
any series into one or more series that may be established and designated from
time to time. The Trustees may hold as treasury Shares (of the same or some
other series), reissue Shares for such consideration and on such terms as they
may determine, or cancel any Shares of any series reacquired by the Trust at
their discretion from time to time.
(b) The power of the Trustees to invest and reinvest the Trust
Property of each series that may be established shall be governed by Section 3.2
of this Declaration.
(c) All consideration received by the Trust for the issue or sale
of Shares of a particular series, together with all assets in which such
consideration is invested or reinvested, all income, earnings, profits, and
proceeds thereof, including any proceeds derived from the sale, exchange or
liquidation of such assets, and any funds or payments derived from any
reinvestment of such proceeds in whatever form the same may be, shall
irrevocably belong to that series for all purposes, subject only to the rights
of creditors, and shall be so recorded upon the books of account of the Trust.
In the event that there are any assets, income, earnings, profits, and proceeds
thereof, funds, or payments which are not readily identifiable as belonging to
any particular series, the Trustees shall allocate them among any one or more of
the series established and designated from time to time in such manner and on
such basis as they, in their sole discretion, deem fair and equitable. Each
such allocation by the Trustees shall be conclusive and binding upon the
Shareholders of all series for all purposes.
(d) The assets belonging to each particular series shall be
charged with the liabilities of the Trust in respect of that series only and all
expenses, costs, charges and reserves
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attributable to that series and shall not be charged with the liabilities,
expenses, costs, charges and reserves attributable to other series, and any
general liabilities, expenses, costs, charges or reserves of the Trust which are
not readily identifiable as belonging to any particular series shall be
allocated and charged by the Trustees to and among any one or more of the series
established and designated from time to time in such manner and on such basis as
the Trustees in their sole discretion deem fair and equitable. Each allocation
of liabilities, expenses, costs, charges and reserves by the Trustees shall be
conclusive and binding upon the shareholders of all series for all purposes.
The Trustees shall have full discretion, to the extent not inconsistent with the
1940 Act, to determine which items shall be treated as income and which items as
capital; and each such determination and allocation shall be conclusive and
binding upon the Shareholders.
(e) The power of the Trustees to pay dividends and make
distributions with respect to any one or more series shall be governed by
Section 8.2 of this Declaration. Dividends and distributions on Shares of a
particular series may be paid with such frequency as the Trustees may determine,
to the holders of Shares of that series, from such of the income and capital
gains, accrued or realized, from the assets belonging to that series, as the
Trustees may determine, after providing for actual and accrued liabilities
belonging to that series. All dividends and distributions on Shares of a
particular series shall be distributed pro rata to the shareholders of that
series in proportion to the number of Shares of that series held by such holders
at the date and time of record established for the payment of such dividends or
distributions, except that such dividends and distributions shall appropriately
reflect expenses related directly or indirectly to the distribution of Shares of
a class of such series.
The establishment and designation of any series or class within such
series of Shares shall be effective upon the execution by a majority of the then
Trustees (or by an officer of the Trust pursuant to a vote of a majority of the
Trustees) of an instrument setting forth the establishment and designation of
such series or class within such series. Such instrument shall also set forth
any rights and preferences of such series or class within such series which are
in addition to the rights and preferences of Shares set forth in this
Declaration. At any time that there are no Shares outstanding of any particular
series or class within such series previously established and designated, the
Trustees may by an instrument executed by a majority of their number (or by an
officer of the Trust pursuant to a vote of a majority of the Trustees) abolish
that series or class within such series and the establishment and designation
thereof. Each instrument referred to in this paragraph shall have the status of
an amendment to this Declaration.
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ARTICLE VII
REDEMPTIONS
SECTION 7.1 REDEMPTIONS. All outstanding Shares may be redeemed at
the option of the holders thereof, upon and subject to the terms and conditions
provided in this Article VII. The Trustee shall, upon application of any
Shareholder or pursuant to authorization from any Shareholder, redeem or
repurchase from the Shareholder outstanding Shares for an amount per share
determined by the Trustees in accordance with any applicable laws and
regulations; provided that (a) the amount per share shall not exceed the cash
equivalent of the proportionate interest of each share in the assets of the
Trust or any series thereof at the time of the redemption or repurchase and (b)
if so authorized by the Trustees, the Trust may, at any time and from time to
time, charge fees for effecting such redemption or repurchase, at rates the
Trustees may establish, as and to the extent permitted under the 1940 Act, and
may, at any time and from time to time, pursuant to the Act, suspend the right
of redemption. The procedures for effecting and suspending redemption or
repurchase, at rates the Trustees may establish, as and to the extent permitted
under the 1940 Act, and may, at any time and from time to time, pursuant to the
Act, suspend the right of redemption. The procedures for effecting and
suspending redemption shall be as set forth in the Prospectus from time to time.
Payment will be made in the manner described in the Prospectus.
SECTION 7.2 REDEMPTION OF SHARES; DISCLOSURE OF HOLDING. If the
Trustees shall, at any time and in good faith, be of the opinion that direct or
indirect ownership of Shares or other securities of the Trust or any series
thereof has or may become concentrated in any Person to an extent which would
disqualify the Trust as a regulated investment company under the Internal
Revenue Code, then the Trustees shall have the power by lot or other means
deemed equitable by them (i) to call for redemption by any such Person a number,
or principal amount, of Shares or other securities of the Trust or series
thereof sufficient, in the opinion of the Trustees, to maintain or bring the
direct or indirect ownership of Shares or other securities of other Trust or
series thereof into conformity with the requirements for such qualification and
(ii) to refuse to transfer or issue Shares or other securities of the Trust or
any series thereof to any Person whose acquisition of the Shares or other
securities of the Trust in question would in the opinion of the Trustees result
in such disqualification. The redemption shall be effected at a redemption
price determined in accordance with Section 7.1 hereof.
The holders of Shares or other securities of the Trust or any series
thereof shall upon demand disclose to the Trustees in writing such information
with respect to direct and indirect
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ownership of Shares or other securities of the Trust or series thereof as the
Trustees deem necessary to comply with the provisions of the Internal Revenue
Code, or to comply with the requirements of any other authority.
SECTION 7.3 REDEMPTION OF ACCOUNTS OF LESS THAN $500. The Trustees
shall have the power at any time to redeem Shares of any Shareholder at a
redemption price determined in accordance with Section 7.1 if at such time the
aggregate net asset value of the Shares in the Shareholder's account is less
than $500. A Shareholder will be notified that the value of his account is less
than $500 and allowed at least sixty (60) days to make an additional investment
before redemption is processed.
SECTION 7.4 PAYMENT FOR REDEEMED SHARES IN KIND. Subject to any
applicable provisions of the 1940 Act, payment for any Shares redeemed pursuant
to Section 7.1 or 7.2 hereof may, at the option of the Trustees or such officer
or officers of the Trust as they may authorize for the purpose, be made in cash
or in kind, or partially in cash and partially in kind, and, in case of full or
partial payment in kind, the Trustees or such authorized officer or officers
shall have absolute discretion to determine the securities or other assets of
the Trust and the amount thereof to be distributed in kind. For such purpose,
the value of any securities or other non-cash assets delivered in payment for
Shares redeemed shall be determined in the same manner as the value of such
securities or other non-cash assets are determined in accordance with Section
8.1 hereof for purposes of determining the net asset value per Share applicable
to such Shares, as of the same time that the net asset value per Share
applicable to such Shares is determined.
SECTION 7.5 OTHER REDEMPTIONS. The Trust or series thereof may also
reduce the number of outstanding Shares pursuant to the provisions of Section
8.3 hereof.
ARTICLE VIII
DETERMINATION OF NET ASSET VALUE,
NET INCOME AND DISTRIBUTIONS
SECTION 8.1 NET ASSET VALUE. The net asset value of each outstanding
Share of each series of the Trust shall be determined at such time or times on
such days as the Trustees may determine, in accordance with the 1940 Act, with
respect to each series The method of determination of net asset value of Shares
of each class of a series shall be determined by the Trustees and shall be as
set forth in the Prospectus with respect to the applicable series with any
expenses being borne solely by a class of Shares being reflected in the net
asset value of Shares of each class. The power and duty to make the daily
calculations for any series may be
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delegated by the Trustees to the adviser, administrator, manager, custodian,
transfer agent or such other person as the Trustees may determine. The Trustees
may suspend the daily determination of net asset value to the extend permitted
by the 1940 Act.
SECTION 8.2 DISTRIBUTIONS TO SHAREHOLDERS. The Trustees shall from
time to time distribute ratably among the Shareholders of any series such
proportion of the net profits, surplus (including paid-in-surplus), capital, or
assets with respect to such series held by the Trustees as they deem proper with
any expenses being borne solely by a class of Shares of any series being
reflected in the net profits or other assets being distributed to such class.
Such distribution may be made in cash or property (including without limitation
any type of obligations of the Trust or any assets thereof), and the Trustees
may distribute ratably among the Shareholders of any series additional Shares of
such series issuable hereunder in such manner, at such times, and on such terms
as the Trustees shall determine. The Trustees may always retain from the net
profits such amount as they may deem necessary to pay the debts or expenses of
the Trust or to meet obligations of the Trust, or as they deem desirable to use
in the conduct of its affairs or to retain for future requirements or extensions
of the business. The Trustees may adopt and offer to Shareholders of any series
such dividend reinvestment plans, cash dividend payout plans, or related plans
as the Trustees shall deem appropriate for such series.
Inasmuch as the computation of net income and gains for Federal income tax
purposes may vary from the computation thereof on the books, the above
provisions shall be interpreted to give the Trustees the power in their
discretion to distribute for any fiscal year as ordinary dividends and as
capital gains distributions, respectively, additional amounts sufficient to
enable the Trust to avoid or reduce liability for taxes.
SECTION 8.3 DETERMINATION OF NET INCOME. The Trustees shall have the
power to determine the net income of the Trust or any series thereof one or more
times on each business day and at each determination to declare the net income
as dividends in additional Shares. The determination of net income and the
resultant declaration of dividends shall be as set forth in the Prospectus. It
is expected that the Trust or any series thereof will have a positive net income
at the time of each determination. If for any reason the net income is a
negative amount, the Trustees will be effected by having each Shareholder
proportionately contribute to the capital the necessary Shares that represent
the amount of the excess upon such determination. Each Shareholder will be
deemed to have agreed to such contribution in these circumstances by his
investment in the Trust or any series thereof. The Trustees shall have full
discretion to determine whether any cash or property received shall be treated
as income or as principal and whether
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any item of expenses shall be charged to the income or the principal account,
and their determination made in good faith shall be conclusive upon the
Shareholders. I the case of stock dividends received, the Trustees shall have
full discretion to determine, in the light of the particular circumstances, how
much, if any, of the value thereof shall be treated as income, with the balance,
if any, to be treated as principal.
SECTION 8.4 POWER TO MODIFY FOREGOING PROCEDURES. Notwithstanding
any of the foregoing provisions of this Article VIII, the Trustees may
prescribe, in their absolute discretion, such other bases and times for
determining the per share net asset value of the Trust's Shares or net income,
or the declaration and payment of dividends and distributions as they deem
necessary or desirable or to enable the Trust to comply with any provision of
the 1940 Act, including any rule or regulation adopted pursuant to Section 22 of
the 1940 Act by the Securities and Exchange Commission or any securities
association registered under the Securities Exchange Act of 1934, all as in
effect now or hereafter amended or modified.
ARTICLE IX
DURATION; TERMINATION OF
TRUST; AMENDMENT; MERGERS, ETC.
SECTION 9.1 DURATION. The Trust or any series thereof shall continue
without limitation of time but subject to the provisions of this Article IX.
SECTION 9.2 TERMINATION OF TRUST. (a) The Trust may be terminated by
(1) the affirmative vote of the holders of not less than two-thirds of the
Shares of each series of the Trust at any meeting of Shareholders, (2) by an
instrument in writing, without a meeting, signed by a majority of the Trustees
and consented to by the holders of not less than two-thirds of such Shares, or
(3) by the Trustees by written notice to the Shareholders, In addition, any
series may be so terminated by vote or written consent of not less than
two-thirds of the Shares of such series. Upon the termination of the Trust or
any series:
(i) The Trust or such series shall carry on no business except
for the purpose of winding up its affairs.
(ii) The Trustees shall proceed to wind up the affairs of the
Trust or such series and all of the powers of the Trustees under this
Declaration shall continue until the affairs of the Trust or such series
shall have been wound up, including the power to fulfill or discharge the
contracts of the Trust or such series, collect its assets, sell, convey,
assign, exchange, transfer to otherwise dispose of all or any
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part of the remaining Trust Property to one or more persons at public or
private sale for consideration which may consist in whole or in part of
cash, securities or other property of any kind, discharge or pay its
liabilities, and do all other acts appropriate to liquidate its business;
provided that any sale, conveyance, assignment, exchange, transfer or other
disposition of all or substantially all the Trust Property shall require
approval of the principal terms of the transaction and the nature and
amount of the consideration by vote or consent of the holders of a majority
of the Shares entitled to vote.
(iii) After paying or adequately providing for the payment of all
liabilities, and upon receipt of such releases, indemnities and refunding
agreements, as they deem necessary for their protection, the Trustees may
distribute the remaining Trust Property of any series, in cash or in kind
or partly each, among the Shareholders of such series and each class of
such series, according to their respective rights taking into account their
respective net asset values and the proper allocation of expenses being
borne solely by any series or any class of Shares of a series.
(b) After termination of the Trust or a series and distribution to the
Shareholders as herein provided, a majority of the Trustees (or an officer of
the Trust pursuant to a vote of a majority of the Trustees) shall execute and
lodge among the records of the Trust an instrument in writing setting forth the
fact of such termination, and such instrument shall be filed with the Secretary
of the Commonwealth of Massachusetts, as well as with any other governmental
office where such filing may from time to time be required by the laws of
Massachusetts. Upon termination of the Trust, the Trustees shall thereupon be
discharged from all further liabilities and duties hereunder, and the rights and
interests of all Shareholders shall thereupon cease. Upon termination of any
series, the Trustees shall thereupon be discharged from all further liabilities
and duties with respect to such series, and the rights and interests of all
Shareholders of such series shall thereupon cease.
SECTION 9.3 AMENDMENT PROCEDURE. (a) This Declaration may be amended
by a Majority Shareholder Vote, at a meeting of Shareholders, or by written
consent without a meeting. The Trustees may also amend this Declaration without
the vote or consent of Shareholders to change the name of the Trust or a series,
to supply any omission, to cure, correct or supplement any ambiguous, defective
or inconsistent provision hereof, or if they deem it necessary to conform this
Declaration to the requirements of applicable federal laws or regulations or the
requirements of
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the regulated investment company provisions of the Internal Revenue Code, but
the Trustees shall not be liable for failing so to do.
(b) No amendment may be made under this Section 9.3 which would change
any rights with respect to any Shares of the Trust or a series by reducing the
amount payable thereon upon liquidation of the Trust or a series or by
diminishing or eliminating any voting rights pertaining thereto, except with the
vote or consent of the holders of two-thirds of the Shares outstanding and
entitled to vote. Nothing contained in this Declaration shall permit the
amendment of this Declaration to impair the exemption from personal liability of
the Shareholders, Trustees, officers, employees and agents of the Trust or a
series or to permit assessments upon Shareholders.
(c) A certificate signed by a majority of the Trustees or by the
Secretary or any Assistant Secretary of the Trust, setting forth an amendment
and reciting that it was duly adopted by the Shareholders or by the Trustees as
aforesaid or a copy of the Declaration, as amended, and executed by a majority
of the Trustees or certified by the Secretary or any Assistant Secretary of the
Trust, shall be conclusive evidence of such amendment when lodged among the
records of the Trust. Such amendment shall be effective when lodged among the
records of the Trust unless some later effective date is specified.
Notwithstanding any other provision hereof, until such time as a
Registration Statement under the Securities Act of 1933, as amended, covering
the first public offering of securities of the Trust or a series thereof shall
have become effective, this Declaration may be terminated or amended in any
respect by the affirmative vote of a majority of the Trustees or by an
instrument signed by a majority of the Trustees.
SECTION 9.4 MERGER, CONSOLIDATION AND SALE OF ASSETS. The Trust or
any series thereof may merge or consolidate with any other corporation,
association, trust or other organization or may sell, lease or exchange all or
substantially all of the Trust Property or property of a series, including its
good will, upon such terms and conditions and for such consideration when and as
authorized, at any meeting of Shareholders called for the purpose, by the
affirmative vote of the holders of not less than two-thirds of the Shares;
provided, however, that, if the merger, consolidation, sale, lease or exchange
is recommended by the merger, consolidation, sale, lease or exchange is
recommended by the Trustees, a Majority Shareholder Vote shall be sufficient
authorization.
SECTION 9.5 INCORPORATION. With approval of a Majority Shareholder
Vote, the Trustees may cause to be organized or assist in organizing a
corporation or corporations under the laws of any
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jurisdiction or any other trust, partnership, association or other organization
to take over all of the Trust Property or property of a series or to carry on
any business in which the Trust or any series shall directly or indirectly have
any interest, and to sell, convey and transfer the Trust Property or the
property of a series to any corporation, trust, association or organization in
exchange for the shares or securities thereof or otherwise, and to lend money
to, subscribe for the Shares or securities of, and enter into any contracts with
any corporation, trust, partnership, association or organization in which the
Trust or any series holds or is about to acquire shares or any other interest.
The Trustees may also cause a merger or consolidation between the Trust or any
series or any successor thereto and any corporation, trust, partnership,
association or other organization if and to the extent permitted by law, as
provided under the law then in effect. Nothing contained herein shall be
construed as requiring approval of Shareholders for the Trustees to organize or
assist in organizing one or more corporations, trusts, partnerships,
associations or other organizations and selling, conveying or transferring a
portion of the Trust Property to such organization or entities.
ARTICLE X
REPORTS TO SHAREHOLDERS
The Trustees shall at least semi-annually submit to the Shareholders a
written financial report of the transactions of the Trust or a series thereof,
including financial statements which shall at least annually be certified by
independent public accountants.
ARTICLE XI
MISCELLANEOUS
SECTION 11.1 FILING. This Declaration and any amendment hereto shall
be filed in the office of the Secretary of the Commonwealth of Massachusetts and
in such other places as may be required under the laws of Massachusetts and may
also be filed or recorded in such other places as the Trustees deem appropriate.
Each amendment so filed shall be accompanied by a certificate signed and
acknowledged by a Trustee or by the Secretary or any Assistant Secretary of the
Trust stating that such action was duly taken in a manner provided herein. A
restated Declaration, integrating into a single instrument all of the provisions
of the Declaration which are then in effect and operative, may be executed from
time to time by a majority of the Trustees and shall, upon filing with the
Secretary of The Commonwealth of Massachusetts, be conclusive evidence of all
amendments contained therein and may thereafter be referred to in lieu of the
original Declaration and the various amendments thereto.
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SECTION 11.2 RESIDENT AGENT. The Trust may appoint and maintain a
resident agent in The Commonwealth of Massachusetts.
SECTION 11.3 GOVERNING LAW. This Declaration is executed by the
Trustees with reference to the laws of The Commonwealth of Massachusetts, and
the rights of all parties and the validity and construction of every provision
hereof shall be subject to and construed according to the laws of the
Commonwealth, notwithstanding any Massachusetts law governing choice of law
which may require the construction of this Declaration in accordance with the
laws of another state or jurisdiction.
SECTION 11.4 COUNTERPARTS. The Declaration may be simultaneously
executed in several counterparts, each of which shall be deemed to be an
original, and such counterparts, together, shall constitute one and the same
instrument, which shall be sufficiently evidenced by any such original
counterpart.
SECTION 11.5 RELIANCE BY THIRD PARTIES. Any certificate executed by
an individual who, according to the records of the Trust, appears to be a
Trustee hereunder, or Secretary or Assistant Secretary of the Trust, certifying
to: (a) the number or identity of Trustees or Shareholders, (b) the due
authorization of the execution of any instrument or writing, (c) the form of any
vote passed at a meeting of Trustees or Shareholders, (d) the fact that the
number of Trustees or Shareholders present at any meeting or executing any
written instrument satisfies the requirements of this Declaration, (e) the form
of any By-Laws adopted by or the identity of any officers elected by the
Trustees or (f) the existence of any fact or facts which in any manner relate to
the affairs of the Trust, shall be conclusive evidence as to the matters so
certified in favor of any Person dealing with the Trustees and their successors.
SECTION 11.6 PROVISIONS IN CONFLICT WITH LAW OR REGULATIONS. (a) The
provisions of the Declaration are severable, and if the Trustees shall
determine, with the advice of counsel, that any of such provisions is in
conflict with the 1940 Act, the regulated investment company provisions of the
Internal Revenue Code or with other applicable laws and regulations, the
conflicting provisions shall be deemed never to have constituted a part of the
Declaration; provided, however, that such determination shall not affect any of
the remaining provisions of the Declaration or render invalid or improper any
action taken or omitted prior to such determination.
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(b) If any provision of the Declaration shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
affect only the provision in the jurisdiction and shall not in any manner affect
the provision in any other jurisdiction or any other provision of the
Declaration in any jurisdiction.
IN WITNESS WHEREOF, the undersigned have set forth their hands and seals
this 27th day of September, 1994.
/s/ Stephen C. Eyre
------------------------------------
Stephen C. Eyre
/s/ Delayne D. Gold
------------------------------------
Delayne D. Gold
/s/ Don G. Hoff
------------------------------------
Don G. Hoff
/s/ Harry A. Jacobs, Jr.
------------------------------------
Harry A. Jacobs, Jr.
/s/ Sidney R. Knafel
------------------------------------
Sidney R. Knafel
/s/ Robert E. LaBlanc
------------------------------------
Robert E. LaBlanc
/s/ Lawrence C. McQuade
------------------------------------
Lawrence C. McQuade
/s/ Thomas A. Owens, Jr.
------------------------------------
Thomas A. Owens, Jr.
/s/ Richard A. Redeker
------------------------------------
Richard A. Redeker
/s/ Clay T. Whitehead
------------------------------------
Clay T. Whitehead
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CERTIFICATE
The undersigned, as Secretary of Prudential U.S. Government Fund (the
"Fund"), does hereby certify that the amended and restated Declaration of Trust
attached hereto was duly adopted by the Fund's Trustees on September 27, 1994,
pursuant to Sections 9.3 and 11.1 of the Declaration of Trust.
/s/ S. Jane Rose
------------------------------------
S. Jane Rose, Secretary
Acknowledged:
/s/ Domenick Pugliese
- ----------------------------
Domenick Pugliese, Assistant
Secretary
<PAGE>
EXHIBIT 6(a)
PRUDENTIAL U.S. GOVERNMENT FUND
Distribution Agreement
(CLASS A SHARES)
Agreement made as of August 1, 1994, 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 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.
<PAGE>
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.
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 hereof, to investors at the
offering price as set forth in the Prospectus.
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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 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
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<PAGE>
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.
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 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.
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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 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.
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
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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 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
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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 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 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
7
<PAGE>
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 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 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
8
<PAGE>
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, 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 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
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<PAGE>
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 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 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: /s/ Robert F. Gunia
-------------------
Robert F. Gunia
Executive Vice President,
Treasurer, Comptroller
Prudential U.S. Government Fund
By: /s/ Lawrence C. McQuade
-----------------------
Lawrence C. McQuade
President
10
<PAGE>
EXHIBIT 6(b)
PRUDENTIAL U.S. GOVERNMENT FUND
Distribution Agreement
(CLASS B SHARES)
Agreement made as of August 1, 1994, 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 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.
<PAGE>
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 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.
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<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 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
3
<PAGE>
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 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 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
4
<PAGE>
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 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
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<PAGE>
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 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
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
6
<PAGE>
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 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
7
<PAGE>
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 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 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
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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.
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.
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
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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 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 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 Securities
Incorporated
By: /s/ Robert F. Gunia
-------------------
Robert F. Gunia
Senior Vice President
Prudential U.S. Government Fund
By: /s/ Lawrence C. McQuade
-----------------------
Lawrence C. McQuade
President
10
<PAGE>
EXHIBIT 6(c)
PRUDENTIAL U.S. GOVERNMENT FUND
Distribution Agreement
(CLASS C SHARES)
Agreement made as of August 1, 1994, 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.
<PAGE>
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 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.
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<PAGE>
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 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
3
<PAGE>
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,
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
4
<PAGE>
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 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
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<PAGE>
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 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
6
<PAGE>
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
7
<PAGE>
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 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
8
<PAGE>
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.
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
9
<PAGE>
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 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 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 Securities
Incorporated
By: /s/ Robert F. Gunia
-------------------
Robert F. Gunia
Senior Vice President
Prudential U.S. Government Fund
By: /s/ Lawrence C. McQuade
-----------------------
Lawrence C. McQuade
President
10
<PAGE>
SHEREFF, FRIEDMAN, HOFFMAN & GOODMAN, LLP
919 Third Avenue
New York, New York 10022
December 28, 1994
Prudential U.S. Government Fund
One Seaport Plaza
New York, New York 10292
Gentlemen and Ladies:
Prudential U.S. Government Fund (the "Fund"), is filing with the Securities
and Exchange Commission Post-Effective Amendment No. 15 to its Registration
Statement under the Securities Act of 1933, as amended (the "1933 Act") on
Form N-1A (File No. 33-01332), relating to the registration under the 1933 Act
of 6,819,674 additional shares of its shares of beneficial interest, par
value $.01 per share (the "Additional Shares"), which are to be offered and sold
by the Fund in the manner and on the terms set forth in the prospectus of the
Fund current and effective under the 1933 Act at the time of sale. Of the
Additional Shares, 6,789,340 are previously outstanding shares of beneficial
interest of the Fund, par value $.01 per share, which were redeemed by the Fund
during its fiscal year ended October 31, 1994. According to Post-Effective
Amendment No. 15 to the Fund's Registration Statement, none of the Additional
Shares have previously been used by the Fund for reduction pursuant to paragraph
(a) of Rule 24e-2 under the Investment Company Act of 1940 (the "1940 Act") in
previous filings of post-effective amendments to the Fund's Registration
Statement during the current year, or for reduction pursuant to paragraph
(c) of Rule 24f-2 under the 1940 Act during the Fund's current fiscal year, of
the registration fee payable by the Fund for the registration of shares for
sale under the 1933 Act.
We have, as counsel, participated in various proceedings relating to the
Fund and to the proposed issuance of the Additional Shares. We have examined
copies, either certified or otherwise proven to our satisfaction to be genuine,
of the Fund's Declaration of Trust and By-laws, as currently in effect, and a
certificate issued by the Secretary of State of the Commonwealth of
Massachusetts, certifying the existence and good standing of the Fund. We are
generally familiar with the corporate affairs of the Fund.
Based upon the foregoing, it is our opinion that:
1. The Fund has been duly organized and is validly existing under the laws of
the Commonwealth of Massachusetts.
<PAGE>
Prudential U.S. Government Fund
December 28, 1994
Page 2
2. The Fund is authorized to issue an unlimited number of its shares of
beneficial interest, par value $.01 per share.
3. Subject to the effectiveness of the above-mentioned Post-Effective
Amendment No. 15 to the Fund's Registration Statement and compliance with
applicable state securities laws, upon the issuance of the Additional Shares for
a consideration not less than the par value thereof, and not less than the
net asset value thereof as required by the 1940 Act and in accordance with the
terms of the Registration Statement, such shares will be legally issued and
outstanding and fully paid and non-assessable. However, we note that as set
forth in the Registration Statement, the Fund's shareholders might, under
certain circumstances, be liable for transactions effected by the Fund.
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as a part of the above-mentioned Post-Effective Amendment
No. 15 to the Registration Statement and with any state securities commission
where such filing is required. In giving this consent we do not admit that we
come within the category of persons whose consent is required under Section 7 of
the 1933 Act.
We are members of the Bar of the State of New York and do not hold
ourselves out as being conversant with the laws of any jurisdiction other than
those of the United States of America and the State of New York. We note that
we are not licensed to practice law in the Commonwealth of Massachusetts, and to
the extent that an opinion herein involves the laws of the Commonwealth of
Massachusetts, such opinion should be understood to be based solely upon our
review of the documents referred to above, the published statutes of the
Commonwealth of Massachusetts and, where applicable, published cases, rules or
regulations of regulatory bodies of that Commonwealth.
Very truly yours,
/s/ Shereff, Friedman, Hoffman & Goodman, LLP
Shereff, Friedman, Hoffman & Goodman, LLP
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Post-Effective Amendment No. 15 to Registration
Statement No. 33-01332 of Prudential U.S. Government Fund of our report dated
December 16, 1994, 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.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
New York, New York
December 23, 1994
<PAGE>
EXHIBIT 15(a)
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
<PAGE>
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."
2
<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
3
<PAGE>
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
(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
4
<PAGE>
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.
5
<PAGE>
7. AMENDMENTS
The Plan may not be amended to change the combined service and distribution
expenses 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 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
6
<PAGE>
Fund, and neither the Trustees, officers, agents nor shareholders assume any
personal liability for obligations entered into on behalf of the Fund.
Dated: 8/1/94
7
<PAGE>
EXHIBIT 15(b)
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
<PAGE>
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 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
2
<PAGE>
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:
3
<PAGE>
(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
(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.
4
<PAGE>
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
expenses to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under
5
<PAGE>
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 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: 8/1/94
6
<PAGE>
EXHIBIT 15(c)
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
<PAGE>
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 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
2
<PAGE>
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:
3
<PAGE>
(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 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.
4
<PAGE>
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
expenses to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under
5
<PAGE>
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: 8/1/94
6
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> PRUDENTIAL U.S. GOVERNMENT FUND (CLASS A)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1994
<PERIOD-END> OCT-31-1994
<INVESTMENTS-AT-COST> 133,976,422
<INVESTMENTS-AT-VALUE> 126,497,698
<RECEIVABLES> 5,351,590
<ASSETS-OTHER> 72,248
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 131,921,536
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,005,091
<TOTAL-LIABILITIES> 1,005,091
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 149,450,010
<SHARES-COMMON-STOCK> 14,288,175
<SHARES-COMMON-PRIOR> 16,399,030
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (11,054,841)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (7,478,724)
<NET-ASSETS> 130,916,445
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,339,097
<OTHER-INCOME> 0
<EXPENSES-NET> 2,633,859
<NET-INVESTMENT-INCOME> 8,705,238
<REALIZED-GAINS-CURRENT> (1,123,882)
<APPREC-INCREASE-CURRENT> (21,394,608)
<NET-CHANGE-FROM-OPS> (13,813,252)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (8,705,238)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 39,812,693
<NUMBER-OF-SHARES-REDEEMED> (65,811,259)
<SHARES-REINVESTED> 5,677,995
<NET-CHANGE-IN-ASSETS> (42,839,061)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (9,930,959)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 766,090
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,633,859
<AVERAGE-NET-ASSETS> 7,093,000
<PER-SHARE-NAV-BEGIN> 10.59
<PER-SHARE-NII> 0.61
<PER-SHARE-GAIN-APPREC> (1.43)
<PER-SHARE-DIVIDEND> (0.61)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.16
<EXPENSE-RATIO> 1.09
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> PRUDENTIAL U.S. GOVERNMENT FUND (CLASS B)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1994
<PERIOD-END> OCT-31-1994
<INVESTMENTS-AT-COST> 133,976,422
<INVESTMENTS-AT-VALUE> 126,497,698
<RECEIVABLES> 5,351,590
<ASSETS-OTHER> 72,248
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 131,921,536
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,005,091
<TOTAL-LIABILITIES> 1,005,091
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 149,450,010
<SHARES-COMMON-STOCK> 14,288,175
<SHARES-COMMON-PRIOR> 16,399,030
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (11,054,841)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (7,478,724)
<NET-ASSETS> 130,916,445
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,339,097
<OTHER-INCOME> 0
<EXPENSES-NET> 2,633,859
<NET-INVESTMENT-INCOME> 8,705,238
<REALIZED-GAINS-CURRENT> (1,123,882)
<APPREC-INCREASE-CURRENT> (21,394,608)
<NET-CHANGE-FROM-OPS> (13,813,252)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (8,705,238)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 39,812,693
<NUMBER-OF-SHARES-REDEEMED> (65,811,259)
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> PRUDENTIAL U.S. GOVERNMENT FUND (CLASS C)
<S> <C>
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<FISCAL-YEAR-END> OCT-31-1994
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</TABLE>
