<PAGE>
As filed with the Securities and Exchange Commission on May 12, 1994
Registration No. 33-22363
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]
PRE-EFFECTIVE AMENDMENT NO. [_]
POST-EFFECTIVE AMENDMENT NO. 10 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [_]
AMENDMENT NO. 12 [X]
(Check appropriate box or boxes)
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PRUDENTIAL-BACHE STRUCTURED MATURITY FUND, INC.
(Exact name of registrant as specified in charter)
(doing business as Prudential Structured Maturity Fund)
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)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE
DATE OF THE REGISTRATION STATEMENT.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX):
[_] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)
[_] on (date) pursuant to paragraph (a), of Rule 485
PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940, REGISTRANT
HAS PREVIOUSLY REGISTERED AN INDEFINITE NUMBER OF SHARES OF ITS COMMON STOCK
PAR VALUE $.01 PER SHARE. THE REGISTRANT WILL FILE A NOTICE FOR ITS FISCAL
YEAR ENDED DECEMBER 31, 1994 ON OR ABOUT FEBRUARY 28, 1995.
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<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
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<S> <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
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 Valuesits Shares
Item 8. Redemption or Repurchase................................... Shareholder Guide; How the Fund Values
its Shares
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............................ General Information
Item 13. Investment Objectives and Policies......................... Investment Objective and Policies;
Investment Restrictions
Item 14. Management of the Fund..................................... Directors 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
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; Net Asset Value
Item 20. Tax Status................................................. Taxes
Item 21. Underwriters............................................... Distributor
Item 22. Calculation of Performance Data............................ Performance Information
Item 23. Financial Statements....................................... Financial Statements
</TABLE>
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.
<PAGE>
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
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PROSPECTUS DATED [ ], 1994
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Prudential Structured Maturity Fund, Inc. (the Fund), Municipal Income
Portfolio (the Portfolio), is one of two separate portfolios of an open-end
management investment company, or mutual fund. The Portfolio is non-
diversified and seeks to provide high current income that is exempt from
federal income taxes consistent with the preservation of principal. The
Portfolio will invest primarily in investment grade municipal securities or in
non-rated securities which, in the opinion of the Fund's investment adviser,
are of comparable quality. THE PORTFOLIO MAY ALSO INVEST UP TO 30% OF ITS
TOTAL ASSETS IN LOWER-RATED BONDS, COMMONLY KNOWN AS "JUNK BONDS," OR IN NON-
RATED SECURITIES WHICH, IN THE OPINION OF THE INVESTMENT ADVISER, ARE OF
COMPARABLE QUALITY. The Portfolio seeks to achieve its objective primarily
through structuring its portfolio by utilizing a "laddered" maturity strategy.
Under normal market conditions, securities are allocated by maturity among
eight annual maturity categories ranging from one year or less to between
seven and eight years with each category representing approximately one-eighth
of the Portfolio's assets. As the securities in each annual category mature or
as new investments are made in the Portfolio, the proceeds will be invested to
maintain the balance of investments among the eight annual maturity
categories. There can be no assurance that the Portfolio's investment
objective will be achieved. See "How the Fund Invests--Investment Objective
and Policies."
THE PORTFOLIO'S INVESTMENT IN LOWER QUALITY MUNICIPAL OBLIGATIONS IS SUBJECT
TO SPECIAL RISK CONSIDERATIONS. INVESTMENTS OF THIS TYPE ARE SUBJECT TO A
GREATER RISK OF LOSS OF PRINCIPAL AND INTEREST, INCLUDING DEFAULT RISK, THAN
HIGHER RATED BONDS. PURCHASERS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED
WITH AN INVESTMENT IN THE PORTFOLIO. See "How the Fund Invests--Investment
Objective and Policies--Risk Factors Relating to Investing in High-Yield
Municipal Securities." The portfolio may also purchase and sell futures
contracts and options thereon. See "How the Fund Invests--Hedging and Income
Enhancement Strategies."
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 and the
Municipal Income Portfolio that a prospective investor ought to know before
investing. Additional information about the Fund and the Portfolio has been
filed with the Securities and Exchange Commission in a Statement of Additional
Information, dated [ ], 1994, which information is incorporated herein by
reference (is legally considered a part of this Prospectus) and is available
without charge upon request to the Fund at the address or telephone number
noted above.
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Investors are advised to read this Prospectus and retain it for future
reference.
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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 the Prospectus and is qualified in its entirety by the more
detailed information appearing elsewhere herein.
WHAT IS PRUDENTIAL STRUCTURED MATURITY FUND, INC. ?
Prudential Structured Maturity Fund, Inc. is a mutual fund whose shares are
offered in two portfolios, each of which operates as a separate 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
management investment company. Only the Municipal Income Portfolio is offered
through this Prospectus.
WHAT IS THE PORTFOLIO'S INVESTMENT OBJECTIVE?
The Portfolio's investment objective is high current income that is exempt
from federal income taxes consistent with the preservation of principal. It
seeks to achieve this objective primarily through investing in municipal
securities and by structuring its portfolio by utilizing a "laddered" maturity
strategy. Under normal market conditions, these securities are allocated by
maturity among annual maturity categories ranging from one year or less to
between seven and eight years with each category representing approximately
one-eighth of the Portfolio's assets (laddered maturities). See "How the Fund
Invests--Investment Objective and Policies" at page .
WHAT ARE THE PORTFOLIO'S SPECIAL CHARACTERISTICS AND RISKS?
The Portfolio may invest up to 30% of its assets in municipal securities
rated at the time of purchase below "BBB" by Standard & Poors Corporation (S&P)
or "Baa" by Moody's Investors Service (Moody's) or similarly by another
nationally recognized rating service, or, if not rated, of comparable quality
in the opinion of the investment adviser. Lower-quality securities may be
sensitive to credit risk and changes in interest rates. See "How the Fund
Invests--Investment Objective and Policies--Municipal Securities" at page 5.
The Portfolio may also purchase and sell options and may engage in transactions
involving financial futures and options thereon for hedging, risk reduction and
income enhancement purposes. See "How the Fund Invests--Hedging and Income
Enhancement Strategies" at page 9. The Portfolio is non-diversified so that
more than 5% of its total assets may be invested in the securities of one or
more issuers. Investment in a non-diversified portfolio involves greater risk
than investment in a diversified portfolio. See "How the Fund Invests--
Investment Objective and Policies--Special Considerations" at page .
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 .40 of 1%
of the Portfolio's average daily net assets. As of March 31, 1994, PMF served
as manager or administrator to 66 investment companies, including 37 mutual
funds, with aggregate assets of approximately [$51] 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 .
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor of
the Portfolio's Class A shares and is currently paid for its services at an
annual rate of .10 of 1% of the average daily net assets of the Class A shares.
2
<PAGE>
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Portfolio's Class B and Class C shares and is currently paid
for its services at an annual rate of .50 of 1% of the average daily net assets
of the Class B shares and is currently paid for its services at an annual rate
of .75 of 1% of the average daily net assets of the Class C shares.
See "How the Fund Is Managed--Distributor" at 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 and "Shareholder Guide--Shareholder
Services" at page .
HOW DO I PURCHASE SHARES?
You may purchase shares of the Portfolio 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 and "Shareholder Guide--How to Buy Shares of the
Fund" at page .
WHAT ARE MY PURCHASE ALTERNATIVES?
The Portfolio offers three classes of shares:
. Class A Shares: Sold with an initial sales charge of up to 3.25% 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
3% to zero of the lower of the amount invested or the
redemption proceeds) which will be imposed on certain
redemptions made within four years of purchase. Although
Class B shares are subject to higher ongoing distribution-
related expenses than Class A shares, Class B shares will
automatically convert to Class A shares (which are subject
to lower ongoing expenses) approximately five 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 .
HOW DO I SELL MY SHARES?
You may redeem shares of the Portfolio 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 .
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income 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 .
3
<PAGE>
FUND EXPENSES
(MUNICIPAL INCOME PORTFOLIO)
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- ------------------------- -----------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Sales Load
Imposed on Purchases
(as a percentage of
offering price)....... 3.25% None None
Maximum Sales Load or
Deferred Sales Load
Imposed on Reinvested
Dividends............. None None None
Deferred Sales Load
(as a percentage of None 3% during the first year, 1% on redemptions
original purchase decreasing 1% annually to made within one
price or redemption 1% in the third and year of purchase
proceeds, whichever is fourth year and
lower)................ 0% the fifth year*
Redemption Fees....... None None None
Exchange Fee.......... None None None
<CAPTION>
ANNUAL FUND OPERATING
EXPENSES***
(AS A PERCENTAGE OF Class A Class B Class C
AVERAGE NET ASSETS) ------- ------- -------
<S> <C> <C> <C>
Management Fees (after
waiver)............... .0% .0% .0%
12b-1 Fees+........... .10++ .50+++ .75++
Other Expenses (after
subsidy).............. .0 .0 .0
---- ---- ----
Total Fund Operating
Expenses.............. .10% .50% .75%
==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<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..................................... $33 $36 $38 $45
Class B..................................... $35 $26 $28 $45
Class C**................................... $35 $24 $42 $73
You would pay the following expenses on the
same investment assuming no redemption:
Class A..................................... $33 $36 $38 $45
Class B..................................... $ 5 $16 $28 $45
Class C**................................... $18 $24 $42 $93
</TABLE>
The above examples are estimated based on expenses expected to be incurred
during the fiscal year ending December 31, 1994. The examples 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 an investor in understanding the various
costs and expenses that an investor in the Portfolio 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 an estimate
of operating expenses of the Portfolio such as directors' and professional
fees, registration fees, reports to shareholders and transfer agency and
custodian fees.
- ------------
* Class B shares will automatically convert to Class A shares approximately
five years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares.
** Based on expenses expected to be incurred during the fiscal year ended
December 31, 1994 after taking into account management fee waivers and
expense subsidies. Without taking into account such waivers and subsidies,
Management Fees would be .40% and Other Expenses would be .53% for Class A,
B and C and Total Fund Operating Expenses would be 1.03% for Class A, 1.53%
for Class B and 1.88% for Class C. See "How the Fund Is Managed--
Distributor--Fee Waivers and Subsidy."
+ 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 Portfolio may not exceed 6.25 % of the total
gross sales, subject to certain exclusions. This 6.25% limitation is
imposed on the Portfolio rather than on a per shareholder basis. Therefore
long-term Class B and Class C shareholders of the Portfolio 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 and C Distribution and Service Plan(s) provide that
the Fund may pay a distribution fee of up to .30 of 1% and 1% per annum of
the average daily net assets of the Class A and Class C shares,
respectively, the Distributor has agreed to limit its distribution fees
with respect to Class A and Class C shares of the Fund to no more than .10
of 1% and .75 of 1% of the average daily net assets of the Class A and
Class C shares, respectively, for the fiscal year ending December 31, 1994.
See "How the Fund Is Managed--Distributor."
+++ Although the Class B Distribution and Service Plan provides that the Fund
may pay a distribution fee of .75 of 1% (including a service fee of .25 of
1%) of the average daily net assets of the Class B shares, the Distributor
has agreed to limit its distribution fees to .50 of 1% of the average daily
net assets of the Class B shares for the fiscal year ending December 31,
1994. See "How the Fund Is Managed--Distributor."
4
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL STRUCTURED MATURITY FUND (THE FUND) IS AN OPEN-END MANAGEMENT
INVESTMENT COMPANY, OR MUTUAL FUND, CONSISTING OF TWO PORTFOLIOS. EACH
PORTFOLIO OF THE FUND IS MANAGED INDEPENDENTLY. THE MUNICIPAL INCOME PORTFOLIO
IS NON-DIVERSIFIED AND ITS INVESTMENT OBJECTIVE IS HIGH CURRENT INCOME THAT IS
EXEMPT FROM FEDERAL INCOME TAXES CONSISTENT WITH THE PRESERVATION OF
PRINCIPAL. THE PORTFOLIO SEEKS TO ACHIEVE THIS OBJECTIVE BY INVESTING IN A
PORTFOLIO OF OBLIGATIONS ISSUED BY OR ON BEHALF OF STATES, TERRITORIES AND
POSSESSIONS OF THE UNITED STATES AND THE DISTRICT OF COLUMBIA AND THEIR
POLITICAL SUBDIVISIONS, AGENCIES AND INSTRUMENTALITIES, THE INTEREST ON WHICH
IS GENERALLY ELIGIBLE FOR EXCLUSION FROM FEDERAL INCOME TAXATION (MUNICIPAL
OBLIGATIONS OR MUNICIPAL SECURITIES). IN STRUCTURING ITS PORTFOLIO OF
MUNICIPAL SECURITIES, THE PORTFOLIO WILL UTILIZE A "LADDERED" MATURITY
STRATEGY. UNDER NORMAL MARKET CONDITIONS, MUNICIPAL SECURITIES ARE ALLOCATED
BY MATURITY AMONG EIGHT ANNUAL MATURITY CATEGORIES RANGING FROM ONE YEAR OR
LESS TO BETWEEN SEVEN AND EIGHT YEARS WITH EACH CATEGORY REPRESENTING
APPROXIMATELY ONE-EIGHTH OF THE PORTFOLIO'S ASSETS (LADDERED MATURITIES). AS
THE SECURITIES IN EACH ANNUAL CATEGORY MATURE OR AS NEW INVESTMENTS ARE MADE
IN THE PORTFOLIO, THE PROCEEDS WILL BE INVESTED TO MAINTAIN THE BALANCE OF
INVESTMENTS AMONG THE EIGHT ANNUAL MATURITY CATEGORIES. THERE CAN BE NO
ASSURANCE THAT SUCH OBJECTIVE WILL BE ACHIEVED. See "Investment Objective and
Policies" in the Statement of Additional Information.
THE PORTFOLIO SEEKS TO PROVIDE INVESTORS WITH MORE STABILITY OF PRINCIPAL
THAN LONG-TERM BONDS HAVE HISTORICALLY PROVIDED THROUGH THE STRUCTURED
PORTFOLIO MANAGEMENT STRATEGY OF INVESTING IN SHORT- TO INTERMEDIATE-TERM
MUNICIPAL SECURITIES. LADDERING INVESTMENTS AMONG SECURITIES WITH A RANGE OF
MATURITIES OF FROM ONE YEAR OR LESS TO BETWEEN SEVEN AND EIGHT YEARS PROVIDES
AN ADDED DEGREE OF PORTFOLIO DIVERSIFICATION, WHICH TENDS TO REDUCE VOLATILITY
TO A LEVEL LOWER THAN THAT EXPERIENCED BY A LONG-TERM BOND FUND. Generally,
the prices of municipal obligations vary inversely with interest rates.
Municipal obligations with longer maturities produce higher yields and are
subject to greater price fluctuations as a result of changes in interest rates
(market risk) than municipal obligations with shorter maturities. Shorter
maturities generally provide lower yields but greater principal stability.
Nonetheless, interest rates are currently much lower than in recent years. If
interest rates rise, the prices on bonds in the Portfolio and the net asset
value of the Portfolio will decline. In addition, lower-rated municipal
obligations typically provide a higher yield than higher-rated municipal
obligations of similar maturity. However, lower-rated municipal obligations
are also subject to a greater degree of risk with respect to the ability of
the issuer to meet the principal and interest payments on the obligations
(credit risk) and may also be subject to greater price volatility due to the
market perceptions of the creditworthiness of the issuer. The investment
adviser has had experience structuring portfolios with laddered maturities for
institutional clients since 1977.
The Portfolio's investment adviser will allocate assets among the various
categories by maturity and not by type of investment and will continuously
monitor each annual category. The investment adviser will use effective
average maturity when calculating each annual maturity category and, depending
upon market conditions, the investment adviser may recognize the call date of
a municipal security as its effective maturity date rather than its stated
maturity date. In addition, the investment adviser may use futures contracts
to create synthetic securities that fit into one of the annual maturity
categories. See "Hedging and Income Enhancement Strategies--Futures Contracts
and Options Thereon" below. The Portfolio's effective dollar-weighted average
maturity is generally expected to be between 4 and 5 years. See "Municipal
Securities" below.
The investment adviser will buy and sell portfolio securities to take
advantage of investment opportunities based on its analysis of market
conditions, interest rates and general economic factors, thereby increasing
the Portfolio's annual portfolio turnover rate. See "Other Investments and
Policies--Portfolio Turnover". From time to time, the Portfolio may also sell
portfolio securities to meet redemption requests.
5
<PAGE>
Interest on certain municipal obligations may be a preference item for
purposes of the federal alternative minimum tax. The Portfolio may invest
without limit in municipal obligations that are "private activity bonds" (as
defined in the Internal Revenue Code) the interest on which would be a
preference item for purposes of the federal alternative minimum tax. See
"Taxes, Dividends and Distributions." Municipal securities may include general
obligation bonds of states, counties, cities, towns, etc., revenue bonds of
utility systems, highways, bridges, port and airport facilities, colleges,
hospitals, etc., and industrial development and pollution control bonds.
THE PORTFOLIO'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE,
MAY NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE
PORTFOLIO'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.
MUNICIPAL SECURITIES
THE PORTFOLIO WILL INVEST AT LEAST 70% OF ITS TOTAL ASSETS IN "INVESTMENT
GRADE" MUNICIPAL SECURITIES WHICH AT THE TIME OF PURCHASE ARE RATED WITHIN THE
FOUR HIGHEST QUALITY GRADES AS DETERMINED BY EITHER MOODY'S INVESTORS SERVICE
(MOODY'S) (CURRENTLY AAA, AA, A, BAA FOR BONDS, MIG 1, MIG 2, MIG 3, MIG 4 FOR
NOTES AND P-1, P-2 AND P-3 FOR COMMERCIAL PAPER), STANDARD & POOR'S
CORPORATION (S&P) (CURRENTLY AAA, AA, A, BBB FOR BONDS, SP-1, SP-2 AND SP-3
FOR NOTES AND A-1 FOR COMMERCIAL PAPER), OR SIMILARLY BY ANOTHER NATIONALLY
RECOGNIZED RATING SERVICE, OR, IF UNRATED, WILL POSSESS CREDITWORTHINESS, IN
THE OPINION OF THE INVESTMENT ADVISER, COMPARABLE TO SUCH "INVESTMENT GRADE"
RATED MUNICIPAL SECURITIES. Municipal securities rated Baa by Moody's are
described by Moody's as being investment grade but are also characterized as
having speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade securities. See
"Description of Security Ratings" in the Appendix.
THE PORTFOLIO MAY ALSO INVEST UP TO 30% OF ITS TOTAL ASSETS IN SECURITIES
RATED BELOW BAA BY MOODY'S OR BELOW BBB BY S&P, OR A SIMILARLY NATIONALLY
RECOGNIZED RATING SERVICE, OR IF NOT RATED, OF COMPARABLE QUALITY IN THE
OPINION OF THE INVESTMENT ADVISER, BASED UPON ITS CREDIT ANALYSIS. Securities
rated below Baa by Moody's and below BBB by S&P are considered speculative.
See "Description of Security Ratings" in the Appendix. Such lower-rated, high
yield securities are commonly referred to as "junk bonds." Such securities
generally offer a higher current yield than those in the higher-rated
categories but also involve greater price volatility and risk of loss of
principal and income. See "Risk Factors Relating to Investing in High Yield
Municipal Obligations" below. Many issuers of lower-quality bonds choose not
to have their obligations rated and the Portfolio may invest without further
limit in such unrated securities. Investors should carefully consider the
relative risks associated with investments in securities which carry lower
ratings and in comparable non-rated securities. The market for rated
securities is usually broader than that for non-rated securities, which may
result in less flexibility in disposal of such non-rated securities.
Subsequent to its purchase by the Portfolio, a municipal security may be
assigned a lower rating or cease to be rated. Such an event would not require
the elimination of the issue from the Portfolio, but the investment adviser
will consider such an event in determining whether the Fund should continue to
hold the security.
THE PORTFOLIO MAY ALSO INVEST UP TO 5% OF ITS ASSETS IN SECURITIES THAT ARE
IN DEFAULT IN THE PAYMENT OF PRINCIPAL OR INTEREST. Once bonds default, they
may represent good investment opportunities from, for example, an expected
near-term marked improvement in an issuer's financial condition or the ability
to help the issuer restructure their finances and become current on their
payments. The Prudential Investment Corporation (PIC) currently has a team of
professionals which evaluates such defaulted issues. This 5% limitation is
included in the Portfolio's 30% limitation on assets rated below investment
grade. The investment adviser will assess the defaulted security's structure
and assign it to the appropriate maturity category. See "Investment Objective
and Policies--Risks of Investing in Defaulted Securities" in the Portfolio's
Statement of Additional Information.
If subsequent to purchase, the security's effective maturity is determined
to exceed eight years, the investment adviser is not required to dispose of
the security provided that no more than 5% of the Portfolio's total assets are
invested in securities
6
<PAGE>
whose effective maturities exceed eight years. This allows the Portfolio to
continue to hold securities which may still represent good investment value
although their maturity is greater than eight years and to avoid selling a
security hastily and at a potentially disadvantageous price.
UNDER NORMAL MARKET CONDITIONS, THE PORTFOLIO WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN MUNICIPAL SECURITIES. During
abnormal market conditions or to provide liquidity, the Portfolio may hold
cash or cash equivalents or investment grade taxable obligations. The
Portfolio may invest in tax-exempt commercial paper and general obligation and
revenue notes such as Tax Anticipation Notes, Revenue Anticipation Notes, Bond
Anticipation Notes and Construction Loan Notes or in taxable cash equivalents,
such as certificates of deposit, bankers acceptances and time deposits or
other short-term taxable investments such as repurchase agreements. When, in
the opinion of the investment adviser, abnormal market conditions require a
temporary defensive position, the Portfolio's laddered maturity structure may
be altered for as long as the investment adviser deems necessary.
THE PORTFOLIO MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN AND INVERSE FLOATERS.
Floating rate securities normally have a rate of interest which is set as a
specific percentage of a designated base rate, such as the rate on Treasury
Bonds or Bills or the prime rate at a major commercial bank. The interest rate
on floating rate securities changes periodically when there is a change in the
designated base interest rate. Variable rate securities provide for a
specified periodic adjustment in the interest rate based on prevailing market
rates and generally would allow the Portfolio to demand payment of the
obligation on short notice at par plus accrued interest, which amount may be
more or less than the amount the Portfolio paid for them. An inverse floater
is a debt instrument with a floating or variable interest rate that moves in
the opposite direction of the interest rate on another security or the value
of an index. Changes in the interest rate on the other security or index
inversely affect the residual interest rate paid on the inverse floater, with
the result that the inverse floater's price will be considerably more volatile
than that of a fixed-rate bond. The market for inverse floaters is relatively
new but growing rapidly. The investment adviser intends to invest in inverse
floaters only for risk management purposes.
THE PORTFOLIO MAY ALSO INVEST IN MUNICIPAL LEASE OBLIGATIONS. A MUNICIPAL
LEASE OBLIGATION IS A MUNICIPAL SECURITY THE INTEREST ON AND PRINCIPAL OF
WHICH IS PAYABLE OUT OF LEASE PAYMENTS MADE BY THE PARTY LEASING THE
FACILITIES FINANCED BY THE ISSUE. Typically, municipal lease obligations are
issued by a state or municipal financing authority to provide funds for the
construction of facilities (e.g., schools, dormitories, office buildings or
prisons) or the acquisition of equipment. The facilities are typically used by
the state or municipality pursuant to a lease with a financing authority.
Certain municipal lease obligations may trade infrequently. Accordingly, the
investment adviser will monitor the liquidity of municipal lease obligations
under the supervision of the Board of Directors. Municipal lease obligations
will not be considered illiquid for purposes of the Portfolio's 15% limitation
on illiquid securities provided the investment adviser determines that there
is a readily available market for such securities under the supervision of the
Board of Directors. See "Investment Objective and Policies--Other Investments
Applicable to the Municipal Income Portfolio--Illiquid Securities" in the
Statement of Additional Information.
THE PORTFOLIO MAY ACQUIRE PUT OPTIONS (PUTS) GIVING THE PORTFOLIO THE RIGHT
TO SELL SECURITIES HELD IN ITS PORTFOLIO AT A SPECIFIED EXERCISE PRICE ON A
SPECIFIED DATE. Such puts may be acquired for the purpose of protecting the
Portfolio from a possible decline in the market value of the security to which
the put applies in the event of interest rate fluctuations or, in the case of
liquidity puts, for the purpose of shortening the effective maturity of the
underlying security. The aggregate value of puts (other than liquidity puts)
may not exceed 10% of the net asset value of the Portfolio. The acquisition of
a put may involve an additional cost to the Portfolio, by payment of a premium
for the put, by payment of a higher purchase price for securities to which the
put is attached or through a lower effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase
the underlying security. Accordingly, the Portfolio will acquire puts only
under the following circumstances: (i) the put is written by the issuer of the
underlying security and such security is rated within the four highest
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quality grades as determined by Moody's or S&P; (ii) the put is written by a
person other than the issuer of the underlying security and such person has
securities outstanding which are rated within such four highest quality
grades; or (iii) the put is backed by a letter of credit or similar financial
guarantee issued by a person having securities outstanding which are rated
within the four-highest quality grades of such rating services.
THE PORTFOLIO MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR
"DELAYED DELIVERY" BASIS IN EACH CASE WITHOUT LIMIT. When municipal
obligations are offered on a when-issued or delayed delivery basis, the price
and coupon rate are fixed at the time the commitment to purchase is made but
delivery and payment for the securities take place at a later date. Normally,
the settlement date occurs within one month of purchase; the purchase price
for such securities includes interest accrued during the period between
purchase and settlement and, therefore, no interest accrues to the economic
benefit of the purchaser during such period. In the case of purchases by the
Portfolio, the price that the Portfolio is required to pay on the settlement
date may be in excess of the market value of the municipal securities on that
date. While securities may be sold prior to the settlement date, the Portfolio
intends to purchase these securities with the purpose of actually acquiring
them unless a sale would be desirable for investment reasons. At the time the
Portfolio makes the commitment to purchase a municipal obligation on a when-
issued or delayed delivery basis, it will record the transaction and reflect
the value of the obligation, each day, in determining its net asset value.
This value may fluctuate from day to day in the same manner as values of
municipal obligations otherwise held by the Portfolio. If the seller defaults
in the sale, the Portfolio could fail to realize the appreciation, if any,
that had occurred. The Portfolio will establish a segregated account with its
Custodian in which it will maintain cash and liquid, high-grade debt
obligations equal in value to its commitments for when-issued or delayed
delivery securities.
THE PORTFOLIO MAY ALSO PURCHASE MUNICIPAL FORWARD CONTRACTS. A MUNICIPAL
FORWARD CONTRACT IS A MUNICIPAL SECURITY WHICH IS PURCHASED ON A WHEN-ISSUED
BASIS WITH DELIVERY TAKING PLACE UP TO FIVE YEARS FROM THE DATE OF PURCHASE.
No interest will accrue on the security prior to the delivery date. The
investment adviser will monitor the liquidity, value, credit quality and
delivery of the security under the supervision of the Board of Directors.
THE PORTFOLIO MAY PURCHASE SECONDARY MARKET INSURANCE ON MUNICIPAL
SECURITIES WHICH IT HOLDS OR ACQUIRES. Secondary market insurance would be
reflected in the market value of the municipal obligation purchased and may
enable the Portfolio to dispose of a defaulted security at a price similar to
that of comparable municipal securities which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor.
While insurance coverage for the securities held by the Portfolio reduces
credit risk by providing that the insurance company will make timely payment
of principal and interest if the issuer defaults on its obligation to make
such payment, it does not afford protection against fluctuation in the price,
i.e., the market value of the municipal securities caused by changes in
interest rates and other factors, nor in turn against fluctuations in the net
asset value of the shares of the Portfolio.
SPECIAL CONSIDERATIONS
The recent national recession has severely affected several sectors of the
national economy. As a result, the ability of a State and its local
governmental entities to raise revenues sufficient to pay certain obligations
may be impaired. If an issuer of any municipal security is unable to meet its
financial obligations for whatever reason, the income derived by the
Portfolio, the ability to preserve or realize appreciation of the Portfolio's
capital and its liquidity could be adversely affected.
The Portfolio is "non-diversified" so that more than 5% of its total assets
may be invested in the securities of one or more issuers. Investment in a non-
diversified portfolio involves greater risk than investment in a diversified
portfolio because a loss resulting from the default of a single issuer may
represent a greater portion of the total assets of a non-diversified
portfolio.
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RISK FACTORS RELATING TO INVESTING IN HIGH YIELD MUNICIPAL SECURITIES
FIXED-INCOME SECURITIES ARE SUBJECT TO THE RISK OF AN ISSUER'S INABILITY TO
MEET PRINCIPAL AND INTEREST PAYMENTS ON THE SECURITIES (CREDIT RISK) AND MAY
ALSO BE SUBJECT TO PRICE VOLATILITY DUE TO SUCH FACTORS AS INTEREST RATE
SENSITIVITY, MARKET PERCEPTION OF THE CREDITWORTHINESS OF THE ISSUER AND
GENERAL MARKET LIQUIDITY (MARKET RISK). LOWER-RATED OR UNRATED (I.E., HIGH
YIELD) SECURITIES, COMMONLY KNOWN AS JUNK BONDS, ARE MORE LIKELY TO REACT TO
DEVELOPMENTS AFFECTING MARKET AND CREDIT RISK THAN ARE MORE HIGHLY-RATED
SECURITIES, WHICH REACT PRIMARILY TO MOVEMENTS IN THE GENERAL LEVEL OF
INTEREST RATES. The investment adviser considers both credit risk and market
risk in making investment decisions for the Portfolio. Investors should
carefully consider the relative risks of investing in high yield municipal
securities and understand that such securities are not generally meant for
short-term investing.
The amount of high yield securities outstanding proliferated in the 1980's
in conjunction with the increase in merger and acquisition and leveraged
buyout activity. An economic downturn could severely affect the ability of
highly leveraged issuers to service their debt obligations or to repay their
obligations upon maturity. In addition, the secondary market for high yield
securities, which is concentrated in relatively few market makers, may not be
as liquid as the secondary market for more highly rated securities. Under
adverse market or economic conditions, the secondary market for high yield
securities could contract further, independent of any specific adverse changes
in the condition of a particular issuer. As a result, the investment adviser
could find it more difficult to sell these securities or may be able to sell
the securities only at prices lower than if such securities were widely
traded. Prices realized upon the sale of such lower rated or unrated
securities, under these circumstances, may be less than the prices used in
calculating the Portfolio's net asset value.
If an issuer calls a security for redemption, the Portfolio may have to
replace the security with a lower yielding security, resulting in a decreased
return for investors. If the Portfolio experiences unexpected net redemptions,
it may be forced to sell its higher quality securities, resulting in a decline
in the overall credit quality of the portfolio and increasing its exposure to
the risks of high yield securities.
HEDGING AND INCOME ENHANCEMENT STRATEGIES
THE PORTFOLIO MAY ALSO ENGAGE IN VARIOUS PORTFOLIO STRATEGIES TO REDUCE
CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO ENHANCE INCOME, BUT NOT FOR
SPECULATION. These strategies include the use of futures contracts and options
thereon. The Portfolio's ability to use these strategies may be limited by
market conditions, regulatory limits and tax considerations and there can be
no assurance that any of these strategies will succeed.
FUTURES CONTRACTS AND OPTIONS THEREON
THE PORTFOLIO IS AUTHORIZED TO PURCHASE AND SELL CERTAIN FINANCIAL FUTURES
CONTRACTS (FUTURES CONTRACTS) AND OPTIONS THEREON (I) TO HEDGE ITS SECURITIES
AGAINST FLUCTUATIONS IN VALUE CAUSED BY CHANGES IN PREVAILING MARKET INTEREST
RATES; (II) TO HEDGE AGAINST THE RISK OF BONDS BEING CALLED; (III) TO HEDGE
AGAINST INCREASES IN THE COST OF SECURITIES THE PORTFOLIO INTENDS TO PURCHASE;
AND (IV) TO CREATE A "SYNTHETIC" SECURITY THAT WILL FIT INTO ONE OF THE
MATURITY CATEGORIES. THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS ON
FUTURES CONTRACTS BY THE PORTFOLIO INVOLVES ADDITIONAL TRANSACTION COSTS AND
IS SUBJECT TO VARIOUS OTHER RISKS.
A FUTURES CONTRACT OBLIGATES THE SELLER OF A CONTRACT TO DELIVER TO THE
PURCHASER OF A CONTRACT CASH EQUAL TO A SPECIFIC DOLLAR AMOUNT TIMES THE
DIFFERENCE BETWEEN THE VALUE OF A SPECIFIC FIXED-INCOME SECURITY OR INDEX AT
THE CLOSE OF THE LAST TRADING DAY OF THE CONTRACT AND THE PRICE AT WHICH THE
AGREEMENT IS MADE OR AN AGREED AMOUNT OF A SPECIFIC FIXED-INCOME SECURITY. NO
PHYSICAL DELIVERY OF THE UNDERLYING SECURITIES IS MADE. The Portfolio will
engage in transactions in only those futures contracts and options thereon
that are traded on a commodities exchange or a board of trade.
The Portfolio intends to engage in futures contracts and options on futures
contracts as a hedge against changes resulting from market conditions in the
value of securities which are held by the Portfolio or which the Portfolio
intends to purchase,
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in accordance with the rules and regulations of the Commodity Futures Trading
Commission. The Portfolio also intends to engage in such transactions when
they are economically appropriate for the reductions of risks inherent in the
ongoing management of the Portfolio.
THE PORTFOLIO MAY NOT PURCHASE OR SELL FUTURES CONTRACTS OR OPTIONS THEREON
IF, IMMEDIATELY THEREAFTER, (I) IN THE CASE OF SUCH PURCHASES AND SALES FOR
INCOME ENHANCEMENT OR RISK MANAGEMENT PURPOSES, THE SUM OF THE AMOUNT OF
INITIAL MARGIN DEPOSITS ON THE PORTFOLIO'S FUTURES CONTRACTS AND PREMIUMS PAID
FOR OPTIONS THEREON WOULD EXCEED 5% OF THE LIQUIDATION VALUE OF THE
PORTFOLIO'S TOTAL ASSETS OR (II) THE SUM OF INITIAL AND NET CUMULATIVE
VARIATION MARGIN ON OUTSTANDING FUTURES CONTRACTS, TOGETHER WITH PREMIUMS PAID
FOR OPTIONS THEREON, WOULD EXCEED 20% OF THE TOTAL ASSETS OF THE PORTFOLIO.
There are no limitations on the percentage of the portfolio which may be
hedged and no limitations on the use of the Portfolio's assets to cover
futures contracts and options thereon, except that the aggregate value of the
obligations underlying put options will not exceed 50% of the Portfolio's
assets. Certain requirements for qualification as a regulated investment
company under the Internal Revenue Code may limit the Portfolio's ability to
engage in futures contracts and options thereon. See "Taxes" in the Statement
of Additional Information.
Currently, futures contracts are available on several types of fixed-income
securities, including U.S. Treasury Bonds and Notes, Government National
Mortgage Association modified pass-through mortgage-backed securities, three-
month U.S. Treasury Bills and bank certificates of deposit. Futures contracts
are also available on a municipal bond index, based on The Bond Buyer
Municipal Bond Index, an index of 40 actively traded municipal bonds. The
Portfolio may also engage in transactions in other futures contracts that
become available, from time to time, in other fixed-income securities or
municipal bond indices and in other options on such contracts if the
investment adviser believes such contracts and options would be appropriate
for hedging the Portfolio's investments.
THE PORTFOLIO MAY INVEST IN A SECURITY WITH A MATURITY GREATER THAN EIGHT
YEARS AND SIMULTANEOUSLY HEDGE THE PRICE VOLATILITY BY SELLING FUTURES
CONTRACTS IN SUFFICIENT AMOUNTS SUCH THAT THE THEORETICAL PRICE VOLATILITY OF
THE COMBINED SECURITY/FUTURES POSITION WILL BE APPROXIMATELY THAT OF A
MUNICIPAL SECURITY WITH A MATURITY OF EIGHT YEARS OR LESS. IN THIS MANNER, THE
INVESTMENT ADVISER WILL CREATE A "SYNTHETIC SECURITY." SUCH SYNTHETIC
SECURITIES MAY BE INVESTMENT GRADE, BUT ARE MORE COMMONLY RATED LOWER-QUALITY.
The Portfolio's investment adviser intends to invest in such synthetic
securities when, in its opinion, the Portfolio will realize greater market
liquidity, lower transaction costs, greater expected capital appreciation or
enhanced preservation of capital or higher yield. Once the effective maturity
of the security is below eight years, the investment adviser may close out the
futures contract.
THERE IS NO ASSURANCE THAT SYNTHETIC POSITIONS WILL TRADE LIKE COMPARABLE
ACTUAL SECURITIES. ANY USE OF FUTURES CONTRACTS INVOLVES THE RISK OF IMPERFECT
CORRELATION IN MOVEMENTS IN THE PRICE OF THE FUTURES CONTRACTS AND THE
MOVEMENTS IN THE PRICE OF THE SECURITY BEING HEDGED. FURTHERMORE, THE
PORTFOLIO'S ABILITY TO CREATE SYNTHETIC SECURITIES IS SUBJECT TO VARIOUS OTHER
LIMITATIONS. See "Special Risk of Hedging and Income Enhancement Strategies"
below.
SPECIAL RISKS OF HEDGING AND INCOME ENHANCEMENT STRATEGIES
THERE CAN BE NO ASSURANCE THAT VIABLE MARKETS WILL CONTINUE OR THAT A LIQUID
SECONDARY MARKET WILL EXIST TO TERMINATE ANY PARTICULAR FUTURES CONTRACT AT
ANY SPECIFIC TIME. If it is not possible to close a futures position entered
into by the Portfolio, the Portfolio would continue to be required to make
daily cash payments of variation margin in the event of adverse price
movements. In such a situation, if the Portfolio had insufficient cash, it
might have to sell portfolio securities to meet daily variation margin
requirements at a time when it might be disadvantageous to do so. The
inability to close futures positions also could have an adverse impact on the
ability of the Portfolio to hedge effectively. There is also a risk of loss by
the Portfolio of margin deposits in the event of bankruptcy of a broker with
whom it has an open position in a futures contract.
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THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS BY
THE PORTFOLIO IS SUBJECT TO ADDITIONAL TRANSACTION COSTS AND VARIOUS
ADDITIONAL RISKS. Any use of futures transactions involves the risk of
imperfect correlation in movements in the price of futures contracts and
movements in interest rates and, in turn, the prices of the securities that
are the subject of the hedge. If the price of the futures contract moves more
or less than the price of the security that is the subject of the hedge, the
Portfolio will experience a gain or loss that will not be completely offset by
movements in the price of the security. The risk of imperfect correlation is
greater where the securities underlying futures contracts are taxable
securities (rather than municipal securities), are issued by companies in
different market sectors or have different maturities, ratings or geographic
mixes than the security being hedged. In addition, the correlation may be
affected by additions to or deletions from the index which serves as the basis
for a futures contract. Also, there is the risk of the possible need to defer
closing out certain hedged positions to avoid adverse tax consequences.
Finally, if the price of the security that is subject to the hedge has moved
in a favorable direction, the advantage to the Fund would be partially offset
by the loss incurred on the futures contract.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Portfolio may on occasion enter into repurchase agreements whereby the
seller of a security agrees to repurchase that security from the Portfolio 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 Portfolio's
money is invested in the security. The Portfolio'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 Portfolio will require additional
collateral. If the seller defaults and the value of the collateral securing
the repurchase agreement declines, the Portfolio may incur a loss. The
Portfolio 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 "Investment Objective and Policies--Other Investments
Applicable to Both Portfolios--Repurchase Agreements" in the Statement of
Additional Information.
ILLIQUID SECURITIES
The Portfolio 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 contractual restrictions on resale.
Municipal lease obligations that have a readily available market are not
considered illiquid for the purposes of this limitation. The investment
adviser will monitor the liquidity of municipal lease obligations under the
supervision of the Trustees. Repurchase agreements subject to demand are
deemed to have a maturity equal to the notice period. See "Investment
Objectives and Policies--Illiquid Securities" in the Statement of Additional
Information.
SECURITIES LENDING
The Portfolio 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 Portfolio 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 Portfolio an amount
equivalent to any dividend or interest paid on such
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securities and the Portfolio 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 Portfolio cannot lend more
than 30% of the value of its total assets.
BORROWING
The Portfolio may borrow an amount equal to no more than 20% of the value of
its total assets (computed at the time the loan is made) from banks for
temporary, extraordinary or emergency purposes or for the clearance of
transactions. The Portfolio may pledge up to 20% of its total assets to secure
these borrowings. The Portfolio will not purchase portfolio securities if its
borrowings exceed 5% of its net assets.
PORTFOLIO TURNOVER
The Portfolio does not expect to trade in securities for short-term gain. It
is anticipated that the annual portfolio turnover rate will not exceed 150%.
High portfolio turnover may involve correspondingly greater transaction costs,
which will be borne by the Portfolio. The portfolio turnover rate is calculated
by dividing the lesser of sales or purchases of portfolio securities by the
average monthly value of the Portfolio's portfolio securities, excluding
securities having a maturity at the date of purchase of one year or less.
INVESTMENT RESTRICTIONS
The Portfolio is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies may
not be changed without the approval of the holders of a majority of the
Portfolio'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 FUND HAS A BOARD OF DIRECTORS WHICH, IN ADDITION TO OVERSEEING THE
ACTIONS OF THE FUND'S MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW,
DECIDES 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.
The Portfolio is responsible for the payment of certain fees and expenses
including, among others, the following: (i) management and distribution fees;
(ii) the fees of unaffiliated Directors, (iii) the fees of the Portfolio's
Custodian and Transfer and Dividend Disbursing Agent; (iv) the fees of the
Portfolio's legal counsel and independent accountants; (v) brokerage
commissions incurred in connection with portfolio transactions; (vi) all taxes
and charges of governmental agencies; (vii) the reimbursement of organizational
expenses; and (viii) expenses related to shareholder communications.
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 .40 OF 1% OF THE AVERAGE DAILY NET ASSETS
OF THE PORTFOLIO. IT WAS INCORPORATED IN MAY 1987 UNDER THE LAWS OF THE STATE
OF DELAWARE.
As of March 31, 1994, PMF served as the manager to 37 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 29 closed-end investment companies. These companies have
aggregate assets of approximately [$51] billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF EACH PORTFOLIO OF THE FUND AND ALSO ADMINISTERS THE FUND'S
CORPORATE AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A 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
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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.
Jerry A. Webman, a Managing Director of PIC, sets broad investment
strategies which are then implemented by the portfolio manager. The current
portfolio manager of the Portfolio is Marie Conti, an Investment Associate of
PIC. Ms. Conti has responsibility for the day-to-day management of the
Portfolio's investments. Ms. Conti has managed the portfolios of the
Prudential Municipal Bond Fund (Modified Term Series) since 1990 and the
Prudential Municipal Series Fund (Florida Series, Georgia Series, Maryland
Series and North Carolina Series) since October 1991. She has been employed by
PIC as a portfolio manager since September 1989 and prior thereto was employed
in an administrative capacity at PIC since August 1988.
PMF and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America (Prudential), a major diversified insurance and
financial services company.
DISTRIBUTOR
PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC. (PMFD), ONE SEAPORT PLAZA, NEW
YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE
OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS A SHARES OF THE
PORTFOLIO. IT IS A WHOLLY-OWNED SUBSIDIARY OF PMF.
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), 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 B AND
CLASS C SHARES OF THE PORTFOLIO. 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 PORTFOLIO
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
PORTFOLIO'S CLASS A, CLASS B AND CLASS C SHARES. These expenses include
commissions and account servicing fees paid to, or on account of, financial
advisers of Prudential Securities and Pruco Securities Corporation (Prusec),
affiliated broker-dealers, 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 Portfolio shares, including lease,
utility, communications and sales promotion expenses. The State of Texas
requires that shares of the Portfolio may be sold in that state only by
dealers or other financial institutions which are registered there as broker-
dealers.
Under the Plans, the Portfolio 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
Portfolio 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 PORTFOLIO MAY PAY PMFD FOR ITS DISTRIBUTION-
RELATED EXPENSES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE OF .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
fees payable under the Class A Plan to .10 of 1% of the average daily net
assets of the Class A shares for the fiscal year ending December 31, 1994.
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UNDER THE CLASS B AND CLASS C PLANS, THE PORTFOLIO MAY PAY PRUDENTIAL
SECURITIES FOR ITS DISTRIBUTION-RELATED EXPENSES WITH RESPECT TO CLASS B AND
CLASS C SHARES AT AN ANNUAL RATE OF UP TO .75 OF 1% AND 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) a
service fee of up to .25 of 1% of the average daily net assets of the Class B
shares, and (ii) total distribution fees (including the service fee of .25 of
1%) may not exceed .75 of 1%. 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 and Class C Plans to .50
of 1% and .75 of 1%, respectively, of the average daily net assets of the
Class B and Class C shares for the fiscal year ending December 31, 1994.
Prudential Securities also receives contingent deferred sales charges from
certain redeeming shareholders. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges."
No Class A, Class B or Class C shares of the Portfolio were outstanding for
the fiscal year ended December 31, 1993. The Portfolio records all payments
made under the Plans as expenses in the calculation of net investment income.
Distribution expenses attributable to the sale of shares of the Portfolio
will be allocated to each class based upon the ratio of sales of each class to
the sales of all shares of the Portfolio 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 Board of Directors of the Fund, including a
majority of the Directors 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 Directors), vote annually to continue the Plan. Each
Plan may be terminated at any time by vote of a majority of the Rule 12b-1
Directors or of a majority of the outstanding shares of the applicable class
of the Portfolio. The Portfolio 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 Portfolio under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments to dealers and other persons who distribute shares of the
Portfolio. Such payments are calculated by reference to the net asset value of
shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc., governing maximum sales charges. See "Distributor"
in the Statement of Additional Information.
FEE WAIVER AND SUBSIDY
PMF may from time to time agree to waive its management fee (or a portion
thereof) and subsidize certain operating expenses of the Portfolio. See "Fund
Expenses." PMF voluntarily has agreed to waive 100% of its management fee and
subsidize all operating expenses of the Class A, Class B and Class C shares of
the Portfolio for the fiscal year ending December 31, 1994. The Portfolio is
not required to reimburse PMF for such fee waiver or expense subsidy. PMFD has
agreed to limit its distribution fees to .10 of 1% of the average daily net
assets of the Class A shares for the fiscal year ending December 31, 1994.
Prudential Securities has agreed to limit its distribution fees to .50 of 1%
and .75 of 1% of the average daily net assets of the Class B shares and Class
C shares, respectively, for the fiscal year ending December 31, 1994. Fee
waivers and expense subsidies will increase the Portfolio's yield and total
return.
PORTFOLIO TRANSACTIONS
Prudential Securities may also act as a broker or futures commission
merchant for the Portfolio, provided that the commissions, fees or other
remuneration it receives are fair and reasonable. See "Portfolio Transactions
and Brokerage" in the Statement of Additional Information.
14
<PAGE>
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Portfolio's 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. (PMFS), 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 Portfolio. PMFS
is a wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005,
New Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE PORTFOLIO'S NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY
SUBTRACTING ITS LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE
REMAINDER BY THE NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY
FOR EACH CLASS. THE BOARD OF DIRECTORS HAS FIXED THE SPECIFIC TIME OF DAY FOR
THE COMPUTATION OF THE PORTFOLIO'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 Board of Directors. Securities may also be valued
based on values provided by a pricing service. See "Net Asset Value" in the
Statement of Additional Information.
The Portfolio 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 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.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
dividends. The NAV of Class B and Class C shares will generally be lower than
the NAV of Class A shares as a result of the larger distribution-related fee
to which Class B and Class C shares are subject. It is expected, however, that
the NAV of the three classes will tend to converge immediately after the
recording of dividends, which 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 PORTFOLIO MAY ADVERTISE ITS "YIELD", "TAX EQUIVALENT
YIELD" AND "TOTAL RETURN" (INCLUDING "AVERAGE ANNUAL" TOTAL RETURN AND
"AGGREGATE" TOTAL RETURN) IN ADVERTISEMENTS OR SALES LITERATURE. YIELD, TAX
EQUIVALENT 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 Portfolio 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 "tax equivalent yield" is calculated
similarly to the "yield," except that the yield is increased using a stated
income tax rate to demonstrate the taxable yield necessary to produce an
after-tax equivalent to the Portfolio. The "total return" shows how much an
investment in the Portfolio would have increased (decreased) over a specified
period of time (i.e., one, five or ten years or since inception of the
Portfolio) assuming that all
15
<PAGE>
distributions and dividends by the Portfolio 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 that may be payable upon redemption. The
Portfolio also may include comparative performance information in advertising
or marketing the shares of the Portfolio. Such performance information may
include data from Lipper Analytical Services, Inc., other industry
publications, business periodicals and market indices. See "Performance
Information" in the Statement of Additional Information. The Portfolio will
include performance data for each class of shares of the Portfolio in any
advertisement or information including performance data of the Portfolio.
Further performance information is contained in the Fund's annual and semi-
annual reports to shareholders, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE PORTFOLIO WILL ELECT TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED (THE INTERNAL REVENUE CODE). ACCORDINGLY, THE PORTFOLIO WILL NOT BE
SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME AND CAPITAL
GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. To the extent not
distributed by the Portfolio, net taxable investment income and capital gains
and losses are taxable to the Portfolio. See "Taxes" in the Statement of
Additional Information.
To the extent the Portfolio invests in taxable obligations, it will earn
taxable investment income. Also, to the extent the Portfolio sells securities
or engages in hedging transactions in futures contracts and options thereon,
it may earn both short-term and long-term capital gain or loss.
Under the Internal Revenue Code, special rules apply to the treatment of
certain options and futures contracts (Section 1256 contracts). At the end of
each year, such investments held by the Portfolio will be required to be
"marked to market" for federal income tax purposes, that is, treated as having
been sold at market value. Sixty percent of any gain or loss recognized on
these "deemed sales" and on actual dispositions will be treated as long-term
capital gain or loss, and the remainder will be treated as short-term capital
gain or loss. Gain or loss realized by the Portfolio from the sale of
securities generally will be treated as capital gain or loss; however, gain
from the sale of certain securities (including municipal obligations) will be
treated as ordinary income to the extent of any "market discount." Market
discount generally is the difference, if any, between the price paid by the
Portfolio for the security and the principal amount of the security (or, in
the case of a security issued at an original issue discount, the revised issue
price of the security). The market discount rule does not apply to any
security that was acquired by the Portfolio at its original issue. See "Taxes"
in the Statement of Additional Information.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the
Portfolio will flow through as tax-exempt interest to its shareholders
provided that 50% or more of the value of its assets at the end of each
quarter of its taxable year is invested in municipal bonds and notes and other
obligations, the interest on which is excluded from gross income for federal
income tax purposes. During normal market conditions, substantially all of the
Portfolio's total assets will be invested in such obligations. See "How the
Fund Invests--Investment Objective and Policies."
16
<PAGE>
Dividends out of net taxable investment income, if any, together with
distributions of net short-term capital gains in excess of net long-term
capital losses, 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
currently 28%. The maximum long-term capital gains rate for corporate
shareholders currently is the same as the maximum tax rate for ordinary
income.
Any gain or loss realized upon a sale or redemption of Portfolio shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held for more than one year and
otherwise as short-term capital gain or loss. Any such loss, however, on
shares that are held for six months or less will be treated as long-term
capital loss to the extent of any capital gain distributions received by the
shareholder. In addition, any short-term capital loss will be disallowed to
the extent of any tax-exempt dividends received by the shareholders on shares
that are held for six months or less.
Interest on indebtedness incurred or continued to purchase or carry shares
of the Portfolio will not be deductible for federal or state purposes.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE PORTFOLIO. Tax-exempt interest from certain
municipal obligations (i.e., certain private activity bonds issued after
August 7, 1986) will be treated as an item of tax preference for purposes of
the alternative minimum tax. The Portfolio anticipates that, under regulations
to be promulgated, items of tax preference incurred by the Portfolio will be
attributed to the Portfolio's shareholders, although some portion of such
items could be allocated to the Portfolio itself. Depending upon each
shareholder's individual circumstances, the attribution of items of tax
preference incurred by the Portfolio could result in liability for the
shareholder for the alternative minimum tax. Similarly, the Portfolio could be
liable for the alternative minimum tax for items of tax preference attributed
to it. The Portfolio is permitted to invest in municipal obligations of the
type that will produce items of tax preference.
Corporate shareholders in the Portfolio may incur a preference item known as
the "adjustment for current earnings" and corporate shareholders should
consult with their tax advisers with respect to this potential preference
item.
The Fund has obtained an opinion of counsel to the effect that the
conversion of Class B shares into Class A shares does not constitute a taxable
event for U.S. income tax purposes. However, such opinion is not binding on
the Internal Revenue Service.
Shareholders are advised to consult their own tax advisers regarding
specific questions as to federal, state or local taxes.
WITHHOLDING TAXES
Under U.S. Treasury Regulations, the Portfolio is required to withhold and
remit to the U.S. Treasury 31% of redemption proceeds 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). Withholding
also is required on taxable dividends and capital gains distributions made by
the Portfolio unless it is reasonably expected that at least 95% of the
distributions of the Portfolio are comprised of tax-exempt dividends.
DIVIDENDS AND DISTRIBUTIONS
THE PORTFOLIO EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY NET
CAPITAL GAINS. Dividends and distributions paid by the Portfolio with respect
to each class of shares, to the extent any dividends or distributions 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 and service fees, generally resulting in lower dividends for
Class B and Class C shares. Distributions of net capital gains, if any, will
be paid in the same amount for each class of shares. See "How the Fund Values
its Shares."
17
<PAGE>
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE
PORTFOLIO, BASED ON THE NAV OF EACH CLASS ON THE PAYMENT DATE, OR SUCH OTHER
DATE AS THE DIRECTORS 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
Prudential Mutual Fund Services, Inc., Attention: Account Maintenance, P.O.
Box 15015, New Brunswick, New Jersey 08906-5015. 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. If
you hold shares through Prudential Securities, you should contact your
financial adviser to elect to receive dividends and distributions in cash.
Any distributions of net capital gains paid shortly after a purchase by an
investor will have the effect of reducing the per share net asset value of the
investor's shares by the per share amount of the distributions. Such
distributions, although in effect a return of invested principal, are subject
to federal income taxes. Accordingly, prior to purchasing shares of the
Portfolio, an investor should carefully consider the impact of capital gains
distributions which are expected to be or have been announced.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
THE FUND WAS INCORPORATED IN MARYLAND ON JUNE 8, 1988. THE FUND IS
AUTHORIZED TO ISSUE 500 MILLION SHARES OF COMMON STOCK, $.01 PAR VALUE PER
SHARE, DIVIDED INTO THREE CLASSES FOR EACH PORTFOLIO, DESIGNATED CLASS A,
CLASS B AND CLASS C COMMON STOCK, EACH OF WHICH CONSISTS OF 83 1/3 MILLION
AUTHORIZED SHARES. Each class of common stock 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 Managed--Distributor." The Fund has received an
order from the SEC permitting the issuance and sale of multiple classes of
common stock. Currently, the Portfolio is offering three classes designated
Class A, Class B and Class C shares. In accordance with the Fund's Articles of
Incorporation, the Board of Directors may authorize the creation of additional
series of common stock and classes within such series, with such preferences,
privileges, limitations and voting and dividend rights as the Board of
Directors may determine.
The Board of Directors may increase or decrease the number of authorized
shares without approval by the shareholders. 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 "Shareholder Guide--How to Sell Your
Shares." Each share of each class of common stock is equal as to earnings,
assets and voting privileges, except as noted above and each class bears the
expenses related to the distribution of its shares. Except for the conversion
feature applicable to the Class B shares, there are no conversion, preemptive
or other subscription rights. In the event of liquidation, each share of
common stock in each portfolio 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 Directors.
THE FUND DOES NOT INTEND TO HOLD SHAREHOLDERS MEETINGS UNLESS OTHERWISE
REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF DIRECTORS IS REQUIRED TO BE
ACTED ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. 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 DIRECTORS OR TO TRANSACT ANY OTHER BUSINESS.
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<PAGE>
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
INITIAL OFFERING OF SHARES
During a subscription period (the Subscription Period) currently expected to
commence on or about [ , 1994 and to end on or about , 1994,
Prudential Securities, as subscription agent, will solicit subscriptions for
shares of the Portfolio. Shares will be offered to investors at a maximum
offering price of $[ ] per share, which is inclusive of the maximum sales
charge of 3.25% (3.36% of the net amount invested) for the Class A Shares.
Class B and Class C Shares will be offered to investors at the net asset value
of $10.00 per share. Investors that place orders for shares of $100,000 or more
will pay a reduced sales charge. See "Continuous Offering of Shares." Shares of
the Portfolio subscribed for under the Subscription Period will be issued on a
closing date (which is expected to occur on the business day after the end of
the Subscription Period).
Prudential Securities will notify each investor of the end of the
Subscription Period and payment will be due within five days thereafter. If any
orders received during the Subscription Period are accompanied by payment, such
payment will be returned unless instructions have been received authorizing
investment in a money market fund. All such moneys received and invested in a
money market fund, including any dividends received on these funds, will be
automatically invested in the Portfolio on the closing date without any further
action by the investor. Shareholders who purchase their shares during the
Subscription Period will not receive stock certificates. The minimum initial
investment during the Subscription Period for Class A and Class B shares is
$1,000 per class and $5,000 for Class C shares, except that there are no
minimum investment requirements for certain retirement and employee savings
plans or custodial accounts for the benefit of minors.
Subscribers for shares will not have any of the rights of a shareholder of
the Fund until the shares subscribed for have been paid for and their issuance
has been reflected in the books of the Fund. The Fund reserves the right to
withdraw, modify or terminate the initial offering without notice and to refuse
any order in whole or in part.
CONTINUOUS OFFERING OF SHARES
THE PORTFOLIO EXPECTS TO COMMENCE A CONTINUOUS OFFERING OF ITS SHARES ON
[ , 1994]. YOU MAY PURCHASE SHARES OF THE PORTFOLIO THROUGH PRUDENTIAL
SECURITIES, PRUSEC OR DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT,
PRUDENTIAL MUTUAL FUND SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION:
INVESTMENT SERVICES, P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The
minimum initial investment for Class A and Class B shares is $1,000 per class
and $5,000 for Class C shares. The minimum subsequent investment is $100 for
all classes. All minimum investment requirements are waived for certain
retirement and employee savings plans or custodial accounts for the benefit of
minors. For purchases made through the Automatic Savings Accumulation Plan, the
minimum initial and subsequent investment is $50. See "Shareholder Services"
below.
AN INVESTMENT IN THE PORTFOLIO MAY NOT BE APPROPRIATE FOR TAX-EXEMPT OR TAX-
DEFERRED INVESTORS. SUCH INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS.
THE PURCHASE PRICE IS THE NAV NEXT DETERMINED FOLLOWING RECEIPT OF AN ORDER
BY THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE WHICH, AT
YOUR OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS A SHARES)
OR (II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). SEE "ALTERNATIVE
PURCHASE PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES."
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<PAGE>
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 stock
certificates.
The Fund reserves the right to reject any purchase order (including an
exchange) or to suspend or modify the continuous offering of its shares. See
"How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
Transactions in Fund shares may be subject to postage and handling charges
imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Portfolio 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 (State Street), Boston, Massachusetts, Custody and Shareholder
Services Division, Attention: Prudential Structured Maturity Fund, Inc.
(Municipal Income Portfolio), 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
Portfolio 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 Structured
Maturity Fund, Inc. (Municipal Income Portfolio), 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 PORTFOLIO 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 .30 of 1% Initial sales charge waived
of 3.25% of the public (Currently being or reduced for certain
offering price charged at a rate purchases
of .10 of 1%)
CLASS B Maximum contingent deferred .75 of 1% Shares convert to Class A
sales charge or CDSC of 3% (Currently being shares approximately five
of the lesser of the amount charged at a rate years after purchase
invested or the redemption of .50 of 1%)
proceeds; declines to zero
after four years
CLASS C Maximum CDSC of 1% of the 1% (Currently Shares do not convert to
lesser of the amount being charged at a another class
invested or the redemption rate of .75 of 1%)
proceeds on redemptions made
within one year of purchase
</TABLE>
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<PAGE>
The three classes of shares represent an interest in the same portfolio of
investments of the Portfolio 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 Common
Stock"), 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 Portfolio
will receive different compensation for selling Class A, Class B and Class C
shares and will generally receive more compensation initially for selling
Class A and Class B shares than for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER
THINGS, (1) the length of time you expect to hold your investment, (2) the
amount of any applicable sales charge (whether imposed at the time of purchase
or redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) the fact 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 [5] years
and do not qualify for a reduced sales charge on Class A shares, you should
consider purchasing Class C shares over either Class A or Class B shares since
Class A shares are subject to an initial sales charge of [3.25%] and Class B
shares are subject to a CDSC of 3% which declines to zero over a 4 year
period.
If you intend to hold your investment for [5] 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 [5] 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 4 years in the case of Class B shares and 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
the period in 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.
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<PAGE>
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial
sales charge alternative is the next determined NAV plus a sales charge
(expressed as a percentage of the offering price and of the amount invested),
imposed on a single transaction 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>
Less than $49,000 3.25% 3.36% 3.00%
$50,000 to $99,999 2.75 2.83 2.50
$100,000 to $249,999 2.25 2.30 2.00
$250,000 to $499,999 1.75 1.78 1.55
$500,000 to $999,999 1.00 1.01 .80
$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 of 1933.
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 acquired pursuant to the exchange privilege) may be
aggregated to determine the applicable reduction. See "Reduction and Waiver of
Initial Sales Charges--Class A Shares" in the Statement of Additional
Information.
Class A shares may be purchased at NAV, without payment of an initial sales
charge, by pension, profit-sharing or other employee benefit plans qualified
under Section 401 of the Internal Revenue Code and deferred compensation and
annuity plans under Sections 457 and 403(b)(7) of the Internal Revenue Code
(Benefit Plans), provided that the plan has existing assets of at least $1
million invested in shares of Prudential Mutual Funds (excluding money market
funds other than those acquired pursuant to the exchange privilege) or 1,000
eligible employees or members. In the case of Benefit Plans whose accounts are
held directly with the Transfer Agent and for which the Transfer Agent does
individual account record keeping (Direct Account Benefit Plans) and Benefit
Plans sponsored by PSI or its subsidiaries (PSI or Subsidiary Prototype
Benefit Plans), Class A shares may be purchased at NAV by participants who are
repaying loans made from such plans to the participant. Additional information
concerning the reduction and waiver of initial sales charges is set forth in
the Statement of Additional Information.
In addition, Class A shares may be purchased at NAV, through Prudential
Securities or the Transfer Agent, by the following persons: (a) Directors and
officers of the Fund and other Prudential Mutual Funds, (b) employees of
Prudential Securities and PMF and their subsidiaries and members of the
families of such persons who maintain an "employee related" account at
Prudential Securities or the Transfer Agent, (c) employees and special agents
of Prudential and its subsidiaries and all persons who have retired directly
from active service with Prudential or one of its subsidiaries, (d) registered
representatives and employees of dealers who have entered into a selected
dealer agreement with Prudential Securities provided that purchases at NAV are
permitted by such person's employer and (e) investors who have a business
relationship with a financial adviser who joined Prudential Securities from
another investment firm, provided that (i) the purchase is made within 90 days
of the commencement of the financial adviser's employment at Prudential
Securities, (ii) the purchase is made with proceeds of a redemption of shares
of any open-end, non-money market fund sponsored by the financial adviser's
previous employer (other than a fund which imposes a distribution or service
fee of .25 of 1% or less) on which no deferred sales load, fee or other charge
was imposed on redemption and (iii) the financial adviser served as the
client's broker on the previous purchases.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation
of your entitlement.
22
<PAGE>
No initial sales charges are imposed upon Class A shares purchased upon the
reinvestment of dividends and distributions. See "Purchase and Redemption of
Fund Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in
the Statement of Additional Information.
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 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 YOUR SHARES 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 from the Class B shares will be
reduced by the amount of any applicable contingent deferred sales charge, as
described below. See "Contingent Deferred Sales Charge" below.
IF YOU HOLD SHARES OF THE PORTFOLIO 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 Preferred
Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR
WRITTEN REQUEST EXCEPT AS INDICATED BELOW. Such payment may be postponed or
the right of redemption suspended at times (a) when the New York Stock
Exchange is closed for other than customary weekends and holidays, (b) when
trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or (d) during any other period when
the SEC, by order, so permits; provided that applicable rules and regulations
of the SEC shall govern as to whether the conditions prescribed in (b), (c) or
(d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL
THE FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS
BEEN HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE
CHECK BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY
WIRE OR BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the Board of Directors determines 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 Portfolio, 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
23
<PAGE>
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 Board of
Directors 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 Portfolio at the NAV
next determined after the order is received, which must be within 30 days after
the date of the redemption. No sales charge will apply to such repurchases. You
will receive pro rata credit for any contingent deferred sales charge paid in
connection with the redemption of your shares. You must notify the Fund's
Transfer Agent, either directly or through Prudential Securities or Prusec, at
the time the repurchase privilege is exercised that you are entitled to credit
for the contingent deferred sales charge previously paid. Exercise of the
repurchase privilege will generally not affect federal income tax treatment of
any gain realized upon redemption. If the redemption results 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 3% to zero over a four-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 dollar amount of all payments by you for shares during the preceding
four years, in the case of Class B shares, and one year, in the case of Class C
shares. A CDSC will be applied on the lesser of the original purchase price or
the current value of the shares being redeemed. Increases in the value of your
shares or shares purchased through reinvestment of dividends or distributions
are not subject to a CDSC. The amount of any contingent deferred sales charge
will be paid to and retained by the Distributor. See "How the Fund is Managed--
Distributor" and "Waiver of the Contingent Deferred Sales Charges--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 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
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------- -------------------------
<S> <C>
First......................................... 3.0%
Second........................................ 2.0%
Third......................................... 1.0%
Fourth........................................ 1.0%
Fifth......................................... 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
24
<PAGE>
to the reinvestment of dividends and distributions; then of amounts
representing the increase in NAV above the total amount of payments for the
purchase of Fund shares made during the preceding four years; 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 net
asset value had appreciated to $12 per share, the value of your Class B shares
would be $1,260 (105 shares at $12 per share). The CDSC would not be applied to
the value of the reinvested dividend shares and the amount which represents
appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500
minus $260) would be charged at a rate of 2.0% (the applicable rate in the
second year after purchase) for a total CDSC of $4.80.
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), 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)(7)
custodial account. These distributions include a lump-sum or other distribution
after retirement or, for an IRA or Section 403(b) custodial account, after
attaining age 59 1/2, a tax-free return of an excess contribution or plan
distributions following the death or disability of the shareholder (provided
that the shares were purchased prior to death or disability). The waiver does
not apply in the case of a tax-free rollover or transfer of assets, other than
one following a separation from service. In the case of Direct Account and PSI
or Subsidiary Prototype Benefit Plans, the CDSC will be waived on redemptions
which represent borrowings from such plans. Shares purchased with amounts used
to repay a loan from such plans on which a CDSC was not previously deducted
will thereafter be subject to a CDSC without regard to the time such amounts
were previously invested. In the case of a 401(k) plan, the CDSC will also be
waived upon the redemption of shares purchased with amounts used to repay loans
made from the account to the participant and from which a CDSC was previously
deducted.
In addition, the CDSC will be waived on redemptions of shares held by
Directors of the Fund.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec, at the time of redemption, that you are entitled to
waiver of the CDSC. The waiver will be granted subject to confirmation of your
entitlement.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately five years after purchase. Conversions will occur during
the month following each calendar quarter and will be effected at relative net
asset value without the imposition of any additional sales charge. It is
currently anticipated that conversions will occur on the first Friday of the
month following each calendar quarter, or, if not a business day, on the next
Friday of the month.
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
[five] 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)
25
<PAGE>
multiplied by the total number of Class B shares then in your account. Each
time any Eligible Shares in your account convert to Class A shares, all shares
or amounts representing Class B shares then in your account that were acquired
through the automatic reinvestment of dividends and other distributions will
convert to Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible
Shares calculated as described above will generally be either more or less than
the number of shares actually purchased approximately [five] 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 [five] 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 six years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase
of such shares. It is currently anticipated that the first conversion of Class
B shares will occur in or about January, 1995. At that time all amounts
representing Class B shares then outstanding beyond the applicable conversion
period will automatically convert to Class A shares together with all shares or
amounts representing Class B shares acquired through the automatic reinvestment
of dividends and distributions then held in your account.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code
and (ii) that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended,
Class B shares of the Fund will continue to be subject, possibly indefinitely,
to their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE PORTFOLIO, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE
OTHER PORTFOLIO OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE
EXCHANGE PRIVILEGE), 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 MAY BE EXCHANGED FOR CLASS A, CLASS B AND CLASS C SHARES,
RESPECTIVELY, OF THE OTHER PORTFOLIO OF THE FUND AND OF ANOTHER FUND ON THE
BASIS OF THE RELATIVE NAV. Any applicable CDSC payable upon the redemption of
shares exchanged will be that imposed by the Fund in which shares are initially
purchased and will be calculated from the first day of the month after the
initial purchase, excluding the time shares were held in a money market fund.
Class B and Class C shares may not be exchanged into money market funds other
than Prudential Special Money Market Fund. For purposes of calculating the
holding period applicable to the Class B conversion feature, the time period
during which Class B shares were held in a money market fund will be excluded.
See "Conversion Feature--Class B Shares" above. If your investment in shares of
26
<PAGE>
Prudential Mutual Funds (excluding money market funds other than those acquired
pursuant to the exchange privilege) reaches $1 million and you then hold Class
B and/or Class C shares of the Fund which are free of CDSC, you will be so
notified and offered the opportunity to exchange those shares for Class A
shares of the Fund without the imposition of any sales charge. In the case of
tax-exempt shareholders, if no response is received within 60 days of the
mailing of such notice, eligible Class B and/or Class C shares will be
automatically exchanged for Class A shares. All other shareholders must
affirmatively elect to have their eligible Class B and/or Class C shares
exchanged for Class A shares. An exchange will be treated as a redemption and
purchase for tax purposes. See "Shareholder Investment Account--Exchange
Privilege" in the Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE THE TELEPHONE
EXCHANGE PRIVILEGE ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE
TRANSFER AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may
call the Fund at (800) 225-1852 to execute a telephone exchange of shares, on
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 MUST 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" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED ABOVE.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in the Portfolio 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 and distributions are automatically
reinvested in full and fractional shares of the Portfolio 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 advisor.
. AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP) Under ASAP, you may make regular
purchases of the Portfolio's shares in amounts as little as $50 via an
automatic debit to a bank account or Prudential Securities account (including a
Command Account). For additional information about this service, you may
contact your Prudential Securities financial adviser, Prusec registered
representative or the Transfer Agent directly.
. SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges."
27
<PAGE>
. 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 upon request from the Fund.
. SHAREHOLDER INQUIRIES. 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.
28
<PAGE>
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
BOND RATINGS
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 edged". 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.
SHORT TERM DEBT
Moody's short term debt ratings are opinions of the ability of issuers to
repay punctually promissory obligations which have an original maturity not
exceeding one year.
P-1: Issuers rated "Prime-1" or "P-1" (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
P-2: Issuers rated "Prime-2" or "P-2" (or supporting institutions) have a
strong ability for repayment of senior short-term debt obligations.
A-1
<PAGE>
P-3: Issuers rated "Prime-3" or "P-3" (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations.
TAX-EXEMPT NOTES
Moody's ratings for tax-exempt notes and other short-term loans are designated
Moody's Investment Grade (MIG). This distinction is in recognition of the
differences between short-term and long-term credit risk.
MIG 1: Loans bearing the designation MIG 1 are of the best quality, enjoying
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2: Loans bearing the designation MIG 2 are of high quality, with margins
of protection ample although not so large as in the preceding group.
MIG 3: Loans bearing the designation MIG 3 are of favorable quality, with all
security elements accounted for but lacking the undeniable strength of the
preceding grades.
MIG 4: Loans bearing the designation MIG 4 are of adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
STANDARD & POOR'S CORPORATION
BOND RATINGS
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
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 highest 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.
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 in higher-rated categories.
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major exposures to adverse
conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
A-2
<PAGE>
CCC: Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC: Debt rated CC typically is applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C: Debt rated C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC--debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
Cl: Debt rated Cl is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market.
A: Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designation 1, 2 and 3 to indicate the relative degree of safety.
A-1: This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with the designation A-2 is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issues carrying this designation have adequate capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B: Issues rated B are regarded as having only speculative capacity for timely
payment.
C: This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
TAX-EXEMPT NOTES
Municipal notes issued after July 29, 1984 are rated SP-1, SP-2 and SP-3.
Municipal notes outstanding on July 29, 1984 carry the same symbols as
municipal bonds. The designation SP-1 indicates a very strong capacity to pay
principal and interest. A "+" is added to those issues determined to possess
overwhelming safety characteristics. An SP-2 designation indicates a
satisfactory capacity to pay principal and interest. An SP-3 designation
indicates speculative capacity to pay principal and interest.
A-3
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the
investment options available through our family of funds. For more information
on the Prudential Mutual Funds, including charges and expenses, contact your
Prudential Securities financial adviser or Prusec registered representative or
telephone the Fund 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
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Municipal Income Portfolio
Prudential U.S. Government Fund
The BlackRockGovernment Income Trust
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund,
Inc.
Prudential IncomeVertible(R) Fund,
Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Strategist Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
. Taxable Money Market Funds
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
. Tax-Free Money Market Funds
Prudential Tax-Free Money Fund
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
. Command Funds
Command Money Fund
Command Government Fund
Command Tax-Free Fund
. Institutional Money Market Funds
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
B-1
<PAGE>
P
R
O
S
P
E
C
T
U
S
, 1994
- --------------------------------------------------------------------------------
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 solicita-
tion of any offer to buy any of the securities offered hereby in any jurisdic-
tion to any person to whom it is unlawful to make such offer in such jurisdic-
tion.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS............................................................ 2
FUND EXPENSES.............................................................. 4
HOW THE FUND INVESTS....................................................... 5
Investment Objective and Policies......................................... 5
Hedging and Income Enhancement Strategies................................. 9
Other Investments and Policies............................................ 11
Investment Restrictions................................................... 12
HOW THE FUND IS MANAGED.................................................... 12
Manager................................................................... 12
Distributor............................................................... 13
Portfolio Transactions.................................................... 14
Custodian and Transfer and Dividend Disbursing Agent...................... 15
HOW THE FUND VALUES ITS SHARES............................................. 15
HOW THE FUND CALCULATES PERFORMANCE........................................ 15
TAXES, DIVIDENDS AND DISTRIBUTIONS......................................... 16
GENERAL INFORMATION........................................................ 18
Description of Common Stock............................................... 18
Additional Information.................................................... 19
SHAREHOLDER GUIDE.......................................................... 19
How to Buy Shares of the Fund............................................. 19
Alternative Purchase Plan................................................. 20
How to Sell Your Shares................................................... 23
Conversion Feature--Class B Shares........................................ 25
How to Exchange Your Shares............................................... 26
Shareholder Services...................................................... 27
DESCRIPTION OF SECURITY RATINGS............................................ A-1
THE PRUDENTIAL MUTUAL FUND FAMILY.......................................... B-1
</TABLE>
- --------------------------------------------------------------------------------
MF 140A 444131D
- ----------------------------------
Class A: 74430R105
CUSIP Nos.: Class B: 74430R204
Class C:
- ----------------------------------
PRUDENTIAL STRUCTURED
MATURITY FUND, INC.
MUNICIPAL
INCOME PORTFOLIO
<PAGE>
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
- -------------------------------------------------------------------------------
PROSPECTUS DATED , 1994
- -------------------------------------------------------------------------------
Prudential Structured Maturity Fund, Inc. (the Fund), Income Portfolio (the
Portfolio) is one of two separate portfolios of an open-end, diversified
management investment company. The Portfolio's investment objective is high
current income consistent with the preservation of principal. The Portfolio
seeks to achieve its objective primarily through structuring its portfolio by
utilizing a "laddered" maturity strategy. The Portfolio invests in investment
grade corporate debt securities and in obligations of the U.S. Government, its
agencies and instrumentalities with maturities of six years or less. These
securities are allocated by maturity among six annual maturity categories
ranging from one year or less to between five and six years with each category
representing approximately one-sixth of the Portfolio's assets. As the
securities in each annual category mature or as new investments are made in
the Portfolio, the proceeds will be invested to maintain the balance of
investments among the six annual maturity categories. There can be no
assurance that the Portfolio's investment objective will be achieved. See "How
the Fund Invests--Investment Objective and Policies." The Fund's address is
One Seaport Plaza, New York, New York 10292, and its telephone number is (800)
225-1852.
This Prospectus sets forth concisely the information about the Fund and the
Income Portfolio that a prospective investor ought to know before investing.
Additional information about the Fund and the Portfolio has been filed with
the Securities and Exchange Commission in a Statement of Additional
Information, dated , 1994, which information is incorporated herein by
reference (is legally considered a part of this Prospectus) and is available
without charge upon request to the Fund, at the address or telephone number
noted above.
- -------------------------------------------------------------------------------
Investors are advised to read this Prospectus and retain it for future
reference.
- -------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information
contained in the Prospectus and is qualified in its entirety by the more
detailed information appearing elsewhere herein.
WHAT IS PRUDENTIAL STRUCTURED MATURITY FUND, INC.?
Prudential Structured Maturity Fund, Inc. is a mutual fund whose shares are
offered in two portfolios, each of which operates as a separate 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. Only the Income Portfolio is offered
through this Prospectus.
WHAT IS THE PORTFOLIO'S INVESTMENT OBJECTIVE?
The Portfolio's investment objective is high current income consistent with
the preservation of principal. It seeks to achieve this objective primarily
through structuring its portfolio by utilizing a "laddered" maturity strategy.
The Portfolio invests in investment grade corporate debt securities and in
obligations of the U.S. Government, its agencies and instrumentalities with
maturities of six years or less. These securities are allocated by maturity
among six annual maturity categories ranging from one year or less to between
five and six years with each category representing approximately one sixth of
the Fund's assets ("laddered" maturities). See "How the Fund Invests--
Investment Objective and Policies" at page .
WHAT ARE THE PORTFOLIO'S SPECIAL CHARACTERISTICS AND RISKS?
The Portfolio may invest in debt securities of U.S. issuers that have
securities outstanding that are rated at the time of purchase at least "BBB" by
Standard & Poors Corporation (S&P) or "Baa" by Moody's Investors Service
(Moody's) or, if not rated, are of comparable quality in the opinion of the
investment adviser. The Portfolio may invest up to 25% of its net assets in
asset-backed securities and up to 30% of its assets in collateralized mortgage
obligations and real estate mortgage investment conduits. Such investments may
be sensitive to prepayments and interest rates. See "How the Fund Invests--
Investment Objectives and Policies" at page .
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 .40 of 1%
of the Portfolio's average daily net assets. As of March 31, 1994, PMF served
as manager or administrator to 66 investment companies, including 37 mutual
funds, with aggregate assets of approximately $51 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 .
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor of
the Portfolio's Class A shares and is currently paid for its services at an
annual rate of .10 of 1% of the average daily net assets of the Class A shares.
Prudential Securities Incorporated (Prudential Securities or PSI), a major
underwriter and securities and commodities broker, acts as the Distributor of
the Portfolio's Class B and Class C shares and is currently paid for its
services at an annual rate of .85 of 1% and .75 of 1% of the average daily net
assets of the Class B and Class C shares, respectively.
2
<PAGE>
See "How the Fund Is Managed--Distributor" at 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 and "Shareholder Guide--Shareholder
Services" at page .
HOW DO I PURCHASE SHARES?
You may purchase shares of the Portfolio 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 and "Shareholder Guide--How to Buy Shares of the
Fund" at page .
WHAT ARE MY PURCHASE ALTERNATIVES?
The Portfolio offers three classes of shares:
.Class A Shares: Sold with an initial sales charge of up to 3.25% 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
3% to zero of the lower of the amount invested or the
redemption proceeds) which will be imposed on certain
redemptions made within four years of purchase. Although
Class B shares are subject to higher ongoing distribution-
related expenses than Class A shares, Class B shares will
automatically convert to Class A shares (which are subject
to lower ongoing expenses) approximately five 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 .
HOW DO I SELL MY SHARES?
You may redeem shares of the Portfolio 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 .
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Portfolio 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 .
3
<PAGE>
FUND EXPENSES
(INCOME PORTFOLIO)
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- --------------- --------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Sales Load Im-
posed on Purchases (as
a percentage of offer-
ing price)............ 3.25% 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 3% during the first year, 1% on redemptions
decreasing by 1% annually to made within
1% in the third year and one year of
1% in the fourth year and purchase
0% the fifth year*
Redemption Fees........ None None None
Exchange Fee........... None None None
<CAPTION>
ANNUAL FUND OPERATING EX-
PENSES
(AS A PERCENTAGE OF AV- CLASS A CLASS B CLASS C SHARES**
ERAGE NET ASSETS) ------- ------- ----------------
<S> <C> <C> <C>
Management Fees........ .40% .40% .40%
12b-1 Fees+............ .10*** .85++ .75++
Other Expenses......... .30 .30 .30
--- ---- ----
Total Fund Operating
Expenses.............. .80% 1.55% 1.45%
==== ==== ====
</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 re-
turn and (2) redemption at the end of each time
period:
Class A....................................... $40 $57 $75 $128
Class B....................................... $46 $59 $84 $137
Class C**..................................... $25 $46 $79 $174
You would pay the following expenses on the
same investment assuming no redemption:
Class A....................................... $40 $57 $75 $128
Class B....................................... $16 $49 $84 $137
Class C**..................................... $15 $46 $79 $174
</TABLE>
The above examples with respect to Class A shares and Class B shares are based
on data for the Fund's fiscal year ended December 31, 1993 without taking into
account any fee waivers and expense subsidies. The above example with respect
to Class C shares is based on expenses expected to have been incurred if Class
C shares had been in existence during the fiscal year ended December 31, 1993.
The examples 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 an estimate of
operating expenses of the Fund, such as directors' and professional fees,
registration fees, reports to shareholders and transfer agency and custodian
fees.
- ------------
* Class B Shares will automatically convert to Class A shares approximately
five years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."
** Estimated based on expenses expected to have been incurred if Class C
Shares had been in existence during the fiscal year ended December 31,
1993.
*** Although the Class A Distribution and Service Plan provides that the
Portfolio may pay a distribution fee of up to .30 of 1% of the average
daily net assets of the Class B shares, the Distributor has agreed to limit
its distribution fees with respect to the Class A shares of the Fund to no
more than .10 of 1% for the fiscal year ending December 31, 1994.
+ Pursuant to the 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 Portfolio may not exceed 6.25%
of total gross sales, subject to certain exclusions. This 6.25% limitation
is imposed on each class of the Portfolio rather than on a per shareholder
basis. Therefore, long-term Class B and Class C shareholders of the
Portfolio may pay more in total sales charges than the economic equivalent
of 6.25% of such shareholders' investments in such shares. See "How the
Fund Is Managed--Distributor."
++ Although the Class B and C Distribution and Service Plans provide that the
Fund may pay a distribution fee of up to 1% per annum of the average daily
net assets of the Class B and Class C shares, the Distributor has agreed to
limit its distribution fees with respect to Class B and Class C shares of
the Fund to no more than .85 of 1% and .75% of 1% of the average daily net
assets of the Class B and Class C shares, respectively, for the fiscal year
ending December 31, 1994. See "How the Fund Is Managed--Distributor."
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
The following financial highlights have been audited by Deloitte & Touche,
independent accountants, whose report thereon was unqualified. This information
should be read in conjunction with the financial statements and notes thereto,
which appear in the Statement of Additional Information. The following
financial highlights contain selected data for a share of Class A and Class B
common stock outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. No Class C shares were outstanding
during the periods indicated.
<TABLE>
<CAPTION>
CLASS A CLASS B
---------------------------------------------------- -------------------
SEPTEMBER DECEMBER
1, 9,
1989* 1992++
THROUGH YEAR ENDED THROUGH
YEAR ENDED DECEMBER 31, DECEMBER DECEMBER DECEMBER
---------------------------------------- 31, 31, 31,
PER SHARE OPERATING 1993 1992 1991 1990 1989 1993 1992
PERFORMANCE: -------- -------- -------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 11.79 $ 12.13 $ 11.67 $ 11.63 $ 11.61 $ 11.79 $ 11.79
-------- -------- -------- -------- ------- -------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income... .71 .86+ .93+ 1.00+ .35+ .62 .04
Net realized and
unrealized gain (loss)
on investment
transactions........... .12 (.08) .56 .04 .03 .12 --
-------- -------- -------- -------- ------- -------- -------
Total from investment
operations............ .83 .78 1.49 1.04 .38 .74 .04
-------- -------- -------- -------- ------- -------- -------
LESS DISTRIBUTIONS
Dividends from net
investment income...... (.71) (.86) (.93) (1.00) (.35) (.62) (.04)
Distributions from net
realized gains......... (.13) (.26) (.10) -- (.01) (.13) --
-------- -------- -------- -------- ------- -------- -------
Total distributions.... (.84) (1.12) (1.03) (1.00) (.36) (.75) (.04)
-------- -------- -------- -------- ------- -------- -------
Net asset value, end of
period................. $ 11.78 $ 11.79 $ 12.13 $ 11.67 $ 11.63 $ 11.78 $ 11.79
======== ======== ======== ======== ======= ======== =======
TOTAL RETURN#:.......... 7.19% 6.67% 13.35% 9.40% 3.30% 6.38% .32%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000)........... $119,449 $109,828 $109,997 $113,125 $98,414 $123,306 $11,981
Average net assets
(000).................. $114,728 $107,937 $113,010 $107,276 $89,176 $ 69,314 $ 5,474
Ratios to average net
assets:
Expenses, including
distribution fees..... .80% .70%+ .37%+ .13%+ 0%**+ 1.55% 1.67%**
Expenses, excluding
distribution fees..... .70% .60%+ .27%+ .10%+ 0%**+ .70% .82%**
Net investment income.. 5.92% 7.15%+ 7.89%+ 8.67%+ 8.41%**+ 5.08% 6.31%**
Portfolio turnover...... 137% 91% 117% 46% 69% 137% 91%
</TABLE>
- ------------
* Commencement of investment operations..
** Annualized.
+ Net of expense subsidy and/or fee waiver.
++ Commencement of Class B operations.
# Total return does not consider the effect 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 one year are not
annualized.
5
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
THE INVESTMENT OBJECTIVE OF THE FUND IS HIGH CURRENT INCOME CONSISTENT WITH
THE PRESERVATION OF PRINCIPAL. THE FUND SEEKS TO ACHIEVE THIS OBJECTIVE
PRIMARILY THROUGH STRUCTURING ITS PORTFOLIO BY UTILIZING A "LADDERED" MATURITY
STRATEGY. THE FUND INVESTS IN INVESTMENT GRADE CORPORATE DEBT SECURITIES AND
IN OBLIGATIONS OF THE U.S. GOVERNMENT, ITS AGENCIES AND INSTRUMENTALITIES WITH
MATURITIES OF SIX YEARS OR LESS. THESE SECURITIES ARE ALLOCATED BY MATURITY
AMONG SIX ANNUAL MATURITY CATEGORIES RANGING FROM ONE YEAR OR LESS TO BETWEEN
FIVE AND SIX YEARS WITH EACH CATEGORY REPRESENTING APPROXIMATELY ONE-SIXTH OF
THE FUND'S ASSETS ("LADDERED" MATURITIES). AS THE SECURITIES IN EACH ANNUAL
CATEGORY MATURE OR AS NEW INVESTMENTS ARE MADE IN THE FUND, THE PROCEEDS WILL
BE INVESTED TO MAINTAIN THE BALANCE OF INVESTMENTS AMONG THE SIX ANNUAL
MATURITY CATEGORIES. THERE CAN BE NO ASSURANCE THAT SUCH OBJECTIVE WILL BE
ACHIEVED. See "Investment Objective and Policies" in the Statement of
Additional Information.
THE FUND SEEKS TO PROVIDE INVESTORS WITH MORE STABILITY OF PRINCIPAL THAN
LONG-TERM BONDS HAVE HISTORICALLY PROVIDED THROUGH THE STRUCTURED PORTFOLIO
MANAGEMENT STRATEGY OF INVESTING IN SHORT- TO INTERMEDIATE-TERM DEBT
SECURITIES. LADDERING INVESTMENTS AMONG DEBT INSTRUMENTS WITH A RANGE OF
MATURITIES OF FROM ONE YEAR OR LESS TO SIX YEARS PROVIDES AN ADDED DEGREE OF
PORTFOLIO VARIATION, WHICH TENDS TO REDUCE VOLATILITY TO A LEVEL LOWER THAN
THAT EXPERIENCED BY A LONG-TERM BOND FUND. In general, the longer the maturity
of a debt security, the higher the yield and the greater the potential for
price fluctuation. Conversely, shorter maturities generally provide lower
yields but greater principal stability. The prices of fixed-income securities
are likely to vary inversely with interest rates. The Fund has the potential
for high current yields although they may not be as high as those of a long-
term bond fund. The investment adviser has had experience structuring
portfolios with laddered maturities for institutional clients since 1977.
Under normal market circumstances, the Fund will invest its assets in U.S.
Government securities and investment grade corporate debt obligations having
"laddered" maturities ranging from one year or less to six years. The Fund's
investment adviser will allocate assets among the various categories by
maturity and not by type of investment and will continuously monitor each
annual category. The investment adviser will buy and sell portfolio securities
to take advantage of investment opportunities based on its analysis of market
conditions, interest rates and general economic factors, thereby increasing
the Fund's annual portfolio turnover rate. From time to time, the Fund may
also sell portfolio securities to meet redemption requests.
During times of portfolio structuring as well as when the investment adviser
deems it necessary for defensive purposes or to provide liquidity, Fund assets
may be invested temporarily in high quality money market instruments and
repurchase agreements.
The Fund's effective dollar-weighted average maturity is expected to be
between 2 1/2 and 3 1/2 years. See "U.S. Government Securities--Mortgage-
Related Securities Issued by U.S. Government Agencies and Instrumentalities"
below.
THE FUND'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT 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 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 AND BONDS. 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 and the
lengths of their maturities.
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SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. THE FUND WILL INVEST IN OBLIGATIONS ISSUED OR GUARANTEED BY
AGENCIES OF THE U.S. GOVERNMENT OR INSTRUMENTALITIES ESTABLISHED OR SPONSORED
BY 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 of this type in
which the Fund may invest that are not backed by the full faith and credit of
the United States include obligations which generally may be satisfied only by
the individual credit of the issuing agency, such as obligations of the
Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage
Corporation (FHLMC) and the Resolution Funding Corporation. GNMA, FNMA and
FHLMC investments may include collateralized mortgage obligations. See
"Corporate and Other Debt Obligations" below.
Obligations issued or guaranteed as to principal and interest by the U.S.
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. See "Investment Objective and
Policies--U.S. Government Securities" in the Statement of Additional
Information.
MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. THE FUND MAY INVEST IN MORTGAGE-BACKED SECURITIES THAT ARE
ISSUED BY FNMA AND FHLMC OR GUARANTEED BY GNMA AND WHICH REPRESENT UNDIVIDED
OWNERSHIP INTERESTS IN POOLS OF MORTGAGES. The U.S. Government or the issuing
agency or instrumentality guarantees the payment of interest on and principal
of these securities; however, the guarantees do not extend to the yield or
value of the securities nor do the guarantees extend to the yield or value of
the Fund's shares. These securities are in most cases "pass-through"
instruments, through which the holders receive a share of all interest and
principal payments from the mortgages underlying the securities, net of
certain fees. 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.
The remaining expected average life of a pool of mortgage loans underlying a
mortgage-backed security is a prediction of when the mortgage loans will be
repaid and is based upon a variety of factors, such as the demographic and
geographic characteristics of the borrowers and the mortgaged properties, the
length of time that each of the mortgage loans has been outstanding, the
interest rates payable on the mortgage loans and the current interest rate
environment. The remaining maturity of a mortgage-backed security will be
deemed to be equal to the average maturity of the mortgages underlying such
security determined by the investment adviser on the basis of assumed
prepayment rates with respect to such mortgages. See "Investment Objective and
Policies" in the Statement of Additional Information.
THE FUND WILL INVEST IN BOTH ADJUSTABLE RATE MORTGAGE SECURITIES (ARMS),
WHICH ARE PASS-THROUGH MORTGAGE SECURITIES COLLATERALIZED BY ADJUSTABLE RATE
MORTGAGES, AND FIXED RATE MORTGAGE SECURITIES (FRMS), WHICH ARE SECURITIES
COLLATERALIZED BY FIXED RATE MORTGAGES. See "Investment Objective and
Policies--U.S. Government Securities" in the Statement of Additional
Information.
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
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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.
CORPORATE AND OTHER DEBT OBLIGATIONS
THE FUND MAY INVEST IN DEBT SECURITIES OF U.S. ISSUERS THAT HAVE SECURITIES
OUTSTANDING THAT ARE RATED AT THE TIME OF PURCHASE AT LEAST "BBB" BY STANDARD
& POOR'S CORPORATION (S&P) OR "BAA" BY MOODY'S INVESTORS SERVICE (MOODY'S) OR
A SIMILAR NATIONALLY RECOGNIZED RATING SERVICE OR, IF NOT RATED, ARE OF A
COMPARABLE QUALITY IN THE OPINION OF THE INVESTMENT ADVISER. The Fund may
invest up to 10% of total assets in securities rated at the time of purchase
BB or Ba by S&P or Moodys, respectively (or a similar nationally recognized
rating service), or, if not rated be of a comparable quality in the opinion of
the investment adviser. Securities rated "Baa" by Moody's are considered to be
investment grade, although they have speculative characteristics. Changes in
economic or other circumstances are more likely to lead to a weakened capacity
of issuers whose securities are rated "BBB" or "Baa" to pay interest or repay
principal than is the case for issuers of higher rated securities. Lower-rated
debt obligations typically provide a higher yield than higher-rated
obligations of similar maturity. However, lower-rated obligations are also
subject to a greater degree of risk with respect to the ability of the issuer
to meet the principal and interest payments on the obligations and may also be
subject to greater price volatility due to the market's perceptions of the
credit worthiness of the issuer. The Fund will retain a security whose rating
drops below investment grade (i.e., a "high yield" bond), provided its
retention is otherwise appropriate in connection with pursuit of the Fund's
investment objective. It is contemplated that such securities will be limited
to 5% of the Fund's net assets. See the Appendix to the Statement of
Additional Information for a description of security ratings.
THE FUND MAY INVEST IN WHOLE LOAN MORTGAGE-BACKED SECURITIES ISSUED OTHER
THAN BY U.S. GOVERNMENT AGENCIES AND RATED AT LEAST "AA" BY S&P OR "AA" BY
MOODY'S. See "Investment Objective and Policies--Mortgage-Backed Securities"
in the Statement of Additional Information.
THE CORPORATE OBLIGATIONS IN WHICH THE FUND MAY INVEST INCLUDE ASSET-BACKED
SECURITIES, COLLATERALIZED MORTGAGE OBLIGATIONS AND REAL ESTATE MORTGAGE
INVESTMENT CONDUITS. THE FUND MAY INVEST UP TO 25% OF ITS NET ASSETS IN ASSET-
BACKED SECURITIES AND UP TO 30% IN COLLATERALIZED MORTGAGE OBLIGATIONS AND
REAL ESTATE MORTGAGE INVESTMENT CONDUITS.
ASSET-BACKED SECURITIES. THROUGH THE USE OF TRUSTS AND SPECIAL PURPOSE
CORPORATIONS, VARIOUS TYPES OF ASSETS, PRIMARILY HOME EQUITY LOANS AND
AUTOMOBILE AND CREDIT CARD RECEIVABLES, ARE BEING SECURITIZED IN PASS-THROUGH
STRUCTURES SIMILAR TO THE MORTGAGE PASS-THROUGH STRUCTURES DESCRIBED ABOVE 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 and
debtors are entitled to the protection of a number of state and federal
consumer credit laws, some of which may reduce the ability to obtain full
payment. In the case of 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. The
remaining maturity of an asset-backed security will be deemed to be equal to
the average maturity of the assets underlying such security determined by the
investment adviser on the basis of assumed prepayment rates and other factors
with respect to such assets. In general, these types of loans are of shorter
duration than mortgage loans and are less likely to have substantial
prepayments.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS) AND REAL ESTATE MORTGAGE
INVESTMENT CONDUITS (REMICS). A CMO IS A DEBT SECURITY THAT 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
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SECURITIES. Typically, CMOs are collateralized by GNMA, FNMA or FHLMC
certificates, but also may be collateralized by whole loans or private mortgage
pass-through securities (such collateral collectively hereinafter referred to
as "Mortgage Assets"). Multi-class pass-through securities are equity interests
in a trust composed of Mortgage Assets. Payments of principal and interest on
the Mortgage Assets, and any reinvestment income thereon, provide the funds to
pay debt service on the CMOs or make scheduled distributions on the multi-class
pass-through securities. CMOs may be issued by agencies or instrumentalities of
the U.S. Government, or by private originators of, or investors in, mortgage
loans, including depository institutions, mortgage banks, investment banks and
special purpose subsidiaries of the foregoing. The issuer of a series of CMOs
may elect to be treated as a REMIC. All future references to CMOs shall also be
deemed to include REMICs.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on all classes of the CMOs on a
monthly, quarterly or semi-annual basis. The principal and interest on the
Mortgage Assets may be allocated among the several classes of a CMO series in a
number of different ways. Generally, the purpose of the allocation of the cash
flow of a CMO to the various classes is to obtain a more predictable cash flow
to the individual tranches than exists with the underlying collateral of the
CMO. As a general rule, the more predictable the cash flow is on a CMO tranche,
the lower the anticipated yield will be on that tranche at the time of issuance
relative to prevailing market yields on mortgage-backed securities.
In reliance on rules and interpretations of the Securities and Exchange
Commission (SEC), the Fund's investments in certain qualifying CMOs and REMICs
are not subject to the Investment Company Act's limitation on acquiring
interests in other investment companies. See "Investment Objective and
Policies--Mortgage Backed Securities--Collateralized Mortgage Obligations" in
the Statement of Additional Information. CMOs and REMICs issued by an agency or
instrumentality of the U.S. Government are considered U.S. Government
securities for purposes of this Prospectus.
RISK FACTORS RELATING TO INVESTING IN MORTGAGE-BACKED AND ASSET-BACKED
SECURITIES. THE YIELD CHARACTERISTICS OF MORTGAGE-BACKED AND ASSET-BACKED
SECURITIES DIFFER FROM TRADITIONAL DEBT SECURITIES. AMONG THE MAJOR DIFFERENCES
ARE THAT INTEREST AND PRINCIPAL PAYMENTS ARE MADE MORE FREQUENTLY, USUALLY
MONTHLY, AND PRINCIPAL MAY BE PREPAID AT ANY TIME BECAUSE THE UNDERLYING
MORTGAGE LOANS OR OTHER ASSETS GENERALLY MAY BE PREPAID AT ANY TIME. AS A
RESULT, IF THE FUND PURCHASES SUCH A SECURITY AT A PREMIUM, A PREPAYMENT RATE
THAT IS FASTER THAN EXPECTED WILL REDUCE YIELD TO MATURITY, WHILE A PREPAYMENT
RATE THAT IS SLOWER THAN EXPECTED WILL HAVE THE OPPOSITE EFFECT OF INCREASING
YIELD TO MATURITY. ALTERNATIVELY, IF THE FUND PURCHASES THESE SECURITIES AT A
DISCOUNT, FASTER THAN EXPECTED PREPAYMENTS WILL INCREASE, WHILE SLOWER THAN
EXPECTED PREPAYMENTS WILL REDUCE, YIELD TO MATURITY. THE FUND MAY INVEST A
PORTION OF ITS ASSETS IN DERIVATIVE MORTGAGE-BACKED SECURITIES SUCH AS MBS
STRIPS WHICH ARE HIGHLY SENSITIVE TO CHANGES IN PREPAYMENT AND INTEREST RATES.
THE INVESTMENT ADVISER WILL SEEK TO MANAGE THESE RISKS (AND POTENTIAL BENEFITS)
BY DIVERSIFYING ITS INVESTMENTS IN SUCH SECURITIES AND THROUGH HEDGING
TECHNIQUES.
IN ADDITION, MORTGAGE-BACKED SECURITIES WHICH ARE SECURED BY MANUFACTURED
(MOBILE) HOMES AND MULTI-FAMILY RESIDENTIAL PROPERTIES, SUCH AS GNMA AND FNMA
CERTIFICATES, ARE SUBJECT TO A HIGHER RISK OF DEFAULT THAN ARE OTHER TYPES OF
MORTGAGE-BACKED SECURITIES. See "Investment Objective and Policies" in the
Statement of Additional Information. The investment adviser will seek to
minimize this risk by investing in mortgage-backed securities rated at least
"A" by Moody's and S&P. See "Asset-Backed Securities" above.
Although the extent of prepayments on a pool of mortgage loans depends on
various economic and other factors, as a general rule prepayments on fixed rate
mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Accordingly, amounts
available for reinvestment by the Fund are likely to be greater during a period
of declining interest rates and, as a result, likely to be reinvested at lower
interest rates than during a period of rising interest rates. Asset-backed
securities, although less likely to experience the same prepayment rate as
mortgage-backed securities, may respond to certain of the same factors
influencing prepayments, while at other times different factors may
predominate. Mortgage-backed securities and asset-backed securities may
decrease in value as a result of increases in
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interest rates and may benefit less than other fixed-income securities from
declining interest rates because of the risk of prepayment.
ASSET-BACKED SECURITIES INVOLVE CERTAIN RISKS THAT ARE NOT POSED BY
MORTGAGE-BACKED SECURITIES, RESULTING MAINLY FROM THE FACT THAT ASSET-BACKED
SECURITIES DO NOT USUALLY CONTAIN THE COMPLETE BENEFIT OF A SECURITY INTEREST
IN THE RELATED COLLATERAL. For example, credit card receivables generally are
unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, some of which may reduce the ability to
obtain full payment. In the case of automobile receivables, due to various
legal and economic factors, proceeds from repossessed collateral may not
always be sufficient to support payments on these securities.
STRIPPED MORTGAGE-BACK SECURITIES. In addition to MBS strips issued by
agencies or instrumentalities of the U.S. Government, the Fund may purchase
MBS strips issued by private originators of, or investors in, mortgage loans,
including depository institutions, mortgage banks, investment banks and
special purpose subsidiaries of the foregoing.
YANKEE OBLIGATIONS. THE FUND MAY INVEST IN U.S. DOLLAR-DENOMINATED DEBT
SECURITIES OF FOREIGN CORPORATIONS ISSUED IN THE UNITED STATES AND U.S.
DOLLAR-DENOMINATED DEBT SECURITIES ISSUED OR GUARANTEED AS TO PAYMENT OF
PRINCIPAL AND INTEREST BY GOVERNMENTS, QUASI-GOVERNMENTAL ENTITIES, GOVERNMENT
AGENCIES, SUPRANATIONAL ENTITIES AND OTHER GOVERNMENTAL ENTITIES OF FOREIGN
COUNTRIES, WHICH SECURITIES ARE ISSUED IN THE UNITED STATES (YANKEE
OBLIGATIONS). A supranational entity is an entity constituted by the national
governments of several countries to promote economic development, such as the
World Bank (International Bank for Reconstruction and Development), the
European Investment Bank and the Asian Development Bank. Debt securities of
quasi-governmental entities are issued by entities owned by either a national,
state or equivalent government or are obligations of a political unit that is
not backed by the national government's full faith and credit and general
taxing powers. These include, among others, the Province of Ontario and the
City of Tokyo.
INVESTMENTS IN OBLIGATIONS OF FOREIGN ISSUERS 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 ISSUER THAN ABOUT A DOMESTIC ISSUER AND SUCH ENTITIES MAY NOT
BE SUBJECT TO THE SAME ACCOUNTING, AUDITING AND FINANCIAL RECORDKEEPING
STANDARDS AND REQUIREMENTS AS DOMESTIC ISSUERS.
HEDGING AND INCOME ENHANCEMENT STRATEGIES
THE FUND MAY ALSO ENGAGE IN VARIOUS PORTFOLIO STRATEGIES TO REDUCE CERTAIN
RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO ENHANCE INCOME, BUT NOT FOR
SPECULATION. These strategies include the use of interest rate swap
transactions and Eurodollar futures contracts and options thereon. The Fund's
ability to use these strategies may be limited by market conditions,
regulatory limits and tax considerations and there can be no assurance that
any of these strategies will succeed.
INTEREST RATE SWAP TRANSACTIONS
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 "Investment
Objectives and Policies--Other Investments" in the Statement of Additional
Information.
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
and will not exceed 5% of the Fund's net assets. The use of interest rate
swaps may involve investment techniques and risks different from those
associated with ordinary portfolio transactions. If the investment adviser
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is 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 the investment technique was never
used.
FUTURES CONTRACTS AND OPTIONS THEREON
THE FUND MAY PURCHASE AND SELL EURODOLLAR FUTURES CONTRACTS AND OPTIONS
THEREON WHICH ARE TRADED ON THE CHICAGO MERCANTILE EXCHANGE OR OTHER
COMMODITIES EXCHANGES OR BOARDS OF TRADE, FOR CERTAIN HEDGING, RETURN
ENHANCEMENT AND RISK MANAGEMENT PURPOSES IN ACCORDANCE WITH REGULATIONS OF THE
COMMODITY FUTURES TRADING COMMISSION.
A FINANCIAL FUTURES CONTRACT IS AN AGREEMENT TO PURCHASE OR SELL AN AGREED
AMOUNT OF SECURITIES AT A SET PRICE FOR DELIVERY IN THE FUTURE. Eurodollar
futures contracts and options thereon are denominated in U.S. dollars and are
linked to the London Interbank Offered Rate (LIBOR). These futures contracts
and options thereon 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 FUND MAY NOT PURCHASE OR SELL FUTURES CONTRACTS AND OPTIONS THEREON FOR
RETURN ENHANCEMENT OR RISK MANAGEMENT PURPOSES IF, IMMEDIATELY THEREAFTER, THE
SUM OF THE AMOUNT OF INITIAL MARGIN DEPOSITS ON THE FUND'S FUTURE POSITIONS
AND PREMIUMS PAID FOR OPTIONS THEREON WOULD EXCEED 5% OF THE LIQUIDATION VALUE
OF THE FUND'S TOTAL ASSETS. THE FUND MAY PURCHASE AND SELL FUTURES CONTRACTS
AND OPTIONS THEREON FOR BONA FIDE HEDGING PURPOSES WITHOUT LIMITATION.
SPECIAL RISKS OF HEDGING AND INCOME ENHANCEMENT STRATEGIES
PARTICIPATION IN THE FUTURES MARKETS INVOLVES INVESTMENT RISKS AND
TRANSACTION COSTS TO WHICH THE FUND WOULD NOT BE SUBJECT ABSENT THE USE OF
THIS STRATEGY. If the investment adviser's predictions of movements in the
direction of the securities and interest rate markets are inaccurate, the
adverse consequences to the Fund may leave the Fund in a worse position than
if such strategies were not used. Risks inherent in the use of futures
contracts and options on futures contracts include (1) dependence on the
investment adviser's ability to predict correctly movements in the direction
of interest rates and securities prices; (2) imperfect correlation between the
price of futures contracts and options thereon and movements in the prices of
the securities being hedged; (3) the fact that skills needed to use these
strategies are different from those needed to select portfolio securities; (4)
the possible absence of a liquid secondary market for any particular
instrument at any time; (5) the possible need to defer closing out certain
hedged positions to avoid adverse tax consequences; and (6) the possible
inability of the Fund to purchase or sell a portfolio security at a time that
otherwise would be favorable for it to do so, or the possible need for the
Fund to sell a portfolio security at a disadvantageous time, due to the need
for the Fund to maintain "cover" or to segregate securities in connection with
hedging transactions. See "Investment Objective and Policies--Other
Investments--Interest Rate Futures Contracts" and "Taxes" in the Statement of
Additional Information.
OTHER INVESTMENTS AND POLICIES
Under normal market conditions, the assets of the Fund, other than monies
from recent investments in the Fund pending investment in securities having
laddered maturities, will be invested in U.S. Government securities or
corporate and other debt obligations, as described above. When the investment
adviser deems it necessary for defensive purposes, to provide liquidity or
pending investment in securities having laddered maturities, the assets of the
Fund may be committed temporarily to high quality money market instruments or
repurchase agreements, as described below.
During periods when the investment adviser deems it necessary for temporary
defensive purposes, the Fund may invest without limit in money market
instruments. The Fund will apply the proceeds of new investments in the Fund
to purchase money market instruments and repurchase agreements until these
amounts can be used to purchase corporate and other
debt obligations and U.S. Government securities with laddered maturities of
from one year or less to six years. The yield on money market instruments and
repurchase agreements is generally lower than the yield on corporate and other
debt
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obligations and U.S. Government securities. Accordingly, the Fund's yield and
total return will generally be lower during these periods.
MONEY MARKET INSTRUMENTS
The Fund may invest in high quality money market instruments, including
commercial paper of a U.S. or foreign company or foreign government;
certificates of deposit, bankers' acceptances and time deposits of domestic
and foreign banks; and obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities. These obligations will be U.S.
dollar-denominated. Commercial paper will be rated, at the time of purchase,
at least "A-2" by S&P or "Prime-2" by Moody's, or, if not rated, issued by an
entity having an outstanding unsecured debt issue rated at least "A" or "A-2"
by S&P or "A" or "Prime-2" by Moody's.
REPURCHASE AGREEMENTS
The Fund may on occasion enter into repurchase agreements whereby the seller
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 "Investment Objective and Policies--Other
Investments--Repurchase Agreements" in the Statement of Additional
Information.
COVERED DOLLAR ROLLS
The Fund may enter into covered dollar rolls. In a dollar roll, the Fund
sells securities for delivery in the current month and simultaneously
contracts 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 covered dollar
rolls. Covered 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 covered 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.
The Fund may invest up to 5% of its assets in covered dollar rolls.
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
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income from the borrower. As a matter of fundamental policy, the Fund cannot
lend more than 30% of the value of its total assets.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase or sell securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place a month or more 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 Portfolio's assets committed to the purchase of securities on a when-
issued or delayed delivery basis may increase the volatility of the
Portfolio's net asset value.
BORROWING
The Fund may borrow an amount equal to no more than 20% of the value of its
total assets (computed at the time the loan is made) from banks for temporary,
extraordinary or emergency purposes. The Fund may pledge up to 20% of its
total assets to secure these borrowings. However, the Fund will not purchase
portfolio securities if its borrowings exceed 5% of its net assets.
PORTFOLIO TURNOVER
The Fund does not expect to trade in securities for short-term gain. In is
anticipated that the annual portfolio turnover rate will not exceed 200%. High
portfolio turnover may involve correspondingly greater transaction costs,
which will be borne by the Fund. The portfolio turnover rate is calculated by
dividing the lesser of sales or purchases of portfolio securities by the
average monthly value of the Fund's portfolio securities, excluding securities
having a maturity at the date of purchase of one year or less.
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 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.
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 Portfolio and the counterparty have
provided for the Portfolio, at the Portfolio's election, to unwind the over-
the-counter option. The exercise of such an option ordinarily would involve
the payment by the Portfolio of an amount designed to reflect the
counterparty's economic loss from an early termination, but does allow the
Portfolio to treat the assets used as "cover" as "liquid."
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
may not 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.
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HOW THE FUND IS MANAGED
THE FUND HAS A BOARD OF DIRECTORS WHICH, IN ADDITION TO OVERSEEING THE
ACTIONS OF THE FUND'S MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW,
DECIDES 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 December 31, 1993, the total expenses of Class A
and Class B shares as a percentage of average net assets were .80% and 1.55%.
See "Financial Highlights." No Class C shares were outstanding during the
fiscal year ended December 31, 1993.
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .40 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 December 31, 1993, the Fund paid
management fees to PMF of .40% of the Fund's average net assets. See "Manager"
in the Statement of Additional Information.
As of March 31, 1994, PMF served as the manager to 37 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 29 closed-end investment companies. These companies have
aggregate assets of approximately $51 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.
UNDER A 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 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 April 1992 and has been
employed by PIC as a portfolio manager since 1988. Ms. Carlucci also serves as
the portfolio manager of Prudential U.S. Government Fund, Prudential Series
Fund Government Securities Portfolio, Prudential Series Fund Bond Portfolio
and Prudential Series Fund Zero Coupon Portfolios.
PMF and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America (Prudential), a major diversified insurance and
financial services company.
DISTRIBUTOR
PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC. (PMFD), ONE SEAPORT PLAZA, NEW
YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE
OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS A SHARES OF THE FUND.
IT IS A WHOLLY-OWNED SUBSIDIARY OF PMF.
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PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), 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 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
PORTFOLIO'S CLASS A, CLASS B AND CLASS C SHARES. These expenses include
commissions and account servicing fees paid to, or on account of, financial
advisers of Prudential Securities and Pruco Securities Corporation (Prusec),
affiliated broker-dealers, 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 Portfolio shares, including lease,
utility, communications and sales promotion expenses. The State of Texas
requires that shares of the Portfolio may be sold in that state only by
dealers or other financial institutions which are registered there as broker-
dealers.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE FUND MAY PAY PMFD FOR ITS DISTRIBUTION-RELATED
EXPENSES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE OF UP TO .30 OF 1%
OF THE AVERAGE DAILY NET ASSET VALUE 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 up to .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 fees payable under the Class A Plan to .10 of 1% of the
average daily net assets of the Class A shares for the fiscal year ending
December 31, 1994.
For the year ended December 31, 1993, PMFD received payments of $114,728
under the Class A Plan as reimbursement of expenses related to the
distribution of Class A shares. This amount was primarily expended for payment
of account servicing fees to financial advisers and other persons who sell
Class A shares. For the fiscal year ended December 31, 1993, PMFD also
received approximately $669,100 in initial sales charges.
UNDER THE CLASS B AND CLASS C PLANS, THE PORTFOLIO MAY PAY PRUDENTIAL
SECURITIES FOR ITS DISTRIBUTION-RELATED EXPENSES WITH RESPECT TO CLASS B AND
CLASS C SHARES AT AN ANNUAL RATE OF UP TO 1% OF THE AVERAGE DAILY NET ASSETS
OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B and Class C Plans
provide 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 each of the Class
B and Class C shares, and (ii) a service fee of up to .25 of 1% of the average
daily net assets of each of the Class B and 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 and Class C Plans to no more than .85 of 1% and
.75 of 1% of the average daily net assets of the Class B and Class C shares,
respectively, for the fiscal year ending December 31, 1994. Prudential
Securities also receives contingent deferred sales charges from certain
redeeming shareholders. See "Shareholder Guide--How to Sell Your Shares--
Contingent Deferred Sales Charges."
For the fiscal year ended December 31, 1993, Prudential Securities incurred
distribution expenses of approximately $2,786,300 under the Class B Plan and
received $589,173 from the Portfolio under the Class B Plan. In addition,
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<PAGE>
Prudential Securities received approximately $86,000 in contingent deferred
sales charges from redemptions of Class B shares during this period. No Class
C shares were outstanding during the fiscal year ending December 31, 1993.
For the fiscal year ended December 31, 1993, the Portfolio paid distribution
expenses of .10% and .85% of the average net assets of the Class A and Class B
shares, respectively. The Fund records all payments made under the Plans as
expenses in the calculation of net investment income. No Class C shares were
outstanding during the fiscal year ended December 31, 1993.
Distribution expenses attributable to the sale of shares of the Portfolio
will be allocated to each class based upon the ratio of sales of each class to
the sales of all shares of the Portfolio other than expenses allocable to a
particular class. The distribution fee and initial 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 Board of Directors of the Portfolio, including
a majority of the Directors 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 Directors), vote annually to continue the Plan. Each
Plan may be terminated at any time by vote of a majority of the Rule 12b-1
Directors or of a majority of the outstanding shares of the applicable class
of the Fund. The Portfolio 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 Portfolio under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments to dealers and other persons which distribute shares of the
Portfolio. Such payments may be calculated by reference to the net asset value
of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. governing maximum sales charges. See "Distributor" in
the Statement of Additional Information.
PORTFOLIO TRANSACTIONS
Prudential Securities may also act as a broker or futures commission
merchant for the Portfolio, provided that the commissions, fees or other
remuneration it receives are fair and reasonable. 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 02171, serves as Custodian for the Portfolio's 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. (PMFS), 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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<PAGE>
HOW THE FUND VALUES ITS SHARES
THE FUND'S NET ASSET VALUE PER SHARE OR NAV 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 BOARD OF DIRECTORS HAS 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 Board of Directors. 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.
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. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger distribution-
related fee to which Class B and Class C shares are subject. It is expected,
however, that the NAV of the three classes will tend to converge immediately
after the recording of dividends, which 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 OR 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 that may be payable upon
redemption. The Fund also may include comparative performance information in
advertising or marketing the Fund's shares. Such performance information may
include data from Lipper Analytical Services, Inc., other industry
publications, business periodicals and market indices. See "Performance
Information" in the Statement of Additional Information. The Fund will include
performance data for each class of shares of the Fund in any advertisement or
information including performance data of the Fund. Further performance
information is contained in the Fund's annual and semi-annual reports to
shareholders, which may be obtained without charge. See "Shareholder Guide--
Shareholder Services--Reports to Shareholders."
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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 OF 1986, AS
AMENDED (THE INTERNAL REVENUE CODE). ACCORDINGLY, THE FUND WILL NOT BE SUBJECT
TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME AND CAPITAL GAINS, IF
ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. See "Taxes" in the Statement of
Additional Information.
TAXATION OF SHAREHOLDERS
All dividends out of net investment income, together with distributions of
net short-term capital gains, 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 such to the shareholders, whether or not
reinvested and regardless of the length of time a shareholder has owned his or
her shares. The maximum long-term capital gains rate for individuals is 28%.
The maximum long-term capital gains rate for corporate shareholders is
currently the same as the maximum tax rate for ordinary income.
Dividends paid by the Fund will be eligible for the 70% dividends-received
deduction for corporate shareholders to the extent that the Fund's income is
derived from certain dividends paid by domestic corporations. Capital gains
distributions are not eligible for the 70% dividends received deduction.
Any gain or loss realized upon a sale or redemption of Fund shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held for more than one year and
otherwise as short-term capital gain or loss. Any such loss, however, on
shares that are held for six months or less will be treated as long-term
capital loss to the extent of any capital gain distributions received by the
shareholder.
The Fund has obtained an opinion of counsel to the effect that the
conversion of Class B shares into Class A shares does not constitute a taxable
event for U.S. income tax purposes. However, such opinion is not binding on
the Internal Revenue Service.
Shareholders are advised to consult their own tax advisers regarding
specific questions as to federal, state or local taxes.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Fund generally is required to withhold
and remit to the U.S. Treasury 31% of dividends, capital gain income and
redemption proceeds payable to individuals and certain non corporate
shareholders who fail to furnish correct tax identification numbers on IRS
Form W-9 (or IRS Form W-8 in the case of certain foreign shareholders).
Dividends of net investment income and net short-term capital gains paid 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 DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY NET CAPITAL
GAINS. 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 net capital gains,
if any, will be paid in the same amount for each class of shares. See "How the
Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES, AT THE
NAV ON THE PAYMENT DATE UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT LESS THAN
FIVE BUSINESS DAYS PRIOR TO THE PAYMENT DATE TO RECEIVE SUCH DIVIDENDS
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AND DISTRIBUTIONS IN CASH. The Board of Directors reserves the right to change
the reinvestment date from the payment date to the record date for certain
capital gains distributions. Such election should be submitted to Prudential
Mutual Fund Services, Inc., Attention: Account Maintenance, P.O. Box 15015,
New Brunswick, New Jersey 08906-5015. 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. If you hold shares through Prudential Securities you should contact
your financial adviser to elect to receive dividends and distributions in
cash.
WHEN THE FUND GOES "EX-DIVIDEND," ITS NAV IS REDUCED BY THE AMOUNT OF THE
DIVIDEND OR DISTRIBUTION. IF YOU BUY SHARES JUST PRIOR TO THE EX-DIVIDEND DATE
FOR A CAPITAL GAIN DISTRIBUTION, 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 CAPITAL
GAIN DISTRIBUTIONS WHEN MAKING YOUR PURCHASES.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
THE FUND WAS INCORPORATED IN MARYLAND ON JUNE 8, 1988. THE FUND IS
AUTHORIZED TO ISSUE 500 MILLION SHARES OF COMMON STOCK, $.01 PAR VALUE PER
SHARE, DIVIDED INTO THREE CLASSES FOR EACH PORTFOLIO, DESIGNATED CLASS A,
CLASS B AND CLASS C COMMON STOCK, EACH OF WHICH CONSISTS OF 83 1/3 MILLION
AUTHORIZED SHARES. Each class of common stock 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
common stock. Currently, the Fund is offering three classes, designated Class
A, Class B and Class C shares. In accordance with the Fund's Articles of
Incorporation, the Board of Directors may authorize the creation of additional
series of common stock and classes within such series, with such preferences,
privileges, limitations and voting and dividend rights as the Board of
Directors may determine.
The Board of Directors may increase or decrease the number of authorized
shares without approval by the shareholders. 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 "Shareholder Guide--How to Sell Your
Shares." Each share of each class of common stock is equal as to earnings,
assets and voting privileges, except as noted above, and each class bears the
expenses related to the distribution of its shares. Except for the conversion
feature applicable to the Class B shares, there are no conversion, preemptive
or other subscription rights. In the event of liquidation, each share of
common stock 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 Directors.
THE FUND DOES NOT INTEND TO HOLD SHAREHOLDERS MEETINGS UNLESS OTHERWISE
REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF DIRECTORS IS REQUIRED TO BE
ACTED ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. 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 DIRECTORS OR TO TRANSACT ANY OTHER BUSINESS.
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ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information
set forth in the Registration Statement filed by the Fund with the SEC under
the Securities Act of 1933. Copies of the Registration Statement may be
obtained at a reasonable charge from the SEC or may be examined, without
charge, at the office of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The minimum initial
investment for Class A and Class B shares is $1,000 per class and $5,000 for
Class C shares. The minimum subsequent investment is $100 for all classes. All
minimum investment requirements are waived for certain retirement and employee
savings plans or custodial accounts for the benefit of minors. For purchases
made through the Automatic Savings Accumulation Plan, the minimum initial and
subsequent investment is $50. See "Shareholder Services" below.
THE PURCHASE PRICE IS THE NAV 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 share certificate is desired, it must be requested in writing for
each transaction. Certificates are issued only for full shares. Shareholders
who hold their shares through Prudential Securities will not receive share
certificates.
The Fund reserves the right to reject any purchase order (including an
exchange) or to suspend or modify the continuous offering of its shares. See
"How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
Transactions in Fund shares may be subject to postage and handling charges
imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must first telephone PMFS to receive an account number at (800) 225-1852
(toll-free). 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
(State Street), Boston, Massachusetts, Custody and Shareholder Services
Division, Attention: Prudential Structured Maturity Fund, Inc., specifying on
the wire the account number assigned by PMFS and your name and identifying the
sales charge alternative (Class A or Class B 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 Structured
Maturity Fund, Inc., Class A, Class B or Class C shares and your name and
individual account
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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 AND 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
------------------------ ------------------------ -----------------------------
<C> <S> <C> <C>
Class A Maximum initial sales .30 of 1% Initial sales charge waived
charge of 3.25% of the (Currently being or reduced for certain
public offering price charged at a rate purchases
of .10 of 1%)
Class B Maximum contingent 1% (Currently being Shares convert to Class A
deferred sales charge or charged at a rate shares approximately seven
CDSC of 3% of the lesser of .85 of 1%) years after purchase
of the amount invested
or the redemption
proceeds; declines to
zero after four years
Class C Maximum CDSC of 1% of 1% (Currently being Shares do not convert to
the lesser of the amount charged at a rate another class
invested or the of .75 of 1%)
redemption proceeds on
redemptions made within
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 Common
Stock"), 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 Portfolio
will receive different compensation for selling Class A, Class B and Class C
shares and will generally receive more compensation initially for selling
Class A and Class B shares than for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER
THINGS, (1) the length of time you expect to hold your investment, (2) the
amount of any applicable sales charge (whether imposed at the time of purchase
or redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) the fact 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 [5] years
and do not qualify for a reduced sales charge on Class A shares since Class A
shares are subject to an initial sales charge of 3.25% and Class B shares are
subject to a
21
<PAGE>
CDSC of 3% which declines to zero over a 4 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 [5] 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 [5] 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 4 years in the case of Class B shares and 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 fees 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
the period in 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>
Less than $50,000......... 3.25% 3.36% 3.00%
$50,000 to $99,999........ 2.75 2.83 2.50
$100,000 to $249,999...... 2.25 2.30 2.00
$250,000 to $499,999...... 1.75 1.78 1.55
$500,000 to $999,999...... 1.00 1.01 .80
$1,000,000 and above...... None None None
</TABLE>
Selling dealers may be deemed to be underwriters, as that term is defined
under the federal securities law.
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 acquired pursuant to the exchange privilege) may be
aggregated to determine the applicable reduction. See "Reduction and Waiver of
Initial Sales Charges--Class A Shares" in the Statement of Additional
Information.
Class A shares may be purchased at NAV, without payment of an initial sales
charge, by pension, profit-sharing or other employee benefit plans qualified
under Section 401 of the Internal Revenue Code and deferred compensation and
annuity plans under Sections 457 and 403(b)(7) of the Internal Revenue Code
(Benefit Plans), provided that the plan has existing assets of at least $1
million invested in shares of Prudential Mutual Funds (excluding money market
funds other than those
22
<PAGE>
acquired pursuant to the exchange privilege) or 1,000 eligible employees or
members. In the case of Benefit Plans whose accounts are held directly with
the Transfer Agent and for which the Transfer Agent does individual account
record keeping (Direct Account Benefit Plans) and Benefit Plans sponsored by
PSI or its subsidiaries (PSI or Subsidiary Prototype Benefit Plans), Class A
shares may be purchased at NAV by participants who are repaying loans made
from such plans to the participant. Additional information concerning the
reduction and waiver of initial sales charges is set forth in the Statement of
Additional Information.
In addition, Class A shares may be purchased at NAV, through Prudential
Securities or the Transfer Agent, by the following persons: (a) Directors and
officers of the Fund and other Prudential Mutual Funds, (b) employees of
Prudential Securities and PMF and their subsidiaries and members of the
families of such persons who maintain an "employee related" account at
Prudential Securities or the Transfer Agent, (c) employees and special agents
of Prudential and its subsidiaries and all persons who have retired directly
from active service with Prudential or one of its subsidiaries, (d) registered
representatives and employees of dealers who have entered into a selected
dealer agreement with Prudential Securities provided that purchases at NAV are
permitted by such person's employer and (e) investors who have a business
relationship with a financial adviser who joined Prudential Securities from
another investment firm, provided that (i) the purchase is made within 90 days
of the commencement of the financial adviser's employment at Prudential
Securities, (ii) the purchase is made with proceeds of a redemption of shares
of any open-end, non-money market fund sponsored by the financial adviser's
previous employer (other than a fund which imposes a distribution or service
fee of .25 of 1% or less) on which no deferred sales load, fee or other charge
was imposed on redemption and (iii) the financial adviser served as the
client's broker on the previous purchases.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec that you are entitled to the reduction or
waiver of the sales charge. The reduction or waiver will be granted subject to
confirmation of your entitlement. No initial sales charges are imposed upon
Class A shares purchased upon the reinvestment of dividends and distributions.
See "Purchase and Redemption of Fund Shares--Reduction and Waiver of Initial
Sales Charges--Class A Shares" in the Statement of Additional Information.
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 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 YOUR 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 from the Class B
shares will be reduced by the amount of any applicable contingent deferred
sales charge, as described below. See "Contingent Deferred Sales Charges"
below.
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM YOUR SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION
SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD
CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE
CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE
REDEMPTION REQUEST TO BE PROCESSED. IF REDEMPTION IS REQUESTED BY A
CORPORATION, PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY
ACCEPTABLE TO THE TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH REQUEST WILL BE
ACCEPTED. All correspondence and documents concerning redemptions should be
sent to the Fund in care of its Transfer Agent, Prudential Mutual Fund
Services, Inc., Attention: Redemption Services, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
23
<PAGE>
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 inquires 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 Preferred
Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR
WRITTEN REQUEST EXCEPT AS INDICATED BELOW. Such payment may be postponed or
the right of redemption suspended at times (a) when the New York Stock
Exchange is closed for other than customary weekends and holidays, (b) when
trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or (d) during any other period when
the SEC, by order, so permits; provided that applicable rules and regulations
of the SEC shall govern as to whether the conditions prescribed in (b), (c) or
(d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL
THE FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS
BEEN HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE
CHECK BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY
WIRE OR BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payments 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 Board
of Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose
account has a net asset value of less than $500 due to a redemption. The Fund
will give such shareholders 60 days' prior written notice in which to purchase
sufficient additional shares to avoid such redemption. No contingent deferred
sales charge will be imposed on any involuntary redemption.
30-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the NAV next
determined after the order is received, which must be within 30 days after the
date of the redemption. No sales charge will apply to such repurchases. You
will receive pro rata credit for any contingent deferred sales charge paid in
connection with the redemption of your shares. You must notify the Fund's
Transfer Agent, either directly or through Prudential Securities or Prusec, at
the time the repurchase privilege is exercised that you are entitled to credit
for the contingent deferred sales charge previously paid. Exercise of the
repurchase privilege will generally not affect federal income tax treatment of
any gain realized upon redemption. If the redemption resulted in a loss, some
or all of the loss, depending on the amount reinvested, will not be allowed
for federal income tax purposes.
CONTINGENT DEFERRED SALES CHARGES
Redemption of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 3% to zero over a four year period. Class C
shares redeemed within one year of purchase will be subject to a 1% CDSC. The
CDSC will
24
<PAGE>
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 of the Fund to an amount which is lower than
the dollar amount of all payments by you for shares during the preceding four
years, in the case of Class B shares, and one year, in the case of Class C
shares. A CDSC will be applied on the lesser of the original purchase price or
the current value of the shares being redeemed. Increases in the value of your
shares or shares purchased through reinvestment of dividends or distributions
are not subject to a CDSC. The amount of any contingent deferred sales charge
will be paid to and retained by the Distributor. See "How the Fund is Managed--
Distributor" and "Waiver of the Contingent Deferred Sales Charges--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 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
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------- -------------------------
<S> <C>
First......................................... 3.0%
Second........................................ 2.0%
Third......................................... 1.0%
Fourth........................................ 1.0%
Fifth and thereafter..........................
</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 NAV above the total amount of payments for
the purchase of Fund shares made during the preceding four years; 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 net
asset value had appreciated to $12 per share, the value of your Class B shares
would be $1,260 (105 shares at $12 per share). The CDSC would not be applied to
the value of the reinvested dividend shares and the amount which represents
appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500
minus $260) would be charged at a rate of 2% (the applicable rate in the second
year after purchase) for a total CDSC of $4.80.
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), 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
25
<PAGE>
account. These distributions include a lump-sum or other distribution after
retirement, or for an IRA or Section 403(b) custodial account, after attaining
age 59 1/2, a tax-free return of an excess contribution or plan distributions
following the death or disability of the shareholder (provided that the shares
were purchased prior to death or disability). The waiver does not apply in the
case of a tax-free rollover or transfer of assets, other than one following a
separation from service. In the case of Direct Account and PSI or Subsidiary
Prototype Benefit Plans, the CDSC will be waived on redemptions which
represent borrowings from such plans. Shares purchased with amounts used to
repay a loan from such plans on which a CDSC was not previously deducted will
thereafter be subject to a CDSC without regard to the time such amounts were
previously invested. In the case of a 401(k) plan, the CDSC will also be
waived upon the redemption of shares purchased with amounts used to repay
loans made from the account to the participant and from which a CDSC was
previously deducted.
In addition, the CDSC will be waived on redemptions of shares held by
Directors of the Fund.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec, at the time of redemption, that you are entitled to
waiver of the CDSC. The waiver will be granted subject to confirmation of your
entitlement.
A quantity discount may apply to redemptions of Class B shares purchased
prior to , 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to , 1994" in the Statement of
Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately five years after purchase. Conversions will occur during
the month following each calendar quarter and will be effected at relative net
asset value without the imposition of any additional sales charge. It is
currently anticipated that conversions will occur on the first Friday of the
month following each calendar quarter, or, if not a business day, on the next
Friday of the month.
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 [five] years prior to the conversion date to (b) the total amount paid
for all Class B shares purchased and then held in your account (ii) multiplied
by the total number of Class B shares then in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or
amounts representing Class B shares then in your account that were acquired
through the automatic reinvestment of dividends and other distributions will
convert to Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible
Shares calculated as described above will generally be either more or less
than the number of shares actually purchased approximately [five] 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 [five] 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
26
<PAGE>
a series of exchanges, on the last day of the month in which the original
payment for purchases of such Class B shares was made. For Class B shares
previously exchanged for shares of a money market fund, the time period during
which such shares were held in the money market fund will be excluded. For
example, Class B shares held in a money market fund for one year will not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase
of such shares. It is currently anticipated that the first conversion of Class
B shares will occur in or about January, 1995. At that time all amounts
representing Class B shares then outstanding beyond the applicable conversion
period will automatically convert to Class A shares together with all shares
or amounts representing Class B shares acquired through the automatic
reinvestment of dividends and distributions then held in your account.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B, and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code
and (ii) that the conversion of shares does not constitute a taxable event.
The conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended,
Class B shares of the Fund will continue to be subject, possibly indefinitely,
to their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND, YOU HAVE AN EXCHANGE PRIVILEGE WITH CERTAIN
OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE PRIVILEGE), 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 MAY BE EXCHANGED FOR CLASS
A, CLASS B AND CLASS C SHARES, RESPECTIVELY, OF ANOTHER FUND ON THE BASIS OF
THE RELATIVE NAV. Any applicable CDSC payable upon the redemption of shares
exchanged will be calculated from the first day of the month after the date of
the initial purchase, excluding the time shares were held in a money market
fund. Class B and Class C shares may not be exchanged into money market funds
other than Prudential Special Money Market Fund. For purposes of calculating
the holding period applicable to the Class B conversion feature, the time
period during which Class B shares were held in a money market fund will be
excluded. See "Conversion Feature--Class B Shares" above. If your investment
in shares of Prudential Mutual Funds (excluding money market funds other than
those acquired pursuant to the exchange privilege) reach $1 million and you
then hold Class B and/or Class C shares of the Fund which are free of CDSC,
you will be so notified and offered the opportunity to exchange those shares
for Class A shares of the Fund without the imposition of any sales charge. In
the case of tax-exempt shareholders, if no response is received within 60 days
of the mailing of such notice, eligible Class B and/or Class C shares will be
automatically exchanged for Class A shares. All other shareholders must
affirmatively elect to have their eligible Class B and/or Class C shares
exchanged for Class A shares. An exchange will be treated as a redemption and
purchase for tax purposes. See "Shareholder Investment Account--Exchange
Privilege" in the Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE THE TELEPHONE
EXCHANGE PRIVILEGE ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO
THE TRANSFER AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you
may call the Fund at (800) 225-1852 to execute a telephone exchange of shares,
on 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.
27
<PAGE>
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST 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" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED ABOVE.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in the Fund you can
take advantage of the following additional services and privileges.
* AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and 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 Account). For additional information about this service, you may
contact your Prudential Securities financial adviser, Prusec registered
representative or the Transfer Agent directly.
* TAX DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the Distributor. These plans are for use by both self-
employed individuals and corporate employers. These plans permit either self-
direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from Prudential Securities or
the Transfer Agent. If you are considering adopting such a plan, you should
consult with your own legal or tax adviser with respect to the establishment
and maintenance of such a plan.
* SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" above.
* 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
are available upon request from the Fund.
* SHAREHOLDER INQUIRIES. 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.
28
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the
investment options available through our family of funds. For more information
on the Prudential Mutual Funds, including charges and expenses, contact your
Prudential Securities financial adviser or Prusec registered representative or
telephone the Funds at (800) 225-1852 for a free prospectus. Read the
prospectus carefully before you invest or send money.
TAXABLE BOND FUNDS
Prudential Adjustable Rate Securities Fund, Inc.
Prudential GNMA Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible (R) Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Strategist Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
. Taxable Money Market Funds
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
. Tax-Free Money Market Funds
Prudential Tax-Free Money Fund
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
. Command Funds
Command Money Fund
Command Government 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>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS............................................................ 2
FUND EXPENSES.............................................................. 4
FINANCIAL HIGHLIGHTS....................................................... 5
HOW THE FUND INVESTS....................................................... 6
Investment Objective and Policies......................................... 6
Hedging and Income Enhancement Strategies................................. 10
Other Investments and Policies............................................ 11
Investment Restrictions................................................... 13
HOW THE FUND IS MANAGED.................................................... 14
Manager................................................................... 14
Distributor............................................................... 14
Portfolio Transactions.................................................... 16
Custodian and Transfer and Dividend Disbursing Agent...................... 16
HOW THE FUND VALUES ITS SHARES............................................. 17
HOW THE FUND CALCULATES PERFORMANCE........................................ 17
TAXES, DIVIDENDS AND DISTRIBUTIONS......................................... 18
GENERAL INFORMATION........................................................ 19
Description of Common Stock............................................... 19
Additional Information.................................................... 20
SHAREHOLDER GUIDE.......................................................... 20
How to Buy Shares of the Fund............................................. 20
Alternative Purchase Plan................................................. 21
How to Sell Your Shares................................................... 23
Conversion Feature--Class B Shares........................................ 26
How to Exchange Your Shares............................................... 27
Shareholder Services...................................................... 28
THE PRUDENTIAL MUTUAL FUND FAMILY.......................................... A-1
</TABLE>
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444131D MF 140A
<TABLE>
- --------------------------------
<S> <C>
Class A: 743924-102
CUSIP Nos.: Class B: 743924-201
Class C:
- --------------------------------
</TABLE>
PRUDENTIAL
STRUCTURED
MATURITY FUND
INCOME PORTFOLIO
P
R
O
S
P
E
C
T
U
S
, 1994
<PAGE>
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
Statement of Additional Information
dated , 1994
Prudential Structured Maturity Fund, Inc. (the Fund), is an open-end,
management investment company comprised of two Portfolios--the Income
Portfolio and the Municipal Income Portfolio. The investment objective of the
Income Portfolio is high current income consistent with the preservation of
principal. The Income Portfolio seeks to achieve its objective primarily
through structuring its portfolio by utilizing a "laddered" maturity strategy.
The Income Portfolio invests in investment grade corporate debt securities and
in obligations of the U.S. Government, its agencies and instrumentalities with
maturities of six years or less. These securities are allocated by maturity
among six annual maturity categories ranging from one year or less to between
five and six years with each category representing approximately one-sixth of
the Income Portfolio's assets. As the securities in each annual category
mature or as new investments are made in the Income Portfolio, the proceeds
will be invested to maintain the balance of investments among the six annual
maturity categories. See "Investment Objective and Policies."
The investment objective of the Municipal Income Portfolio is high current
income that is exempt from federal income taxes consistent with the
preservation of principal. The Municipal Income Portfolio will invest
primarily in investment grade municipal securities but may also invest up to
30% of its total assets in lower-rated municipal securities or in non-rated
securities which, in the opinion of the Fund's investment adviser, are of
comparable quality to such investment grade or lower-rated securities. The
Municipal Income Portfolio seeks to achieve its objective primarily through
structuring its portfolio by utilizing a "laddered" maturity strategy. Under
normal market conditions, the securities are allocated by maturity among eight
annual maturity categories ranging from less than one year to between seven
and eight years with each category representing approximately one-eighth of
the Municipal Income Portfolio's assets. As the securities in each annual
category mature or as new investments are made in the Municipal Income
Portfolio, the proceeds will be invested to maintain the balance of
investments among the eight annual maturity categories. The Portfolio also
invests in futures contracts to create synthetic securities that will fit into
one of the Portfolio's maturity categories. See "Investment Objective and
Policies--Other Investments Applicable to the Municipal Income Portfolio--
Futures Contracts."
There can be no assurance the investment objectives of the Portfolios will
be achieved. See "Investment Objective and Policies".
The Fund's address is One Seaport Plaza, New York, New York 10292, and its
telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus of the Income Portfolio, dated
, 1994 and the Municipal Income Portfolio, dated , 1994, copies of
which may be obtained from the Fund upon request.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CROSS-REFERENCE
TO PAGE IN
PROSPECTUS
-------------------
MUNICIPAL
INCOME INCOME
PAGE PORTFOLIO PORTFOLIO
---- --------- ---------
<S> <C> <C> <C>
General Information................................... B-3 19 18
Investment Objective and Policies..................... B-3 6 5
Investment Restrictions............................... B-15 13 12
Directors and Officers................................ B-16 14 12
Manager............................................... B-18 14 12
Distributor........................................... B-21 14 13
Portfolio Transactions................................ B-22 16 14
Purchase and Redemption of Fund Shares................ B-23 20 19
Shareholder Investment Account........................ B-25 26 26
Net Asset Value....................................... B-28 17 15
Dividends and Distributions........................... B-29 18 16
Taxes................................................. B-29 18 16
Performance Information............................... B-32 17 15
Custodian, Transfer and Dividend Disbursing Agent and
Independent Accountants.............................. B-34 16 15
Independent Auditors' Report.......................... B-35 -- --
Financial Statements.................................. B-36 -- --
</TABLE>
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B-2
<PAGE>
GENERAL INFORMATION
At a special meeting held on , 1994, shareholders approved an
amendment to the Fund's Articles of Incorporation to change the Fund's name
from Prudential-Bache Structured Maturity Fund, Inc. to Prudential Structured
Maturity Fund, Inc.
The Fund initially offered only one series known as Prudential Structured
Maturity Fund. On July 15, 1993, the Board of Directors authorized the
creation of the Municipal Income Portfolio and approved the designation of the
existing shares of the Fund to become shares of the Income Portfolio.
INVESTMENT OBJECTIVE AND POLICIES
INCOME PORTFOLIO
The investment objective of the Income Portfolio is high current income
consistent with the preservation of principal. See "How the Fund Invests--
Investment Objective and Policies" in the Prospectus for the Income Portfolio.
The Income Portfolio seeks to achieve its objective primarily through
structuring its portfolio by utilizing a "laddered" maturity strategy. The
Income Portfolio invests in investment grade corporate debt securities and in
obligations of the U.S. Government, its agencies and instrumentalities with
maturities of six years or less. Under normal market conditions these
securities are allocated by maturity among six annual maturity categories
ranging from one year or less to between five and six years with each category
representing approximately one-sixth of the Income Portfolio's assets. As the
securities in each annual category mature or as new investments are made in
the Income Portfolio, the proceeds will be invested to maintain the balance of
investments among the six annual maturity categories.
The Income Portfolio may invest in the following types of securities.
U.S. Government Securities
MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT INSTRUMENTALITIES.
Mortgages backing the securities purchased by the Portfolio 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 amortizing
mortgage security with installments of principal and interest, the last
installment of which is predominantly 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
undivided 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. The remaining expected average life of a pool of mortgage loans
underlying a mortgage-backed security is a prediction of when the mortgage
loans will be repaid and is based upon a variety of factors, such as the
demographic and geographic characteristics of the borrowers and the mortgaged
properties, the length of time that each of the mortgage loans has been
outstanding, the interest rates payable on the mortgage loans and the current
interest rate environment. Because mortgage-backed securities are often
prepaid, a pass-through security with a stated remaining maturity of more than
its remaining expected average life will be deemed by the Portfolio, for
purposes of determining the Portfolio's effective dollar-weighted average
maturity, to have a remaining maturity equal to its remaining expected average
life. The determination of the remaining expected average life of mortgage-
backed securities will be made by the Fund's investment adviser, subject to
the supervision of the Fund's Board of Directors. In selecting investments for
the Portfolio and in determining the remaining maturity, the investment
adviser will rely on average remaining life data published by various
mortgage-backed securities dealers except to the extent such data are deemed
unreasonable by the investment adviser. The investment adviser might deem such
data unreasonable if such data appeared to present a significantly different
average remaining expected life for a security when compared to data relating
to the average remaining life of comparable securities as provided by other
independent mortgage-backed securities dealers. The Portfolio's effective
dollar-weighted average maturity is expected to be between 2 1/2 and 3 1/2
years.
During periods of declining interest rates, prepayment of mortgages
underlying mortgage-backed securities can be expected to accelerate. When
mortgage obligations are prepaid, the Portfolio reinvests the prepaid amounts
in securities, the yields of which reflect interest rates prevailing at that
time. Therefore, the Portfolio'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 generally will result in
capital losses.
GNMA CERTIFICATES. Certificates of the Government National Mortgage
Association (GNMA Certificates) are mortgage-backed securities, which evidence
an undivided interest in a pool of mortgage loans. GNMA Certificates differ
from bonds in that principal is paid back monthly by the borrower over the
term of the loan rather than returned in a lump sum at maturity. GNMA
Certificates that the Portfolio purchases are the "modified pass-through"
type. "Modified pass-through" GNMA Certificates entitle the holder to receive
B-3
<PAGE>
a share of all interest and principal prepayments paid and owed on the
mortgage pool, net of fees paid to the "issuer" and 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 multi-family residential properties
under construction; (vi) mortgage loans on completed multi-family 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. GNMA is a wholly-owned corporate instrumentality of the
United States within the Department of Housing and Urban Development. The
National Housing Act, as amended (the Housing Act) authorizes GNMA to
guarantee the timely payment of principal and interest on certificates that
are based on and backed by a pool of mortgages insured by the Federal Housing
Administration under the Housing Act, or Title V of the Housing Act of 1949
(FHA loans), or guaranteed by the Veterans Administration under the
Servicemen's Retirement Act of 1944, as amended (VA loans), or by pools of
other eligible mortgage loans. The Housing Act provides that the full faith
and credit of the U.S. Government is pledged to the payment of all amounts
that may be required to be paid under the guarantee. In order to meet its
obligations under such guarantee GNMA is authorized to borrow from the U.S.
Treasury with no limitations as to amount.
FHLMC SECURITIES. The Federal Home Loan Mortgage Corporation 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.
The FHLMC presently issues two types of mortgage pass-through securities,
mortgage participation certificates (PCs) and guaranteed mortgage
certificates. The Portfolio does not intend to invest in guaranteed mortgage
certificates. 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 FHLMC guarantees timely monthly payment of interest on
PCs and the stated principal amount.
FNMA SECURITIES. The Federal National Mortgage Association was established
in 1938 to create a secondary market in mortgages. 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 the
stated principal amount.
ADJUSTABLE RATE MORTGAGE SECURITIES. Generally, adjustable rate mortgage
securities (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 (FRMs) 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
is charged 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. The Portfolio expects this characteristic to contribute to its
objective of preservation of principal.
FIXED-RATE MORTGAGE SECURITIES. The Portfolio anticipates investing in high-
coupon fixed-rate mortgage securities. Such securities are collateralized by
fixed-rate mortgages and tend to have high prepayment rates when the level of
prevailing interest rates declines significantly below the interest rates on
the mortgages. Thus, under those circumstances, the securities are generally
less sensitive to interest rate movements than lower coupon FRMs.
CHARACTERISTICS OF MORTGAGE-BACKED SECURITIES. The interest rates paid on
the ARMs in which the Portfolio invests generally are readjusted at intervals
of one year or less to an increment over some predetermined interest rate
index. There are two main categories of indices: 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 Funds index (often
related to ARMs issued by FNMA), tend to lag behind changes in market rate
levels and tend to be somewhat less volatile.
The underlying mortgages which collateralize the ARMs, CMOs and REMICs in
which the Portfolio invests will frequently have caps and floors which limit
the maximum amount by which the loan rate to the residential borrower may
change up or down (1) per reset
B-4
<PAGE>
or adjustment interval and (2) over the life of the loan. Some residential
mortgage loans restrict periodic adjustments by limiting changes in the
borrower's monthly principal and interest payments rather than limiting
interest rate changes. These payment caps may result in negative amortization.
The market value of mortgage securities, like other U.S. Government
securities, will generally vary inversely with changes in market interest
rates, declining when interest rates rise and rising when interest rates
decline. However, mortgage securities, while having comparable risk of decline
during periods of rising rates, usually have less potential for capital
appreciation than other investments of comparable maturities due to the
likelihood of increased prepayments of mortgages as interest rates decline. In
addition, to the extent such mortgage securities are purchased at a premium,
mortgage foreclosures and unscheduled principal prepayments generally will
result in some loss of the holders' principal to the extent of the premium
paid. On the other hand, if such mortgage securities are purchased at a
discount, an unscheduled prepayment of principal will increase current and
total returns and will accelerate the recognition of income which when
distributed to shareholders will be taxable as ordinary income.
In addition, mortgage-backed securities which are secured by manufactured
(mobile) homes and multi-family residential properties, such as GNMA and FNMA
certificates, are subject to a higher risk of default than are other types of
mortgage-backed securities. The investment adviser will seek to minimize this
risk by investing in mortgage-backed securities rated at least "A" by Moody's
Investor's Service (Moody's) and Standard & Poor's Corporation (S&P).
STRIPS. The Portfolio may invest in component parts of U.S. Government
securities, namely, either the corpus (principal) of such obligations or one
of the interest payments scheduled to be paid on such obligations. These
obligations may take the form of (i) obligations from which the interest
coupons have been stripped, (ii) the interest coupons that are stripped, (iii)
book entries at a Federal Reserve member bank representing ownership of
obligation components or (iv) receipts evidencing the component parts (corpus
or coupons) of U.S. Government obligations that have not actually been
stripped. Such receipts evidence ownership of component parts of U.S.
Government obligations (corpus or coupons) purchased by a third party
(typically an investment banking firm) and held on behalf of the third party
in physical or book-entry form by a major commercial bank or trust company
pursuant to a custody agreement with the third party. U.S. Government
obligations, including those underlying such receipts, are backed by the full
faith and credit of the U.S. Government.
Mortgage-Backed Securities
Mortgage-backed securities are securities that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage
loans secured by real property. There are currently three basic types of
mortgage-backed securities: (i) those issued or guaranteed by the U.S.
Government or one of its agencies or instrumentalities, such as GNMA, FNMA and
FHLMC, described under "U.S. Government Securities" above; (ii) those issued
by private issuers that represent an interest in or are collateralized by
mortgage-backed securities issued or guaranteed by the U.S. Government or one
of its agencies or instrumentalities; and (iii) those issued by private
issuers that represent an interest in or are collateralized by whole mortgage
loans or mortgage-backed securities without a U.S. Government guarantee but
usually having some form of private credit enhancement.
The Portfolio intends to invest in non-agency whole loan mortgage-backed
securities rated at least "AA" by S&P or "Aa" by Moody's.
Private mortgage pass-through securities are structured similarly to the
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.
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 adopted by the Securities and Exchange
Commission (SEC), and the Portfolio may invest in the securities of such
issuers without the limitations imposed by the Investment Company Act of 1940
(the Investment Company Act) on investments by the Portfolio in other
investment companies. In addition, in reliance on an earlier SEC
interpretation, the Portfolio'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 the 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
Portfolio selects CMOs or REMICs that cannot rely on the rule or do not meet
the above requirements, the Portfolio may not invest more than 10% of its
assets in all such entities and may not acquire more than 3% of the voting
securities of any single such entity.
B-5
<PAGE>
MUNICIPAL INCOME PORTFOLIO
The investment objective of the Municipal Income Portfolio is high current
income that is exempt from federal income taxes consistent with the
preservation of principal. The Municipal Income Portfolio will invest
primarily in investment grade municipal securities but may also invest up to
30% of its total assets in lower-rated municipal securities or in non-rated
securities which, in the opinion of the Fund's investment adviser, are of
comparable quality to such investment grade or lower-rated securities. The
Municipal Income Portfolio seeks to achieve its objective primarily through
structuring its portfolio by utilizing a "laddered" maturity strategy. Under
normal market conditions, these securities are allocated by maturity among
eight annual maturity categories ranging from less than one year to between
seven and eight years with each category representing approximately one-eighth
of the Municipal Income Portfolio's assets. As the securities in each annual
category mature or as new investments are made in the Municipal Income
Portfolio, the proceeds will be invested to maintain the balance of
investments among the eight annual maturity categories.
The Municipal Income Portfolio will seek to achieve its investment objective
by investing in a portfolio of obligations issued by or on behalf of states,
territories and possessions of the United States and the District of Columbia
and their political subdivisions, agencies and instrumentalities, the interest
on which is eligible for exclusion from federal income taxation (municipal
obligations or municipal securities).
The Municipal Income Portfolio will invest in "investment grade" tax-exempt
securities which on the date of investment are rated within the four highest
ratings of Moody's, currently Aaa, Aa, A, Baa for bonds, MIG 1, MIG 2, MIG 3,
MIG 4 for notes, and P-1, P-2 and P-3 for commercial paper, or of S&P,
currently AAA, AA, A, BBB for bonds, SP-1, SP-2 and SP-3 for notes and A-1, A-
2 and A-3 for commercial paper, or similarly by a nationally recognized rating
service. The Municipal Income Portfolio may invest up to 30% of its total
assets in municipal securities rated below Baa by Moody's or below BBB by S&P
or similarly by a nationally recognized rating service. The Portfolio may also
invest in non-rated securities of a comparable quality, in the opinion of the
Fund's investment adviser, to the securities in which the Portfolio is
permitted to invest. In addition, the Portfolio may invest up to 5% of its
total assets in municipal securities which are in default in the payment of
principal or interest.
The Prudential Investment Corporation (PIC or the Subadviser) maintains a
municipal credit unit which provides credit analysis and research on tax-
exempt fixed-income securities. The portfolio manager consults routinely with
the credit unit in managing the Municipal Income Portfolio. The municipal
credit unit, which currently maintains a staff of 16 persons, including 12
credit analysts, reviews on an ongoing basis issuers of tax-exempt fixed-
income obligations, including prospective purchases and portfolio holdings of
the Municipal Income Portfolio. Credit analysts have broad access to research
and financial reports, data retrieval services and industry analysts. They
review financial and operating statements supplied by state and local
governments and other issuers of municipal securities to evaluate revenue
projections and the financial soundness of municipal issuers. They study the
impact of economic and political developments on state and local governments,
evaluate industry sectors and meet periodically with public officials and
other representatives of state and local governments and other tax-exempt
issuers to discuss such matters as budget projections, debt policy, the
strength of the regional economy and, in the case of revenue bonds, the demand
for facilities. They also may make site inspections to review specific
projects and to evaluate the progress of construction or the operation of a
facility.
The Municipal Income Portfolio may invest in municipal securities which are
not rated if, based upon a credit analysis by the Subadviser, the Subadviser
believes that the securities are of comparable quality to other investment
grade and lesser quality municipal securities that the Portfolio may purchase.
A description of the ratings is set forth under the heading "Description of
Security Ratings" in the Prospectus of the Municipal Income Portfolio. The
ratings of Moody's and S&P represent the respective opinions of those firms of
the quality of the securities each undertakes to rate. The ratings are general
and are not absolute standards of quality. In determining the suitability for
investment in a particular unrated security, the Subadviser will take into
consideration asset and debt service coverage, the purpose of the financing,
the history of the issuer, the existence of other rated securities of the
issuer, any credit enhancement by virtue of a letter of credit or other
financial guaranty deemed suitable by the investment adviser and other factors
as may be relevant, including comparability to other issuers.
The Portfolio expects that normally it will not invest more than 25% of its
total assets in any one sector of the municipal obligations market including:
hospitals, nursing homes, retirement facilities and other health facilities;
turnpikes and toll roads; ports and airports; colleges and universities; state
and local housing finance authorities; obligations of municipal utilities
systems; or industrial development and pollution control bonds. However,
depending upon prevailing market conditions, the Portfolio may have more than
25% of its total assets invested in any one sector of the municipal
obligations market. Each of the foregoing types of investments might be
subject to particular risks which, to the extent that the Municipal Income
Portfolio is concentrated in such investments, could affect the value or
liquidity of the Portfolio.
As in the past, proposals may be submitted to Congress in the future with
the intended effect of eliminating or further restricting the issuance of
municipal obligations or the federal tax exemption for interest paid on
municipal obligations. In that event, the Portfolio may re-evaluate its
investment objectives.
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The Municipal Income Portfolio may invest in the following types of
securities.
Municipal Securities
Municipal securities include notes and bonds issued by or on behalf of
states, territories and possessions of the United States and their political
subdivisions, agencies and instrumentalities and the District of Columbia, the
interest on which is generally eligible for exclusion from federal income tax
and, in certain instances, applicable state or local income and personal
property taxes. Such securities are traded primarily in the over-the-counter
market.
MUNICIPAL BONDS. Municipal bonds are issued to obtain funds for various
public purposes, including the construction of a wide range of public
facilities such as airports, bridges, highways, housing, hospitals, mass
transportation, schools, streets, water and sewer works and gas and electric
utilities. Municipal bonds also may be issued in connection with the refunding
of outstanding obligations and obtaining funds to lend to other public
institutions or for general operating expenses.
The two principal classifications of municipal bonds are "general
obligation" and "revenue." General obligation bonds are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise tax or other specific revenue source.
Industrial development bonds are issued by or on behalf of public
authorities to obtain funds to provide various privately-operated facilities
for business and manufacturing, housing, sports, pollution control, and for
airport, mass transit, port and parking facilities. Although industrial
development bonds (IDBs) are issued by municipal authorities, they are
generally secured by the revenues derived from payments of the industrial
user. The payment of the principal and interest on IDBs is dependent solely on
the ability of the user of the facilities financed by the bonds to meet its
financial obligations and the pledge, if any, of real and personal property so
financed as security for the payment.
MUNICIPAL NOTES. Municipal notes generally are used to provide for short-
term capital needs and generally have maturities of one year or less.
Municipal notes include:
1. Tax Anticipation Notes. Tax Anticipation Notes are issued to finance
working capital needs of municipalities. Generally, they are issued in
anticipation of various seasonal tax revenues, such as income, sales, use and
business taxes, and are payable from these specific future taxes.
2. Revenue Anticipation Notes. Revenue Anticipation Notes are issued in the
expectation of receipt of other kinds of revenue, such as federal revenues
available under the Federal Revenue Sharing Programs.
3. Bond Anticipation Notes. Bond Anticipation Notes are issued to provide
interim financing until long-term financing can be arranged. In most cases,
the long-term bonds then provide the money for the repayment of the Notes.
4. Construction Loan Notes. Construction Loan Notes are sold to provide
construction financing. Permanent financing, the proceeds of which are applied
to the payment of Construction Loan Notes, is sometimes provided by a
commitment by the Government National Mortgage Association (GNMA) to purchase
the loan, accompanied by a commitment by the Federal Housing Administration to
insure mortgage advances thereunder. In other instances, permanent financing
is provided by commitments of banks to purchase the loan.
TAX-EXEMPT COMMERCIAL PAPER. Issues of tax-exempt commercial paper, the
interest on which is generally exempt from federal income taxes, typically are
represented by short-term, unsecured, negotiable promissory notes. These
obligations are issued by agencies of state and local governments to finance
seasonal working capital needs of municipalities or to provide interim
construction financing and are paid from general revenues of municipalities or
are refinanced with long-term debt. In most cases, tax-exempt commercial paper
is backed by letters of credit, lending agreements, note repurchase agreements
or other credit facility agreements offered by banks or other institutions and
is actively traded.
SPECIAL CONSIDERATIONS RELATING TO MUNICIPAL SECURITIES. Unlike many issues
of common and preferred stock and corporate bonds which are traded between
brokers acting as agents for their customers on securities exchanges,
municipal obligations are customarily purchased from or sold to dealers who
are selling or buying for their own account. Most municipal obligations are
not required to be registered with or qualified for sale by federal or state
securities regulators. Since there are large numbers of municipal obligation
issues of many different issuers, most issues do not trade on any single day.
On the other hand, most issues are always marketable, since a major dealer
will normally, on request, bid for any issue, other than obscure ones.
Regional municipal securities dealers are frequently more willing to bid on
issues of municipalities in their geographic area.
Although almost all municipal obligations are marketable, the structure of
the market introduces its own element of risk; a seller may find, on occasion,
that dealers are unwilling to make bids for certain issues that the seller
considers reasonable. If the seller is forced to sell, he or she may realize a
capital loss that would not have been necessary in different circumstances.
Because the net
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asset value of the Municipal Income Portfolio's shares reflects the degree of
willingness of dealers to bid for municipal obligations, the price of its
shares may be subject to greater fluctuation than shares of other investment
companies with different investment policies. See "Net Asset Value."
OTHER INVESTMENTS APPLICABLE TO BOTH PORTFOLIOS
REPURCHASE AGREEMENTS. Each Portfolio may enter into repurchase agreement
transactions. Each Portfolio's repurchase agreements will be collateralized by
U.S. Government obligations. Each Portfolio will enter into repurchase
transactions only with parties meeting creditworthiness standards approved by
the Fund's Board of Directors. The Fund's investment adviser will monitor the
creditworthiness of such parties, under the general supervision of the Board
of Directors. In the event of a default or bankruptcy by a seller, each
Portfolio 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, each Portfolio will suffer a
loss.
The Fund participates in a joint repurchase 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 each
Portfolio 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.
MONEY MARKET INSTRUMENTS. Each Portfolio may invest in high quality money
market instruments, including:
1. Obligations denominated in U.S. dollars (including certificates of
deposit, bankers' acceptances and time deposits) of commercial banks, savings
banks and savings and loan associations having, at the time of acquisition by
each Portfolio of such obligations, total assets of not less than $1 billion
or its equivalent. Each Portfolio may invest in obligations of domestic banks,
foreign banks, and branches and offices thereof. The term "certificates of
deposit" includes both Eurodollar certificates of deposit, for which there is
generally a market, and Eurodollar time deposits, for which there is generally
not a market. "Eurodollars" are U.S. dollars deposited in banks outside the
United States. For this purpose, the certificates of deposit may have terms in
excess of one year.
2. Commercial paper, variable amount demand master notes, bills, notes and
other obligations issued by a U.S. company, a foreign company or a foreign
government, its agencies, instrumentalities or political subdivisions,
maturing in one year or less, denominated in U.S. dollars, and, at the date of
investment, rated at least "A-2" by S&P or "Prime-2" by Moody's, or, if not
rated, issued by an entity having an outstanding unsecured debt issue rated at
least "A" or "A-2" by S&P or "A" or "Prime-2" by Moody's. If such obligations
are guaranteed or supported by a letter of credit issued by a bank, the bank
(including a foreign bank) must meet the requirements set forth in paragraph 1
above. If such obligations are guaranteed or insured by an insurance company
or other non-bank entity, the insurance company or other non-bank entity must
represent a credit of high quality, as determined by the Fund's Board of
Directors. Under the Investment Company Act, a guaranty is not deemed to be a
security of the guarantor for purposes of satisfying the diversification
requirements provided that the securities issued or guaranteed by the
guarantor and held by each Portfolio do not exceed 10% of the Portfolio's
total assets.
LENDING OF SECURITIES. Consistent with applicable regulatory requirements,
each Portfolio may lend its portfolio securities to brokers, dealers and
financial institutions, provided that outstanding loans do not exceed in the
aggregate 30% of the value of the Portfolio's total assets and that such loans
are callable at any time by the Portfolio and are at all times secured by cash
or equivalent collateral that is equal to at least the market value,
determined daily, of the loaned securities. The advantage of such loans is
that the Portfolio continues to receive payments in lieu of the interest and
dividends of the loaned securities, while at the same time earning interest
either directly from the borrower or on the collateral which will be invested
in short-term obligations.
A loan may be terminated by the borrower on one business day's notice or by
the Portfolio at any time. If the borrower fails to maintain the requisite
amount of collateral, the loan automatically terminates, and the Portfolio
could use the collateral to replace the securities while holding the borrower
liable for any excess of replacement cost over collateral. As with any
extensions of credit, there are risks of delay in recovery and in some cases
loss of rights in the collateral should the borrower of the securities fail
financially. However, these loans of portfolio securities will be made only to
firms determined to be creditworthy pursuant to procedures approved by the
Board of Directors of the Fund. On termination of the loan, the borrower is
required to return the securities to the Portfolio, and any gain or loss in
the market price during the loan would inure to the Portfolio.
Since voting or consent rights, if any, which accompany loaned securities
pass to the borrower, the Portfolio will follow the policy of calling the
loan, in whole or in part as may be appropriate, to permit the exercise of
such rights if the matters involved would have a material effect on the
Portfolio's investment in the securities which are the subject of the loan.
The Portfolio will pay reasonable finders', administrative and custodial fees
in connection with a loan of its securities or may share the interest earned
on collateral with the borrower.
RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES. Fixed-income
securities are subject to the risk of an issuer's inability to meet principal
and interest payments on the obligations (credit risk) and may also be subject
to price volatility due to such factors as interest rate sensitivity, market
perception of the creditworthiness of the issuer and general market liquidity
(market risk).
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Lower rated or unrated (i.e., high yield) securities, commonly referred to as
"junk bonds," are more likely to react to developments affecting market and
credit risk than are more highly rated securities, which react primarily to
movements in the general level of interest rates. The investment adviser
considers both credit risk and market risk in making investment decisions for
the Portfolios. Investors should carefully consider the relative risks of
investing in high yield securities and understand that such securities are not
generally meant for short-term investing.
Federal laws require the divestiture by federally insured savings and loan
associations of their investments in high yield bonds and limit the
deductibility of interest by certain corporate issuers of high yield bonds.
These laws could also adversely affect the Portfolio's net asset value and
investment practices, the secondary market for high yield securities, the
financial condition of issuers of these securities and the value of
outstanding high yield securities.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Portfolios
may have to replace the security with a lower yielding security, resulting in
a decreased return for investors. If the Portfolios experience unexpected net
redemptions, they may be forced to sell their higher quality securities,
resulting in a decline in the overall credit quality of the Portfolios and
increasing the exposure of the Portfolios to the risks of high yield
securities.
OTHER INVESTMENTS APPLICABLE TO THE INCOME PORTFOLIO
WORLD BANK OBLIGATIONS. The Income Portfolio may purchase obligations of the
International Bank for Reconstruction and Development (the World Bank).
Obligations of the World Bank are supported by appropriated but unpaid
commitments of its member countries, including the U.S., and there is no
assurance these commitments will be undertaken or met in the future.
INSTRUMENTS WITH PUTS. The Income Portfolio may purchase money market
instruments together with the right to resell the instruments at an agreed-
upon price or yield within a specified period prior to the maturity date of
the instruments. Such a right to resell is commonly known as a "put," and the
aggregate price which the Portfolio pays for instruments with puts may be
higher than the price which otherwise would be paid for the instruments.
Consistent with the Portfolio's investment objective and applicable rules
issued by the SEC and subject to the supervision of the Board of Directors,
the purpose of this practice is to permit the Portfolio to be fully invested
while preserving the necessary liquidity to meet unusually large redemptions
and to purchase at a later date securities other than those subject to the
put. Puts may be exercised prior to the expiration date in order to fund
obligations to purchase other securities or to meet redemption requests. These
obligations may arise during periods in which proceeds from sales of Portfolio
shares and from recent sales of portfolio securities are insufficient to meet
such obligations or when the funds available are otherwise allocated for
investment. In addition, puts may be exercised prior to the expiration date in
the event the investment adviser revises its evaluation of the
creditworthiness of the issuer of the underlying security. In determining
whether to exercise puts prior to their expiration date and in selecting which
puts to exercise in such circumstances, the investment adviser considers,
among other things, the amount of cash available to the Portfolio, the
expiration dates of the available puts, any future commitments for securities
purchases, the yield, quality and maturity dates of the underlying securities,
alternative investment opportunities and the desirability of retaining the
underlying securities in the Portfolio. When the put is at the option of the
Portfolio, the Portfolio considers the maturity of an instrument subject to
the put to be the earlier of the put expiration date or the stated maturity of
the instrument.
Since the value of the put is dependent on the ability of the put writer to
meet its obligation to repurchase, the Portfolio's policy is to enter into put
transactions only with such brokers, dealers or financial institutions which
present minimal credit risks. There is a credit risk associated with the
purchase of puts in that the broker, dealer or financial institution might
default on its obligation to repurchase an underlying security. In the event
such a default should occur, the Portfolio is unable to predict whether all or
any portion of any loss sustained could subsequently be recovered from the
broker, dealer or financial institution.
OPTIONS TRANSACTIONS. The Income Portfolio reserves the right to enter into
options transactions but has no intention of doing so in the foreseeable
future and until supplemental disclosure is provided in the Prospectus and
Statement of Additional Information.
INTEREST RATE SWAP TRANSACTIONS. The Income Portfolio may enter into
interest rate swap transactions, on either an asset-based or liability-based
basis, depending on whether it is hedging its assets or its liabilities. Under
normal circumstances, the Portfolio will enter into interest rate swaps on a
net basis, i.e., the two payment streams are netted out, with the Portfolio
receiving or paying, as the case may be, only the net amount of the two
payments. The net amount of the excess, if any, of the Portfolio'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 with the Fund's Custodian. To the extent
that the Portfolio 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
Portfolio's obligations, if any, with respect to such interest rate swaps,
accrued on a daily basis. Inasmuch as segregated accounts are established for
these hedging transactions, the investment adviser and the Portfolio believe
such obligations do not constitute senior securities. If there is a default by
the other party to such a transaction, the Portfolio will have contractual
remedies pursuant to the agreement related to the transaction. The swap market
has grown substantially in recent
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years with a large number of banks and investment banking firms. Since
interest rate swaps are individually negotiated, the Portfolio 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. The risk of loss with
respect to interest rate swaps is limited to the net amount of interest
payments that the Portfolio is contractually obligated to make and will not
exceed 5% of the Portfolio's net assets. The Portfolio will enter into
interest rate swaps only with parties meeting creditworthiness standards
approved by the Fund's Board of Directors. The investment adviser will monitor
the creditworthiness of such parties under the supervision of the Board of
Directors.
INTEREST RATE FUTURES CONTRACTS. As a purchaser of an interest rate futures
contract (futures contract), the Income Portfolio incurs an obligation to take
delivery of a specified amount of the obligation underlying the futures
contract at a specified time in the future for a specified price. As a seller
of a futures contract, the Portfolio incurs an obligation to deliver the
specified amount of the underlying obligation at a specified time in return
for an agreed upon price.
The Income Portfolio will purchase or sell futures contracts for the purpose
of hedging its portfolio (or anticipated portfolio) securities against changes
in prevailing interest rates. If the investment adviser anticipates that
interest rates may rise and, concomitantly, the price of U.S. Government or
other debt securities falls, the Portfolio may sell a futures contract. If
declining interest rates are anticipated, the Portfolio may purchase a futures
contract to protect against a potential increase in the price of U.S.
Government or other debt securities the Portfolio intends to purchase.
Subsequently, appropriate U.S. Government or other debt securities may be
purchased by the Portfolio in an orderly fashion; as securities are purchased,
corresponding futures positions would be terminated by offsetting sales of
contracts. In addition, futures contracts will be bought or sold in order to
close out a short or long position in a corresponding futures contract.
Although most futures contracts call for actual delivery or acceptance of
securities, the contracts usually are closed out before the settlement date
without the making or taking of delivery. A futures contract sale is closed
out by effecting a futures contract purchase for the same aggregate amount of
the specific type of security and the same delivery date. If the sale price
exceeds the offsetting purchase price, the seller would be paid the difference
and would realize a gain. If the offsetting purchase price exceeds the sale
price, the seller would pay the difference and would realize a loss.
Similarly, a futures contract purchase is closed out by effecting a futures
contract sale for the same aggregate amount of the specific type of security
and the same delivery date. If the offsetting sale price exceeds the purchase
price, the purchaser would realize a gain, whereas if the purchase price
exceeds the offsetting sale price, the purchaser would realize a loss. There
is no assurance that the Portfolio will be able to enter into a closing
transaction.
When the Portfolio enters into a futures contract it is initially required
to deposit with the Fund's Custodian, in a segregated account in the name of
the broker performing the transaction, an "initial margin" of cash or U.S.
Government securities equal to approximately 2-3% of the contract amount.
Initial margin requirements are established by the exchanges on which futures
contracts trade and may, from time to time, change. In addition, brokers may
establish margin deposit requirements in excess of those required by the
exchanges.
Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing
of funds by a broker's client but is, rather, a good faith deposit on the
futures contract which will be returned to the Portfolio upon the proper
termination of the futures contract. The margin deposits made are marked to
market daily and the Portfolio may be required to make subsequent deposits
into the segregated account, maintained at the Fund's Custodian for that
purpose, or cash or U.S. Government securities, called "variation margin", in
the name of the broker, which are reflective of price fluctuations in the
futures contract. Currently, interest rate futures contracts can be purchased
on debt securities such as U.S. Treasury Bills, Notes and Bonds, Eurodollar
instruments, GNMA Certificates and Bank Certificates of Deposit.
The Portfolio may purchase Eurodollar futures and options thereon, which are
essentially U.S. dollar-denominated futures contracts or options linked to
LIBOR. 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
Portfolio would use Eurodollar futures contracts and options thereon to hedge
against changes in LIBOR, to which many interest rates swaps are linked.
OPTIONS ON FUTURES CONTRACTS. The Income Portfolio may purchase call and put
options on futures contracts which are traded on an exchange and enter into
closing transactions with respect to such options to terminate an existing
position. An option on a futures contract gives the purchaser the right (in
return for the premium paid), and the writer the obligation, 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 term of the option. Upon exercise of the option, the
assumption of offsetting futures positions by the writer and the holder of the
option will be accompanied by the delivery of the accumulated balance in the
writer's futures margin account, which represents the amount by which the
market price of the futures contract at the time of 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.
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The Portfolio will purchase options on futures contracts for identical
purposes to those set forth above for the purchase of a futures contract
(purchase of a call option or sale of a put option) and the sale of a futures
contract (purchase of a put option or sale of a call option), or to close out
a long or short position in futures contracts. If, for example, the investment
adviser wished to protect against an increase in interest rates and the
resulting negative impact on the value of a portion of its U.S. Government
securities portfolio, it might purchase a put option on an interest rate
futures contract, the underlying security of which correlates with the portion
of the portfolio the investment adviser seeks to hedge.
LIMITATIONS ON FUTURES CONTRACTS AND OPTIONS ON FUTURES. Under regulations
of the Commodity Exchange Act, investment companies registered under the
Investment Company Act are exempted from the definition of "commodity pool
operator," subject to compliance with certain conditions. The exemption is
conditioned upon a requirement that all of the fund's futures or options
transactions constitute bona fide hedging transactions within the meaning of
the regulations of the Commodity Futures Trading Commission. The Fund may also
enter into futures contracts or options thereon for risk management and income
enhancement purposes if the aggregate initial margin for such contracts and
premiums paid for such options does not exceed 5% of the liquidation value of
the Fund's total assets. The Income Portfolio will use futures contracts and
options thereon in a manner consistent with these requirements.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. The Income
Portfolio may sell a futures contract to protect against the decline in the
value of U.S. Government securities and other debt securities held by the
Portfolio. However, it is possible that the futures market may advance and the
value of securities held in the Portfolio may decline. If this were to occur,
the Portfolio would lose money on the futures contracts and also experience a
decline in value in its portfolio securities. However, while this could occur
for a very brief period or to a very small degree, over time the market prices
of the securities of a diversified portfolio will tend to move in the same
direction as the prices of futures contracts.
If the Portfolio purchases a futures contract to hedge against the increase
in value of U.S. Government securities it intends to buy, and the value of
such securities decreases, then the Portfolio may determine not to invest in
the securities as planned and will realize a loss on the futures contract that
is not offset by a reduction in the price of the securities.
If the Portfolio maintains a short position in a futures contract, it will
cover this position by holding, in a segregated account maintained at the
Fund's Custodian, cash, U.S. Government securities or other liquid, high-grade
debt obligations equal in value (when added to any initial or variation margin
on deposit) to the market value of the securities underlying the futures
contract. Such a position may also be covered by owning the securities
underlying the futures contract, or by holding a call option permitting the
Portfolio to purchase the same contract at a price no higher than the price at
which the short position was established.
In addition, if the Portfolio holds a long position in a futures contract,
it will hold cash, U.S. Government securities or other liquid, high-grade debt
obligations equal to the purchase price of the contract (less the amount of
initial or variation margin on deposit) in a segregated account maintained for
the Portfolio by the Fund's Custodian. Alternatively, the Portfolio could
cover its long position by purchasing 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 Portfolio.
Exchanges limit the amount by which the price of a futures contract may move
on any day. If the price moves equal the daily limit on successive days, then
it may prove impossible to liquidate a futures position until the daily limit
moves have ceased. In the event of adverse price movements, the Portfolio
would continue to be required to make daily cash payments of variation margin
on open futures positions. In such situations, if the Portfolio has
insufficient cash, it may be disadvantageous to do so. In addition, the
Portfolio may be required to take or make delivery of the instruments
underlying interest rate futures contracts it holds at a time when it is
disadvantageous to do so. The ability to close out options and futures
positions could also have an adverse impact on the Portfolio's ability to
effectively hedge its portfolio.
In the event of the bankruptcy of a broker through which the Portfolio
engages in transactions in futures or options thereon, the Portfolio could
experience delays and/or losses in liquidating open positions purchased or
sold through the broker and/or incur a loss of all or part of its margin
deposits with the broker. Transactions are entered into by the Portfolio only
with brokers or financial institutions deemed creditworthy by the investment
adviser.
While the futures contracts and options transactions to be engaged in by the
Portfolio for the purpose of hedging the Portfolio's securities are not
speculative in nature, there are risks inherent in the use of such
instruments. One such risk which may arise in employing futures contracts to
protect against the price volatility of the Portfolio's securities is that the
prices of securities subject to futures contracts (and thereby the futures
contract prices) may correlate imperfectly with the behavior of the cash
prices of the Portfolio's securities. Another such risk is that prices of
interest rate futures contracts may not move in tandem with the changes in
prevailing interest rates against which the Portfolio seeks a hedge. A
correlation may also be distorted by the fact that the futures market is
dominated by short-term traders seeking to profit from the difference between
a contract or security price objective and their cost of borrowed funds. Such
distortions are generally minor and would diminish as the contract approached
maturity.
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There may exist an imperfect correlation between the price movements of
futures contracts purchased by the Portfolio and the movements in the prices
of the securities which are the subject of the hedge. If participants in the
futures market elect to close out their contracts through offsetting
transactions rather than meet margin deposit requirements, distortions in the
normal relationships between the debt securities and futures market could
result. Price distortions could also result if investors in futures contracts
elect to make or take delivery of underlying securities rather than engage in
closing transactions due to the resultant reduction in the liquidity of the
futures market. In addition, due to the fact that, from the point of view of
speculators, the deposit requirements in the futures markets are less onerous
than margin requirements in the cash market, increased participation by
speculators in the futures market could cause temporary price distortions. Due
to the possibility of price distortions in the futures market and because of
the imperfect correlation between movements in the prices of U.S. Government
securities and movements in the prices of futures contracts, a correct
forecast of interest rate trends by the investment adviser may still not
result in a successful hedging transaction.
There is no assurance that a liquid secondary market will exist for the
futures contracts and options thereon in which the Portfolio may invest. In
the event a liquid market does not exist, it may not be possible to close out
a futures position, and in the event of adverse price movements, the Portfolio
would continue to be required to make daily cash payments of variation margin.
In addition, limitations imposed by an exchange or board of trade on which
futures contracts are traded may compel or prevent the Portfolio from closing
out a contract which may result in reduced gain or increased loss to the
Portfolio. The absence of a liquid market in futures contracts might cause the
Portfolio to make or take delivery of the underlying securities at a time when
it may be disadvantageous to do so.
Compared to the purchase or sale of futures contracts, the purchase of call
or put options on futures contracts involves less potential risk to the
Portfolio because the maximum amount at risk is the premium paid for the
options (plus transaction costs). However, there may be circumstances when the
purchase of a call or put option on a futures contract would result in a loss
to the Portfolio notwithstanding that the purchase or sale of a futures
contract would not result in a loss, as in the instance where there is no
movement in the prices of the futures contracts or underlying U.S. Government
securities.
The Portfolio will limit its use of futures contracts and options thereon to
the purchase of Eurodollar futures contracts and options thereon linked to
LIBOR.
ILLIQUID SECURITIES. The Income Portfolio may invest up to 10% of its net
assets (determined at the time of investment) in illiquid securities including
securities for which there are legal or contractual restrictions on resale,
securities for which there is no readily available market and repurchase
agreements having maturities of more than seven days. See "Investment
Restrictions."
When the Income Portfolio enters into interest rate swaps on other than a
net basis, the entire amount of the Portfolio's obligations, if any, with
respect to such interest rate swaps will be treated as illiquid. To the extent
that the Portfolio enters into interest rate swaps on a net basis, the net
amount of the excess, if any, of the Portfolio's obligations over its
entitlements with respect to each interest rate swap will be treated as
illiquid.
PORTFOLIO TURNOVER. The Income Portfolio's turnover rates in 1993, 1992 and
1991 were 137%, 91% and 117%, respectively. The investment adviser expects
that, under normal circumstances, the Portfolio's turnover rate may be as high
as 200%. See "How the Fund Invests--Investment Objective and Policies" in the
Prospectuses.
OTHER INVESTMENTS APPLICABLE TO THE MUNICIPAL INCOME PORTFOLIO
INSTRUMENTS WITH PUTS. The Municipal Income Portfolio may acquire put
options (puts) giving the Municipal Income Portfolio the right to sell
securities held in the Portfolio at a specified exercise price on a specified
date. Such puts may be acquired for the purpose of protecting the Portfolio
from a possible decline in the market value of the securities to which the put
applies in the event of interest rate fluctuations and, in the case of
liquidity puts, to shorten the effective maturity of the underlying security.
The aggregate value of the premiums paid to acquire puts held in the Portfolio
(other than the liquidity puts) may not exceed 10% of the net asset value of
the Portfolio. The acquisition of a put may involve an additional cost to the
Portfolio, by payment of a premium for the put, by payment of a higher
purchase price for securities to which the put is attached or through a lower
effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase
the underlying security. Accordingly, the Portfolio will acquire puts only
under the following circumstances: (1) the put is written by the issuer of the
underlying security and such security is rated within the four highest quality
grades as determined by Moody's or S&P; (2) the put is written by a person
other than the issuer of the underlying security and such person has
securities outstanding which are rated within such four highest quality
grades, or (3) the put is backed by a letter of credit or similar financial
guarantee issued by a person having securities outstanding which are rated
within the four highest quality grades of such rating services.
FUTURES CONTRACTS. The Municipal Income Portfolio may engage in transactions
in financial futures contracts and options thereon (1) to hedge its securities
against fluctuations in value caused by changes in prevailing market interest
rates; (2) to hedge against the risk of bonds being called; (3) to hedge
against increases in the cost of securities the Portfolio intends to purchase;
and (4) to create a
B-12
<PAGE>
"synthetic" security that will fit into one of the maturity categories. A
clearing corporation associated with the commodities exchange on which a
futures contract trades assumes responsibility for the completion of
transactions and guarantees that open futures contracts will be closed.
Although interest rate futures contracts call for actual delivery or
acceptance of debt securities, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery of the
underlying security.
When the futures contract is entered into, each party deposits with a broker
or in a segregated custodial account approximately 5% of the contract amount,
called the "initial margin." Subsequent payments to and from the broker,
called "variation margin," will be made on a daily basis as the price of the
underlying security or index fluctuates, making the long and short positions
in the futures contracts more or less valuable, a process known as "marking to
market." In the case of options on futures contracts, the holder of the option
pays a premium and receives the right, upon exercise of the option at a
specified price during the option period, to assume a position in the futures
contract (a long position if the option is a call and a short position if the
option is a put). If the option is exercised by the holder before the last
trading day during the option period, the option writer delivers the futures
position, as well as any balance in the writer's futures margin account. If it
is exercised on the last trading day, the option writer delivers to the option
holder cash in an amount equal to the difference between the option exercise
price and the closing level of the relevant index on the date the option
expires.
When the Municipal Income Portfolio purchases a futures contract, it will
maintain an amount of cash, cash equivalents (e.g., commercial paper and daily
tender adjustable rate notes) or liquid, high-grade, fixed-income securities
in a segregated account with the Fund's Custodian, so that the amount so
segregated plus the amount of initial and variation margin held in the account
of its broker equals the market value of the futures contract, thereby
ensuring that the use of such futures contract is unleveraged. A portfolio
that has sold a futures contract may "cover" that position by owning the
instruments underlying the futures contract or by holding a call option on
such futures contract. The Municipal Income Portfolio will not sell futures
contracts if the value of such futures contracts exceeds the total market
value of the securities of the Municipal Income Portfolio. It is not
anticipated that transactions in futures contracts will have the effect of
increasing portfolio turnover.
OPTIONS ON FINANCIAL FUTURES. The Municipal Income Portfolio may purchase
call options and write put and call options on futures contracts and enter
into closing transactions with respect to such options to terminate an
existing position. The Portfolio will use options on futures primarily in
connection with hedging strategies but may also engage in such transactions
for risk management and income enhancement purposes.
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 period of the option. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated 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. If an option is
exercised on the last trading day prior to the expiration date of the option,
the settlement will be made entirely in cash equal to the difference between
the exercise price of the option and the closing price of the futures contract
on the expiration date. Currently options can be purchased or written with
respect to futures contracts on U.S. Treasury Bonds, among other fixed-income
securities, and on municipal bond indices on the Chicago Board of Trade. As
with options on debt securities, the holder or writer of an option may
terminate his or her position by selling or purchasing an option of the same
series. There is no guaranty that such closing transactions can be effected.
When the Municipal Income Portfolio hedges its portfolio by purchasing a put
option, or writing a call option, on a futures contract, it will own a long
futures position or an amount of debt securities corresponding to the open
option position. When the Municipal Income Portfolio writes a put option on a
futures contract, it may, rather than establish a segregated account, sell the
futures contract underlying the put option or purchase a similar put option.
In instances involving the purchase of a call option on a futures contract,
the Municipal Income Portfolio will deposit in a segregated account with the
Fund's Custodian an amount in cash, cash equivalents or liquid, high-grade,
fixed-income securities equal to the market value of the obligation underlying
the futures contract, less any amount held in the initial and variation margin
accounts.
LIMITATIONS ON PURCHASE AND SALE. The Municipal Income Portfolio is subject
to the same limitations on purchase and sales of futures contracts and options
thereon as are described above under "Investments Applicable to the Income
Portfolio." The Municipal Income Portfolio will use financial futures and
options thereon in a manner consistent with these requirements. In addition,
the Municipal Income Portfolio may not enter into futures contracts if,
immediately thereafter, the sum of the amount of initial and net cumulative
variation margin on outstanding futures contracts, together with premiums paid
on options thereon, would exceed 20% of the total assets of the Municipal
Income Portfolio. The Municipal Income Portfolio will continue to invest
substantially all of its net assets in municipal securities except in certain
limited circumstances, as described in the Prospectus of the Municipal Income
Portfolio under "How the Fund Invests--Investment Objective and Policies."
B-13
<PAGE>
RISKS OF FINANCIAL FUTURES TRANSACTIONS. In addition to the risk associated
with predicting movements in the direction of interest rates, discussed in
"How the Fund Invests--Hedging and Income Enhancement Strategies--Special
Risks of Hedging and Income Enhancement Strategies" in the Prospectus for the
Municipal Income Portfolio, there are a number of other risks associated with
the use of financial futures for hedging purposes.
The Municipal Income Portfolio intends to purchase and sell futures
contracts only on exchanges where there appears to be a market in the futures
sufficiently active to accommodate the volume of its trading activity. There
can be no assurance that a liquid market will always exist for any particular
contract at any particular time. Accordingly, there can be no assurance that
it will always be possible to close a futures position when such closing is
desired; and, in the event of adverse price movements, the Municipal Income
Portfolio would continue to be required to make daily cash payments of
variation margin. However, if futures contracts have been sold to hedge
portfolio securities, these securities will not be sold until the offsetting
futures contracts can be purchased. Similarly, if futures have been bought to
hedge anticipated securities purchases, the purchases will not be executed
until the offsetting futures contracts can be sold.
The hours of trading of interest rate futures contracts may not conform to
the hours during which the Portfolio may trade municipal securities. To the
extent that the futures markets close before the municipal securities market,
significant price and rate movements can take place that cannot be reflected
in the futures markets on a day-to-day basis.
RISKS OF TRANSACTIONS IN OPTIONS ON FINANCIAL FUTURES. In addition to the
risks which apply to all options transactions, there are several special risks
relating to options on futures. The ability to establish and close out
positions on such options will be subject to the maintenance of a liquid
secondary market. Compared to the sale of financial futures, the purchase of
put options on financial futures involves less potential risk to the Municipal
Income Portfolio because the maximum amount at risk is the premium paid for
the options (plus transaction costs). However, there may be circumstances when
the purchase of a put option on a financial future would result in a loss to
the Municipal Income Portfolio when the sale of a financial future would not,
such as when there is no movement in the price of debt securities.
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. Although the Municipal
Income Portfolio generally will purchase 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, or 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 Municipal Income
Portfolio would have to exercise its options in order to realize any profit
and would incur transaction costs upon the sale of underlying securities put
options.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options or underlying securities; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the
facilities of an exchange may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date 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 could
continue to be exercisable in accordance with their terms.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain clearing facilities
inadequate, and thereby result in the institution by an exchange of special
procedures which may interfere with the timely execution of customers' orders.
RISKS OF INVESTING IN DEFAULTED SECURITIES. The Municipal Income Portfolio
may invest up to 5% of its total assets in municipal securities that are in
default in the payment of principal or interest or in securities of issuers
involved in bankruptcy proceedings. There are a number of risks associated
with investments in such securities. The primary risk relating to these
investments is that the assets of the issuer upon reorganization from
bankruptcy and after payment of creditors' claims will be insufficient to
cover the municipal obligations held by the Portfolio. There is the
possibility that the Portfolio may incur substantial or total losses on its
investments. To the extent the Portfolio has a significant position in the
securities of a defaulting issuer, it may elect as a shareholder (or
debtholder) to participate in the foreclosure proceedings. Under such
circumstances, the Portfolio could incur legal fees and other expenses in
connection with its investment without ensuring recovery or positive results.
Securities of financially troubled issuers are less liquid and more volatile
than securities of companies not experiencing financial difficulties. The
market prices of such securities are subject to erratic and abrupt market
movements and the spread between bid and asked prices may be greater than
normally expected. In addition, it is anticipated that many of the Portfolio's
investments may not be widely traded. As a result, the Portfolio may
experience delays and incur losses and other costs in connection with the sale
of its portfolio securities.
B-14
<PAGE>
ILLIQUID SECURITIES. The Municipal Income Portfolio 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 contractual
restrictions on resale. Repurchase agreements subject to demand are deemed to
have a maturity equal to the notice period.
Mutual funds do not typically hold a significant amount of illiquid
securities because of the potential for delays on resale and uncertainty in
valuation. Limitations on resale may have an adverse affect on the
marketability of portfolio securities and a mutual fund might be unable to
dispose of illiquid securities promptly or at reasonable prices and might
thereby experience difficulty satisfying redemptions within seven days.
Municipal lease obligations will not be considered illiquid for purposes of
the Municipal Income Portfolio's 15% limitation on illiquid securities
provided the investment adviser determines that there is a readily available
market for such securities. 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). With respect to municipal lease obligations, the investment
adviser also considers: (1) the willingness of the municipality to continue,
annually or biannually, to appropriate funds for payment of the lease; (2) the
general credit quality of the municipality and the essentiality to the
municipality of the property covered by the lease; (3) in the case of unrated
municipal lease obligations, an analysis of factors similar to that performed
by nationally recognized statistical rating organizations in evaluating the
credit quality of a municipal lease obligation, including (i) whether the
lease can be cancelled; (ii) if applicable, what assurance there is that the
assets represented by the lease can be sold; (iii) the strength of the
lessee's general credit (e.g., its debt, administrative, economic and
financial characteristics); (iv) the likelihood that the municipality will
discontinue appropriating funding for the leased property because the property
is no longer deemed essential to the operations of the municipality (e.g., the
potential for an event of nonappropriation); and (v) the legal recourse in the
event of failure to appropriate; and (4) any other factors unique to municipal
lease obligations as determined by the investment adviser.
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 outstanding voting securities of each Portfolio of the Fund. A
"majority of the 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.
Each Portfolio of the Fund may not:
1. Purchase securities on margin (but each Portfolio may obtain such short-
term credits as may be necessary for the clearance of transactions); provided
that the deposit or payment by the Fund of initial or variation margin in
connection with options or futures contracts is not considered the purchase of
a security on margin.
2. Make short sales of securities or maintain a short position, except short
sales "against the box" (except with respect to the Municipal Income
Portfolio).
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) from banks for temporary, extraordinary or emergency
purposes or for the clearance of transactions and may pledge up to 20% of the
value of its total assets to secure such borrowings. The purchase or sale of
securities on a "when-issued" or delayed delivery basis, and the purchase and
sale of financial futures contracts and collateral arrangements with respect
thereto and with respect to interest rate swap transactions, covered dollar
rolls and reverse repurchase agreements, are not deemed to be a pledge of
assets and such arrangements are not deemed to be the issuance of a senior
security. The Fund will not purchase portfolio securities if its borrowings
exceed 5% of its net assets.
4. Purchase any security (other than obligations of the U.S. Government, its
agencies and instrumentalities including municipal obligations and obligations
guaranteed as to principal and interest) if as a result: (i) with respect to
75% of its net assets, more than 5% of the Portfolio's total assets
(determined at the time of investment) would then be invested in securities of
a single issuer (except with respect to Municipal Income Portfolio) or (ii)
25% or more of the Portfolio's total assets (determined at the time of
investment) would be invested in one or more issuers having their principal
business activities in the same industry.
5. Purchase securities, other than obligations of the U.S. Government, its
agencies or instrumentalities, of any issuer having a record, together with
predecessors, of less than three years of continuous operations if,
immediately after such purchase, more than 5% of such Portfolio's total assets
would be invested in such securities.
B-15
<PAGE>
6. Buy or sell real estate or interests in real estate, except that each
Portfolio may purchase and sell mortgage-backed securities, securities
collateralized by mortgages, securities which are secured by real estate,
securities of companies which invest or deal in real estate and publicly
traded securities of real estate investment trusts. The Portfolios may not
purchase interests in real estate limited partnerships which are not readily
marketable.
7. 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.
8. Make investments for the purpose of exercising control or management.
9. 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 10% 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.
10. Invest in interests in oil, gas or other mineral exploration or
development programs, except that each Portfolio may invest in the securities
of companies which invest in or sponsor such programs.
11. Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities (limited to 30% of the value of the Fund's total assets).
12. Purchase common stock or other voting securities, preferred stock,
warrants or other equity securities, except as may be permitted by restriction
number 9.
13. Buy or sell commodities or commodity contracts, except that each
Portfolio may purchase and sell financial futures contracts and options
thereon.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of each Portfolio'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 each
Portfolio's asset coverage for borrowing falls below 300%, each Portfolio will
take prompt action to reduce its borrowings, as required by applicable law.
In order to comply with certain state "blue sky" restrictions, the Fund will
not as a matter of operating policy:
1. Invest in oil, gas and mineral leases or programs.
2. Purchase warrants if as a result a Portfolio would then have more than 5%
of its net assets (determined at the time of investment) invested in warrants.
Warrants will be valued at the lower of cost or market and investment in
warrants which are not listed on the New York Stock Exchange or American Stock
Exchange will be limited to 2% of each Portfolio's net assets (determined at
the time of investment). For the purpose of this limitation, warrants acquired
in units or attached to securities are deemed to be without value.
3. Purchase securities of other registered investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets.
4. Invest in securities of any issuer if, to the knowledge of a Portfolio,
any officer or director of the Portfolio or the Portfolio's Manager or
Subadviser owns more than 1/2 of 1% of the outstanding securities of such
issuer, and such officers and directors who own more than 1/2 of 1% own in the
aggregate more than 5% of the outstanding securities of such issuer.
5. Except with respect to short sales against the box, make short sales
provided that short sales will only be made in those securities that are
listed on a national securities exchange and the value of the short sales of
the securities of any one issuer shall not exceed the lesser of 2% of the
value of a Portfolio's net assets, or 2% of the securities of any one issuer.
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE FUND DURING PAST 5 YEARS
- ---------------- ------------- ---------------------
<S> <C> <C>
Robert R. Fortune Director Financial Consultant; Former Chairman and Chief
c/o Prudential Mutual Executive Officer of Associated Electric & Gas
Fund Management, Inc. Insurance Services Limited and Aegis Insurance
One Seaport Plaza Services, Inc.; Director of Independence Square
New York, NY Income Securities Inc., Temporary Investment
Fund, Inc. and Portfolios for Diversified
Investment, Inc.; Trustee of Trust for Short-
Term Federal Securities, Municipal Fund for
Temporary Investment and The PNC Fund; Managing
General Partner of Chestnut Street Exchange
Fund.
</TABLE>
B-16
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE FUND DURING PAST 5 YEARS
- ---------------- ------------- ---------------------
<S> <C> <C>
Delayne Dedrick Gold Director Marketing and Management Consultant.
c/o Prudential Mutual
Fund Management, Inc.
One Seaport Plaza
New York, NY
*Harry A. Jacobs, Jr. Director Senior Director (since January 1986) of
One Seaport Plaza Prudential Securities; formerly Interim
New York, NY Chairman and Chief Executive Officer of
Prudential Mutual Fund Management, Inc. (PMF)
(June-September 1993), Chairman of the Board of
Prudential Securities Incorporated (Prudential
Securities)(1982-1985) and Chairman of the
Board and Chief Executive Officer of Bache
Group Inc. (1977-1982); Director of the Center
for National Policy, The First Australia Fund,
Inc., The First Australia Prime Income Fund,
Inc., The Global Government Plus Fund, Inc. and
The Global Yield Fund, Inc.; Trustee of The
Trudeau Institute.
*Lawrence C. McQuade Director and Vice Chairman of PMF (since 1988); Managing
One Seaport Plaza President Director, Investment Banking, Prudential
New York, NY Securities (1988-1991); Director of Quixote
Corporation (since February 1992) and BUNZL,
P.L.C. (since June 1991); formerly Director of
Kaiser Tech., Ltd. and Kaiser Aluminum and
Chemical Corp. (March 1987-November 1988) and
Crazy Eddie Inc. (1987-1990); formerly
Executive Vice President and Director of W.R.
Grace & Co. (1975-1987); President and Director
of The Global Government Plus Fund, Inc., The
Global Yield Fund, Inc. and The High Yield
Income Fund, Inc.
Thomas A. Owens, Jr. Director Consultant; Director of EMCORE Corporation
c/o Prudential Mutual (manufacturer of electronic materials).
Fund Management, Inc.
One Seaport Plaza
New York, NY
*Richard A. Redeker Director President, Chief Executive Officer and Director
One Seaport Plaza, (since October 1993), PMF; Executive Vice
New York, NY President, Director and Member of the Operating
Committee (since October 1933), Prudential
Securities; Director (since October 1993) of
Prudential Securities Group, Inc. (PSG);
formerly Senior Executive Vice President and
Director of Kemper Financial Services, Inc.
(September 1978-September 1993); Director of
The Global Government Plus Fund, Inc. and The
High Yield Income Fund, Inc.
Robert J. Schultz Director Retired since January 1987; formerly Financial
c/o Prudential Mutual Vice President of Commonwealth Edison Company
Fund Management, Inc. (electric power company).
One Seaport Plaza
New York, NY
Merle T. Welshans Director Adjunct Professor of Finance, Washington
c/o Prudential Mutual University (since July 1983); prior thereto,
Fund Management, Inc. Vice President--Finance of Union Electric
One Seaport Plaza Company; Trustee of the Olympic Trust Funds of
New York, NY Los Angeles.
</TABLE>
B-17
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE FUND DURING PAST 5 YEARS
- ---------------- ------------- ---------------------
<S> <C> <C>
Robert F. Gunia Vice President Chief Administrative Officer (since July 1990),
One Seaport Plaza Director (since January 1989), and Executive
New York, NY Vice President, Treasurer and Chief Financial
Officer (since June 1987) of PMF; Senior Vice
President (since March 1987) of Prudential
Securities; Vice President and Director (since
May 1989) of The Asia Pacific Fund, Inc.
S. Jane Rose Secretary Senior Vice President (since January 1991),
One Seaport Plaza Senior Counsel (since June 1987) and First Vice
New York, NY President (June 1987- December 1990) of PMF;
Senior Vice President and Senior Counsel (since
July 1992) of Prudential Securities; formerly
Vice President and Associate General Counsel of
Prudential Securities.
Susan C. Cote Treasurer and Senior Vice President (since January 1989) and
One Seaport Plaza Principal Financial First Vice President (June 1987-December 1988)
New York, NY and Accounting of PMF; Senior Vice President (since January
Officer 1992) and Vice President (January 1986-December
1991) of Prudential Securities.
Marguerite E.H. Morrison Assistant Secretary Vice President and Associate General Counsel
One Seaport Plaza (since June 1991) of PMF; Vice President and
New York, NY Associate General Counsel of Prudential
Securities.
</TABLE>
- ---------
* "Interested" Director, as defined in the Investment Company Act, by reason
of his affiliation with Prudential Securities or PMF.
Directors 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.
The officers conduct and supervise the daily business operations of the
Fund, while the Directors, 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 Directors who is not an affiliated person of the
Manager or The Prudential Investment Corporation annual compensation of
$6,000, in addition to certain out-of-pocket expenses. [The Chairman of the
Audit Committee receives an additional $200 per year.]
Directors may receive their Director's fee pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of such Director's fee 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. Payment of the interest so accrued is also deferred and accruals become
payable at the option of the Director. The Fund's obligation to make payments
of deferred Director's fees, together with interest thereon, is a general
obligation of the Fund.
As of March 31, 1994, the Directors and officers of the Fund, as a group,
beneficially owned less than one percent of the outstanding shares of common
stock of the Fund.
As of March 31, 1994, Prudential Securities was record holder of 7,939,112
Class A shares (82% of the outstanding shares) and 8,924,314 Class B shares
(77% of the outstanding shares) of the Fund. In the event of any meetings of
shareholders, Prudential Securities will forward, or cause the forwarding of,
proxy material to the beneficial owners for which it is the record owner.
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 Prospectuses. As of March 31, 1994, PMF managed and/or administered
open-end and closed-end management investment companies with assets of
approximately $[51] billion. According to the Investment Company Institute, as
of December 31, 1993, the Prudential Mutual Funds were the 12th largest family
of mutual funds in the United States.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PMF, subject to the supervision of the Fund's Board of Directors
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
B-18
<PAGE>
connection therewith, furnishes the Fund with office facilities, together with
those ordinary clerical and bookkeeping services which are not being furnished
by State Street Bank and Trust Company, the Fund's custodian, and Prudential
Mutual Fund Services, Inc. (PMFS or the Transfer Agent), the Fund's transfer
and dividend disbursing agent. The management services of PMF for the Fund are
not exclusive under the terms of the Management Agreement and PMF is free to,
and does, render management services to others.
For its services, PMF receives, pursuant to the Management Agreement, a fee
at an annual rate of .40 of 1% of the average daily net assets of each
Portfolio. The fee is computed daily and payable monthly. The Management
Agreement also provides that, in the event the expenses of each Portfolio
(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 a Portfolio'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 each Portfolio. No such reductions were required during the
fiscal year ended December 31, 1993. Currently, the Fund believes that the
most restrictive expense limitation of state securities commissions is 2 1/2%
of each Portfolio'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 corporate 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 Directors 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, each Portfolio of the Fund is
responsible for the payment of the following expenses: (a) the fees payable to
the Manager, (b) the fees and expenses of Directors who are not affiliated
persons of the Manager or of 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 each Portfolio and of pricing
each Portfolio'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 each Portfolio in connection with its
securities transactions, (f) all taxes and corporate fees payable by each
Portfolio 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 Portfolios, (i) the cost of fidelity and liability
insurance, (j) the fees and expenses involved in registering and maintaining
registration of a Portfolio 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 directors'
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 Board of
Directors of the Fund, including all of the Directors who are not parties to
the contract or interested persons of any such party as defined in the
Investment Company Act on June 9, 1993 and by shareholders of the Fund on
April 25, 1990.
For the fiscal year ended December 31, 1993, PMF received a management fee
of $736,171, for the Income Portfolio. There were no waivers or subsidies
during the fiscal year ended December 31, 1993. For the fiscal year ended
December 31, 1992, PMF received a management fee of $280,988, net of waiver of
$152,065, for the Income Portfolio. For the year ended December 31, 1991, the
Fund did not pay a management fee to PMF with respect to the Income Portfolio.
In addition, PMF voluntarily subsidized 75% of the Income Portfolio's expenses
(except for management and distribution fees) until July 1, 1991, at which
time the subsidy level was reduced to 25% of such expenses. The subsidy was
eliminated on December 2, 1991. The Income Portfolio is not required to
reimburse PMF for such fee waiver and subsidy.
Without the effect of the management and distribution fee waivers and/or
expense subsidies, per share expenses for the Class A shares of the Income
Portfolio would have been $.10 and $.11 for the years ended December 31, 1992
and 1991 respectively.
B-19
<PAGE>
Expenses of the Class A shares of the Income Portfolio, including distribution
fees, would have been .83% and .97% for the years ended December 31, 1992 and
1991, respectively. Expenses of the Class A shares of the Income Portfolio,
excluding distribution fees, would have been .73% and .87%, for the years
ended December 31, 1992 and 1991, respectively. Shares of the Municipal Income
Portfolio were not in existence as of December 31, 1993.
PMF has entered into the Subadvisory Agreement with PIC (the Subadviser), a
wholly-owned subsidiary of Prudential. The Subadvisory Agreement provides that
PIC 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 each Portfolio 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 those
services.
The Subadvisory Agreement was last approved by the Board of Directors,
including a majority of the Directors who are not interested persons of the
Fund and who have no direct or indirect financial interest in the Subadvisory
Agreement, on June 9, 1993 and by shareholders of the Income Portfolio on
April 25, 1990.
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 each Portfolio, 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 are subsidiaries of The Prudential Insurance
Company of America (Prudential) which, as of December 31, 1993, is one of the
largest financial institutions in the world and the largest insurance company
in North America. Prudential has been engaged in the insurance business since
1875. In July 1993, Institutional Investor ranked Prudential the third largest
institutional money manager of the 300 largest money management organizations
in the United States as of December 31, 1992.
B-20
<PAGE>
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 each
Portfolio 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 each Portfolio of the Fund.
Pursuant to separate Distribution and Service Plans (the Class A Plans, the
Class B Plans and the Class C Plans, collectively, the Plans) adopted by the
Portfolios 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
each of the Portfolios' Class A, Class B and Class C shares, respectively. See
"How the Fund is Managed--Distributor" in the Prospectuses.
On June 7, 1989 and September 13, 1989, the Board of Directors, including a
majority of the Directors 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
Directors), at meetings called for the purpose of voting on each Plan,
approved an amended and restated plan of distribution of the Class A shares of
the Fund (the Class A Plan) and a plan of distribution for the Class B shares
of the Fund (the Class B Plan). The Class A Plan was last approved by
shareholders of the Fund on April 25, 1990. On September 9, 1992 the Board of
Directors reauthorized the categorization of the shares of the Fund as Class A
shares and the implementation of the Class B Plan. The Board of Directors
reapproved the Class B Plan as restated on September 9, 1992 and the Class B
Plan was approved by the sole holder of Class B shares on September 30, 1992.
On June 9, 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 .10 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 .10 of 1%) may not
exceed .10 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 Distributor has agreed to limit
the distribution fee with respect to the Class B shares to no more than .85 of
1% (.10 of 1% service fee and .75 of 1% asset based sales charge) for the
fiscal year ending December 31, 1994. On July 15, 1993, the Board of Directors
authorized the creation of the Municipal Income Portfolio and reclassified the
Fund's existing shares as shares of the Income Portfolio.
On September 9, 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 Distribution and Service Plans for the Class A and the
Class B shares of the Municipal Income Portfolio. The Class A Plan provides
that (i) .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%. The Distributor has agreed to
limit its distribution fees with respect to the Municipal Income Portfolio to
.10 of 1% of the average daily net assets of the Class A shares for the fiscal
year ending December 31, 1994. The Class B Plan provides for the payment to
the Distributor of (i) a service fee at a rate of .25 of 1% of the average
daily net assets of the Class B shares and (ii) total distribution fees
(including the service fee of .25 of 1%) may not exceed .75 of 1%. The service
fee is used to pay for personal service and/or the maintenance of shareholder
accounts. The Distributor has agreed to limit its distribution fees with
respect to the Municipal Income Portfolio to .50 of 1% of the average daily
net assets of the Class B shares for the fiscal year ending December 31, 1994.
The payments under the Class A and Class B Plans are based on a percentage of
average daily nets assets attributable to Class A and Class B shares
regardless of the amount of expenses incurred; accordingly, distribution fees
may be more than distribution-related expenses. The Fund does not intend to
hold shareholders meetings unless otherwise required by law.
On May 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,
adopted plans of distribution for the Class C shares of the Portfolios and
approved further amendments to the plans of distribution for the Income
Portfolio's Class A and Class B shares changing them from reimbursement type
plans to compensation type plans. The Class A Plan and Class B Plan were
approved by the Board of Directors, including a majority of the Rule 12b-1
Directors, on June 9, 1993. In addition, on March 4, 1994, the Board of
Directors approved, subject to shareholder approval, amendments to the Class A
Plan for the Income Portfolio to increase the distribution fee. As so amended,
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 as a service fee and (ii) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30
of 1%. The Distributor has agreed to limit the distribution fee with respect
to Class A shares to .10 of 1% for the fiscal year ending December 31, 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 , 1994. The Class C Plan was approved by the sole
shareholder of Class C shares on , 1994.
CLASS A PLAN. For the year ended December 31, 1993, PMFD received payments
of $114,728 under the Class A Plan as reimbursement of expenses related to the
distribution of Class A shares of the Income Portfolio. These amounts were
paid to and expended by Prudential Securities and Pruco Securities
Corporation, an affiliated broker-dealer (Prusec), for payments of account
servicing fees to financial advisers and other persons who sell Class A
shares.
B-21
<PAGE>
In addition, for the year ended December 31, 1993 PMFD received
approximately $669,100, in initial sales charges with respect to the Income
Portfolio.
CLASS B PLAN. For the fiscal year ended December 31, 1993, Prudential
Securities received $589,173 from the Fund under the Class B Plan and spent
approximately $2,786,300 in distributing the Class B shares of the Income
Portfolio. It is estimated that of the latter amount approximately 17.4%
($485,000) was spent on compensation to Prusec, an affiliated broker-dealer
for commissions to its financial advisers and other expenses, including an
allocation on account of overhead and other branch office distribution-related
expenses, incurred by it for distribution of Fund shares; approximately 2.7%
($74,000) on prospectus and other printing costs; approximately 1.7% ($47,200)
on interest and/or carrying costs and 78.2% ($2,180,100) on the aggregate of
(i) payments of commissions and account servicing fees to financial advisers
31.6% ($881,300) and (ii) an allocation on account of overhead and other
branch office distribution-related expenses 46.6% ($1,298,800). The term
"overhead and other branch office distribution-related expenses" represents
(a) the expenses of operating Prudential Securities' branch offices in
connection with the sale of Fund shares, including lease costs, the salaries
and employee benefits of operations and sales support personnel, utility
costs, communications 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.
The Distributor also receives the proceeds of contingent deferred sales
charges paid by investors 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 Prospectuses. For the fiscal year ended December 31,
1993, Prudential Securities received approximately $ in contingent deferred
sales charges.
CLASS C PLAN. Prudential Securities receives the proceeds of contingent
deferred sales charges paid by investors upon certain redemptions of Class C
shares. See "Shareholder Guide--How to Sell Your Shares--Contingent Deferred
Sales Charges" in the Prospectus. Prior to the date of this Statement of
Additional Information, no distribution expenses were incurred under the Class
C Plan.
The Class A, Class B and Class C Plans continue in effect from year to year,
provided that each such continuance is approved at least annually by a vote of
the Board of Directors, including a majority vote of the Rule 12b-1 Directors,
cast in person at a meeting called for the purpose of voting on such
continuance. The Plans may be terminated at any time, without penalty, by the
vote of a majority of the Rule 12b-1 Directors or by the vote of the holders
of a majority of the outstanding shares of each Portfolio 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 Board of Directors in the manner described
above. The Plans will automatically terminate in the event of assignment. The
Fund will not be contractually obligated to pay expenses incurred under any
Plan if they are terminated or not continued.
Pursuant to each Plan, the Board of Directors will review, at least
quarterly a written report of the distribution expenses incurred on behalf of
each class of shares of the Portfolios 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 Directors shall be committed to the
Rule 12b-1 Directors.
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. The
Distribution Agreements for the Class B shares of the Income Portfolio, the
Class A and B shares of the Municipal Income Portfolio and the Class A shares
of the Income Portfolio were last approved by the Board of Directors,
including a majority of the Rule 12b-1 Directors, on June 9, 1993, September
9, 1993 and March 4, 1993, respectively.
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 of each Portfolio. In the case of Class B shares,
interest charges on unreimbursed distribution expenses equal to the prime rate
plus one percent per annum may be added to the 6.25% limitation. Sales from
the reinvestment of dividends and distributions are not included in the
calculation of the 6.25% limitation. The annual asset-based sales charge on
Class B shares of the Fund may not exceed .75 of 1% per class. The 6.25%
limitation applies to each class of each Portfolio of 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 of either Portfolio, all sales charges on
shares of that class would be suspended.
PORTFOLIO TRANSACTIONS
The Manager is responsible for decisions to buy and sell securities for the
Fund, the selection of brokers and dealers to effect the transactions and the
negotiation of brokerage commissions, if any. For purposes of this section,
the term "Manager" includes the Subadviser. The Fund does not normally incur
any brokerage commission expense on such transactions. The instruments
purchased
B-22
<PAGE>
by the Fund 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 may be
purchased directly from an issuer, in which case no commissions or discounts
are paid. Portfolio securities may not be purchased from any underwriting or
selling syndicate of which Prudential Securities, during the existence of the
syndicate, is a principal underwriter (as defined in the Investment Company
Act), except in accordance with the rules of the SEC. The Fund will not deal
with Prudential Securities or its affiliates on a principal basis.
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 under 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 may consider research and investment services provided by brokers or
dealers who effect or are parties to portfolio transactions of the Fund, the
Manager or the Manager's other 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 furnishing
such services may be selected for the execution of transactions for such other
accounts, whose aggregate assets are far larger than the Fund's, and the
services furnished by such brokers may be used by the Manager in providing
investment management for the Fund. While such services are useful and
important in supplementing its own research and facilities, the Manager
believes that the value of such services is not determinable and does not
significantly reduce expenses. The Fund does not reduce the advisory fee it
pays to the Manager by any amount that may be attributed to the value of such
services.
Subject to the above considerations, Prudential Securities may act as a
securities broker 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 brokers in connection with comparable
transactions involving similar securities being purchased or sold 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 in a commensurate arm's-
length transaction. Furthermore, the Board of Directors of the Fund, including
a majority of the Rule 12b-1 Directors, has 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. Brokerage transactions with Prudential Securities
are also subject to such fiduciary standards as may be imposed by applicable
law. For the fiscal years ended December 31, 1993, 1992 and 1991, the Fund
paid no brokerage commissions.
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--How to Buy Shares of the Fund" in the Prospectus.
Each class of shares represents an interest in the same portfolio of
investments of the Portfolios and has the same rights, except that (i) each
class bears the separate expenses of its Rule 12b-1 distribution and service
plan, (ii) each class has exclusive voting rights with respect to its plan,
(except that the Fund has agreed with the SEC in connection with the offering
of a conversion feature on Class B shares to submit any amendment of the Class
A distribution and service plan to both Class A and Class B shareholders) and
(iii) only Class B shares have a conversion feature. See "Distributor." Each
class also has separate exchange privileges. See "Shareholder Investment
Account--Exchange Privilege."
B-23
<PAGE>
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares of the Fund are sold at a maximum sales charge of
3.25% and Class B and Class C* shares of the Fund are sold at net asset value.
Shares of the Municipal Income Portfolio were not in existence at December 31,
1993. Using the Income Portfolio's net asset value at December 31, 1993, the
maximum offering price of the Income Portfolio's shares is as follows:
<TABLE>
<CAPTION>
Income
Portfolio
CLASS A ---------
<S> <C>
Net asset value and redemption price per Class A share......... $11.78
Maximum sales charge (3.25% of offering price).................
------
Maximum offering price to public............................... $
======
CLASS B
Net asset value, offering price and redemption price per Class
B share*...................................................... $11.78
======
CLASS C
Net asset value, offering price and redemption price per Class
C share*...................................................... $
======
</TABLE>
---------
* 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 Prospectuses.
REDUCTION AND WAIVER OF 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 Prospectuses.
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 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 charges will be
granted subject to confirmation of the investor's holdings. The Combined
Purchase and Cumulative Purchase Privilege does not apply to individual
participants in the retirement and group plans described above under
"Retirement and Group Plans."
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of
related investors, as described above under "Combined Purchase and Cumulative
Purchase Privilege," may aggregate the value of their existing holdings of the
Class A shares of the Fund and Class A 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 value of the reduced sales
charge. All shares must be held either directly with the Transfer Agent or
through Prudential Securities. The value of existing holdings for purposes of
determining the reduced sales charge is calculated using the maximum offering
price (net asset value plus maximum sales charge) as of the previous business
day. See "How the Fund Values Its Shares" in the Prospectus. The Distributor
must be notified at the time of purchase that the investor is entitled to a
reduced sales charge. The
B-24
<PAGE>
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.
LETTERS OF INTENT. Reduced sales charges are available to investors (or an
eligible group of related investors) who enter into a written Letter of Intent
providing for the purchase, within a thirteen-month period, of Class A shares
of the Fund and Class A shares of other Prudential Mutual Funds. All Class A
shares of the Fund and Class A 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 value of the reduced sales charge. All
shares must be held either directly with the Transfer Agent or through
Prudential Securities. The reduced sales charges will be granted subject to
confirmation of the investors holdings. 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. The effective date of a Letter of Intent may be back-dated up to 90
days, in order that any investments made during this 90-day period, valued at
the purchaser's cost, can be applied to the fulfillment of the Letter of
Intent goal.
The Letter of Intent does not obligate the investor to purchase, nor the
Fund to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the thirteen-month period, the purchaser is required to
pay the difference between the sales charge otherwise applicable to the
purchases made during this period and sales charges actually paid. Such
payment may be made directly to the Distributor or, if not paid, the
Distributor will liquidate sufficient escrowed shares to obtain such
difference. If the goal is exceeded in an amount which qualifies for a lower
sales charge, a price adjustment is made by refunding to the purchaser the
amount of excess sales charge, if any, paid during the thirteen-month period.
Investors electing to purchase Class A shares of the Fund pursuant to a Letter
of Intent should carefully read such Letter of Intent.
QUALITY DISCOUNT--CLASS B SHARES PURCHASED PRIOR TO , 1994
The CDSC is reduced on redemptions of Class B shares of the Fund purchased
prior to , 1994 if immediately after a purchase of such shares, the
aggregate cost of all Class B shares of the Fund owned by you in a single
account exceeded $500,000. For example, if you purchased $100,000 of Class B
shares of the Fund and the following year purchase an additional $450,000 of
Class B shares with the result that the aggregate cost of your Class B shares
of the Fund 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
YEAR SINCE PURCHASE AS A PERCENTAGE OF DOLLARS INVESTED
PAYMENT MADE OR REDEMPTION PROCEEDS
------------------- --------------------------------------
$500,001 TO $1 MILLION OVER $1 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 shares of the Portfolios of the Fund, 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 stock
certificate is desired, it must be requested in writing for each transaction.
Certificates are issued only for full shares and may be redeposited in the
Account at any time. There is no charge to the investor for issuance of a
certificate. Whenever a transaction takes place in the Shareholder Investment
Account, the shareholder will be mailed a statement showing the transaction
and the status of the Account. The Fund makes available to the shareholders
the following privileges and plans.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of a Portfolio at net
asset value per share on the payment date, unless the Board of Directors
determines otherwise. An investor may direct
B-25
<PAGE>
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. The investment will be
made at the net asset value per Class A or Class B share next determined after
receipt of the check or proceeds by the Transfer Agent. Such shareholders will
receive credit for any contingent deferred sales charge paid in connection
with the amount of proceeds being reinvested.
EXCHANGE PRIVILEGE
Each Portfolio of the Fund intends to make 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 other Prudential Mutual Funds may also be exchanged for shares of
each Portfolio 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 will be able to exchange their Class A
shares for Class A shares of certain other Prudential Mutual Funds, shares of
Prudential Government Securities Trust (Intermediate Term Series) and shares
of the money market funds specified below. No fee or sales load will be
imposed upon the exchange. Shareholders of money market funds who acquired
such shares upon exchange of Class A shares may use the Exchange Privilege
only to acquire Class A shares of the Prudential Mutual Funds participating in
the Exchange Privilege.
The following money market funds participate in the Class A Exchange
Privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets
Prudential Tax-Free Money Fund
CLASS B AND CLASS C. Shareholders of each Portfolio 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, Inc., a money market fund. No contingent deferred sales
charge 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 first
day of the month after the initial purchase, rather than the date of the
exchange.
Class B and Class C shares of each Portfolio 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 contingent deferred sales charge, 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 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.
B-26
<PAGE>
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 each Portfolio 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,
respectively, without being subject to any contingent deferred sales charge.
Additional details about the Exchange Privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on sixty days' notice, and any fund, including the
Fund, or the Distributor, has the right to reject any exchange application
relating to such fund's shares.
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more
shares when the price is low and fewer shares when the price is high. The
average cost per share is lower than it would be if a constant number of
shares were bought at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $4,800 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2007, the cost of four years at a private
college could reach $163,000 and over $97,000 at a public university./1/
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals./2/
<TABLE>
<CAPTION>
PERIOD OF $100,000 $150,000 $200,000 $250,000
MONTHLY INVESTMENTS -------- -------- -------- --------
<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
</TABLE>
See "Automatic Savings Accumulation Plan."
- ---------
/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 average rate of return of 8%. This example is for
illustrative purposes only and is not intended to reflect the performance of
an investment in shares of either Portfolio 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.
AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP).
Under ASAP, an investor may arrange to have a fixed amount automatically
invested in the shares of a Portfolio 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 for 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--Class B Shares" 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
B-27
<PAGE>
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 generally 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 applicable sales charges 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 plan, particularly if used in
connection with a retirement plan.
TAX-DEFERRED RETIREMENT PLANS (APPLICABLE TO THE INCOME PORTFOLIO)
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 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.
INDIVIDUAL RETIREMENT ACCOUNTS (APPLICABLE TO THE INCOME PORTFOLIO)
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.
TAX-DEFERRED COMPOUNDING/1/
<TABLE>
<CAPTION>
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
</TABLE>
- -------
/1/ The chart is for illustrative purposes only and does not represent the
performance of either Portfolio 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.
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. The net asset value is calculated separately for each
class of each portfolio.
Under the Investment Company Act, the Board of Directors is responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Board of Directors, the value of
each U.S. Government and corporate security of the Income Portfolio 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.
Securities of the Municipal Income Portfolio for which market quotations are
readily available are valued at their bid quotations. Futures contracts are
valued daily at 4:15 p.m., New York time, at market quotations provided by the
Chicago Board of Trade.
Securities for which market quotations are not readily available are valued
at fair value as determined in good faith under procedures established by the
Fund's Board of Directors. 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 if their original term
to
B-28
<PAGE>
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 original term to maturity
from the date of purchase exceeded 60 days, unless this valuation is determined
not to represent fair value by the Board of Directors.
The Investment Adviser values municipal securities on the basis of valuations
provided by a pricing service which uses information with respect to
transactions in securities, quotations from bond dealers, market transactions
in comparable securities and various relationships between securities in
determining value. This service is furnished by Kenny-S&P, a division of J.J.
Kenny Information Systems. Reliable market quotations generally are not readily
available for purposes of valuing municipal securities. As a result, depending
on the particular municipal securities owned by the Municipal Income Portfolio,
it is likely that most of the valuations for such securities will be based upon
fair value determined under the foregoing procedures.
Each Portfolio will compute its net asset value 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 affect the
net asset value. 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.
As long as the Portfolios declare dividends daily, the net asset value of the
Class A, Class B and Class C shares of each Portfolio will generally be the
same. It is expected, however, that the dividends will differ by approximately
the amount of the distribution expense differential between the classes.
DIVIDENDS AND DISTRIBUTIONS
Each Portfolio of the Fund declares dividends daily based on actual net
investment income determined in accordance with generally accepted accounting
principles. Such dividends will be payable monthly. Each Portfolio's net
capital gains, if any, will be distributed at least annually. In determining
the amount of capital gains to be distributed, any capital loss carryforwards
from prior years will be offset against capital gains. Dividends and
distributions will be paid in additional Class A, Class B or Class C shares of
each Portfolio based on net asset value on the payment date or such other date
as the Board of Directors may determine, unless the shareholder elects in
writing not less than five full business days prior to the payment date to
receive such distributions in cash. In the event that a shareholder's shares
are redeemed on a date other than the monthly dividend payment date, the
proceeds of such redemption will equal the net asset value of the shares
redeemed plus the amount of all dividends declared through the date of
redemption.
The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A shares as a result of the higher distribution
fee applicable to the Class B and Class C shares. The per share distributions
of net capital gains, if any, will be paid in the same amount for Class A,
Class B and Class C shares. See "Net Asset Value."
TAXES
GENERAL
Under the Internal Revenue Code, each Portfolio of the Fund is required to be
treated as a separate entity for federal income tax purposes.
Each Portfolio has elected or will elect to qualify and intends to remain
qualified as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the Internal Revenue Code). This relieves
each Portfolio (but not its shareholders) from paying federal income tax on
income which is distributed to shareholders, provided that it distributes at
least 90% of its net investment income and short-term capital gains, and
permits net capital gains of the Portfolio (i.e., the excess of net long-term
capital gains over net short-term capital losses) to be treated as long-term
capital gains of the shareholders, regardless of how long shareholders have
held their shares in the Portfolio.
Qualification as a regulated investment company will be determined at the
level of the Portfolio and not at the level of the Fund. Accordingly, the
determination of whether a Portfolio qualifies as a regulated investment
company will be based on the activities of the Portfolio, including the
purchases and sales of securities and the income received and expenses incurred
in the Portfolio. Net capital gains of a Portfolio which are available for
distribution to shareholders will be computed by taking into account any
capital loss carryforward of such Portfolio.
Qualification as a regulated investment company requires, among other things,
that (a) at least 90% of a Portfolio's annual gross income (without reduction
for losses from the sale or other disposition of securities) be derived from
interest, dividends, payments with respect to securities loans and gains from
the sale or other disposition of securities, options thereon, futures
contracts, options thereon, forward contracts and foreign currencies; (b) the
Portfolio derives less than 30% of its gross income from gains (without
reduction for losses) from the sale or other disposition of securities, options
thereon, futures contracts, options thereon, forward contracts and foreign
currencies held for less than three months; and (c) the Portfolio diversifies
its holdings so that, at the end of
B-29
<PAGE>
each quarter of the taxable year, (i) at least 50% of the market value of the
Portfolio's assets is represented by cash, U.S. Government obligations and
other securities limited in respect of any one issuer to an amount not greater
than 5% of the Portfolio's assets and 10% of the outstanding voting securities
of 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 U.S. Government
obligations).
Gains or losses on sales of securities by a Portfolio will be treated as
long-term capital gains or losses if the securities have been held by it for
more than one year, except in certain cases where the Portfolio acquires a put
or writes a call thereon or makes a short sale against-the-box. Other gains or
losses on the sale of securities will be short-term capital gains or losses.
Debt securities acquired by a Portfolio may be subject to original issue
discount and market discount rules.
Special rules will apply to futures contracts and options thereon in which a
Portfolio invests. See "Investment Objectives and Policies." These investments
will generally constitute "Section 1256 contracts" and will be required to be
"marked to market" for federal income tax purposes at the end of the
Portfolio's taxable year; that is, treated as having been sold at market
value. Sixty percent of any gain or loss recognized on such "deemed sales" and
on actual dispositions will be treated as long-term capital gain or loss, and
the remainder will be treated as short-term capital gain or loss.
A Portfolio's hedging activities may be affected by the requirement under
the Internal Revenue Code that no more than 30% of the Portfolio's income be
derived from securities, futures contracts and other instruments held for less
than three months. From time to time, this requirement may cause the Portfolio
to limit its acquisitions of futures contracts to those that will not expire
for at least three months. For example, at the present time, there is only a
limited market for futures contracts on the municipal bond index that will not
expire within three months. Therefore, to meet the 30%/three month
requirement, the Municipal Income Portfolio may choose to use futures
contracts based on fixed-income securities that will not expire within three
months.
Each Portfolio is subject to a nondeductible 4% excise tax if it does not
distribute 98% of its ordinary income on a calendar year basis and 98% of its
capital gains on an October 31 year-end basis. Each Portfolio intends to
distribute its income and capital gains in the manner necessary to avoid
imposition of the 4% excise tax. Dividends and distributions generally are
taxable to shareholders in the year in which they are received or accrued;
however, dividends declared in October, November and December payable to
shareholders of record on a specified date in October, November and December
and paid in the following January may be treated as having been paid by the
Portfolio and received by shareholders in such prior year. Under this rule, a
shareholder may be taxed in one year on dividends or distributions actually
received in January of the following year.
Any loss realized on a sale, redemption or exchange of shares of a Portfolio
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 a Portfolio 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 a
Portfolio.
Any dividends or distributions paid shortly after a purchase by an investor
may have the effect of reducing the per share net asset value of the
investor's shares by the per share amount of the dividends or distributions.
Furthermore, such dividends or distributions, although in effect a return of
capital, are subject to federal income taxes. Therefore, prior to purchasing
shares of a Portfolio, the investor should carefully consider the impact of
dividends or capital gains distributions which are expected to be or have been
announced.
Distributions may be subject to additional state and local taxes. See
"Taxes, Dividends and Distributions" in the relevant Prospectus.
If any net long-term capital gains in excess of net short-term capital
losses are retained by the Portfolio for investment, requiring federal income
taxes to be paid thereon by the Portfolio, the Portfolio will elect to treat
these capital gains as having been distributed to shareholders. As a result,
these amounts will be taxed to shareholders as long-term capital gains, and
shareholders will be able to claim their proportionate share of the federal
income taxes paid by the Portfolio on the gains as a credit against their own
federal income tax liabilities and will be entitled to increase the adjusted
tax basis of their shares in the Portfolio by the difference between their pro
rata share of such gains and their tax credit.
Under federal income tax law, each Portfolio will be required to report to
the Internal Revenue Service all distributions of taxable income and capital
gains as well as gross proceeds from the redemption or exchange of shares of
such Portfolio, except in the case of certain exempt shareholders. Further,
all such distributions and proceeds from the redemption or exchange of shares
may be subject to withholding of federal income tax at the rate of 31% in the
case of nonexempt shareholders who fail to furnish the Fund with their
taxpayer identification numbers on IRS Form W-9 and with required
certifications regarding their status under the federal income tax law. If the
withholding provisions are applicable, any such distributions and proceeds,
whether taken in cash or reinvested in shares,
B-30
<PAGE>
will be reduced by the amounts required to be withheld. Investors may wish to
consult their tax advisers about the applicability of the backup withholding
provisions.
Distributions of net investment income and net realized capital gains will
be taxable as described below, whether made in shares or in cash. Shareholders
electing to receive distributions in the form of additional shares will have a
cost basis for federal income tax purposes in each share so received equal to
the net asset value of a share of the Portfolio on the distribution date. All
distributions of taxable net investment income and net realized capital gains,
whether received in shares or cash, must be reported by each shareholder on
his or her federal income tax return.
INCOME PORTFOLIO. Distributions to shareholders of the Income Portfolio of
net investment income and of the excess of net short-term capital gains over
net long-term capital losses will be taxable to the shareholder at ordinary
income rates regardless of whether the shareholder receives such distributions
in additional shares or cash.
Distributions of net capital gains (i.e., the excess of net long-term
capital gains over net short-term capital losses), if any, are taxable as
long-term capital gains regardless of how long the investor has held his or
her shares. However, if a shareholder holds shares in a Portfolio 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 Portfolio as to the federal tax status of
distributions made by the Portfolio.
MUNICIPAL INCOME PORTFOLIO. Subchapter M permits the character of tax-exempt
interest distributed by a regulated investment company to flow through as tax-
exempt interest to its shareholders provided that 50% or more of the value of
its assets at the end of each quarter of its taxable year is invested in
state, municipal or other obligations the interest on which is exempt for
federal income tax purposes. Distributions to shareholders of tax-exempt
interest earned by the Municipal Income Portfolio for the taxable year are
generally not subject to federal income tax but may cause a shareholder to
incur liability for the alternative minimum tax. Distributions of taxable net
investment income, if any, and of the excess of net short-term capital gain
over net long-term capital loss are taxable to shareholders as ordinary
income.
The federal alternative minimum tax may affect corporate and individual
shareholders in the Municipal Income Portfolio. Interest on certain categories
of tax-exempt obligations (i.e., most private activity bonds issued after
August 7, 1985) will constitute a preference item for purposes of the
alternative minimum tax. The Municipal Income Portfolio may invest in such
obligations and, therefore, may receive interest that will be treated as a
preference item. Preference items received by the Municipal Income Portfolio
will be allocated between the Municipal Income Portfolio and its shareholders.
It is possible that the Municipal Income Portfolio will incur some liability
under the alternative minimum tax to the extent preference items are allocated
to it. Corporate shareholders in the Portfolio will also have to take into
account the adjustment for current earnings for minimum tax purposes.
The alternative minimum tax is a flat tax equal to 24% (20% for
corporations) of the taxpayer's so-called alternative minimum taxable income.
Individual taxpayers may reduce their alternative minimum taxable income by a
standard exemption amount of $40,000 ($30,000 if filing singly), although the
exemption amount is reduced for taxpayers with adjusted gross incomes of more
than $150,000 ($112,500 if filing singly). Alternative minimum taxable income
is determined by adding to the taxpayer's regularly-computed taxable income
items of tax preference and certain other adjustments. All shareholders should
consult their tax advisers to determine whether their investment in the
Municipal Income Portfolio will cause them to incur liability for the
alternative minimum tax.
Distributions of net capital gains (i.e., the excess of net long-term
capital gains over net short-term capital losses), if any, are taxable as
long-term capital gains regardless of how long the investor has held his or
her shares. However, if a shareholder holds shares in a Portfolio 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. Any short-term capital
loss realized upon the sale or redemption of shares within 6 months (or such
shorter period as may be established by Treasury regulations) from the date of
purchase of such shares and following receipt of an exempt-interest dividend
will be disallowed to the extent of such tax-exempt dividend. Shareholders
will be notified annually by the Portfolio as to the federal tax status of
distributions made by the Portfolio.
Interest on indebtedness and other expenses incurred by shareholders to
purchase or carry shares of the Municipal Income Portfolio will generally not
be deductible for federal income tax purposes under Section 265 of the
Internal Revenue Code. In addition, under rules used by the Internal Revenue
Service for determining when borrowed funds are considered to be used for the
purpose of purchasing or carrying particular assets, the purchase of shares
may be considered to have been made with borrowed funds even though the
borrowed funds are not directly traceable to the purchase of shares.
Persons holding certain municipal obligations who are also "substantial
users" (or persons related thereto) of facilities financed by such obligations
may not exclude interest on such obligations from their gross income. No
investigation as to the users of the facilities financed by municipal
obligations in the Municipal Income Portfolio has been made by the Portfolio.
Potential investors should consult their tax advisers with respect to this
matter before purchasing shares of the Portfolio.
B-31
<PAGE>
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on certain state and municipal obligations. It can be expected that
similar proposals may be introduced in the future. If such a proposal were
enacted, the availability of state or municipal obligations for investment by
the Portfolio and the value of portfolio securities held by the Portfolio
would be affected. In addition, the Portfolio would reevaluate its investment
objective and policies.
PERFORMANCE INFORMATION
AVERAGE ANNUAL TOTAL RETURN. Each Portfolio 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 Prospectuses.
Average annual total return is computed according to the following formula:
P(1+T)/n/ = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the 1, 5 or 10 year periods (or fractional portion
thereof) at the end of the 1, 5 or 10 year periods (or fractional
portion thereof).
Average annual 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 of the Income Portfolio
for the one and since inception periods ended December 31, 1993 was 3.70%, and
8.37%, respectively. Without expense subsidies and the management fee waiver,
the average annual total return for these periods would have been 3.70%, and
8.14%, respectively. The average annual total return with respect to the Class
B shares of the Income Portfolio for the one year and since inception periods
ended December 31, 1993 was 3.38% and 4.45%. As of December 31, 1993, there
were no shares outstanding for the Municipal Income Portfolio and no Class C
shares outstanding for the Income Portfolio.
AGGREGATE TOTAL RETURN. Each Portfolio 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
Prospectuses of each Portfolio.
Aggregate total return represents the cumulative change in the value of an
investment in a Portfolio and is computed by the following formula:
ERV - P
---------
P
Where: P = a hypothetical initial payment of $1,000.
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year periods (or fractional
portion thereof) at the end of the 1, 5, or 10 year periods (or
fractional portion thereof).
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 of the Income Portfolio for
the one and since inception periods ended December 31, 1993 was 7.14%,and
46.46%, respectively. The aggregate total return for Class B shares of the
Income Portfolio for the one year and since inception periods ended December
31, 1993 was 6.38% and 6.72%, respectively. As of December 31, 1993, there
were no shares outstanding for the Municipal Income Portfolio and no Class C
shares outstanding for the Income Portfolio.
YIELD. Each Portfolio of the Fund may from time to time advertise its yield
as calculated over a 30-day period. Yield is calculated separately for Class
A, Class B and Class C shares. This yield will be computed by dividing the
Portfolio'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) /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.
Yield fluctuates and an annualized yield quotation is not a representation
by the Fund as to what an investment in a Portfolio will actually yield for
any given period.
B-32
<PAGE>
The yield for the 30-day period ended December 31, 1993 for the Income
Portfolio's Class A and Class B shares was 3.98% and 3.36%, respectively. As
of December 31, 1993, there were no shares outstanding for the Municipal
Income Portfolio and no Class C shares outstanding for the Income Portfolio.
TAX EQUIVALENT YIELD. The Municipal Income Portfolio may also calculate the
tax equivalent yield over a 30-day period. The tax equivalent yield will be
determined by first computing the yield as discussed above. The Portfolio will
then determine what portion of that yield is attributable to securities the
income of which is exempt for federal income tax purposes. This portion of the
yield will then be divided by one minus 39.6% (the assumed maximum tax rate
for individual taxpayers not subject to alternative minimum tax) and then
added to the portion of the yield that is attributable to other securities.
The following chart shows the tax-equivalent yield of an investment at
varying rates:
<TABLE>
<CAPTION>
A TAX-EXEMPT YIELD OF:
<S> <C> <C> <C> <C> <C> <C>
3.5% 4.0% 4.5% 5.0% 5.5% 6% 6.5%
<CAPTION>
FEDERAL
TAX RATE IS EQUIVALENT TO A TAXABLE RATE OF:
<S> <C> <C> <C> <C> <C> <C> <C>
28% 4.86% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03%
31% 5.07% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42%
36% 5.47% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16%
39.6% 5.79% 6.62% 7.45% 8.28% 9.11% 9.93% 10.76%
</TABLE>
Income earned on the Municipal Income Portfolio could be subject to the
federal alternative minimum tax. The above information is for illustrative
purposes only and is not intended to imply actual performance.
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/
(ART)
/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.
B-33
<PAGE>
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
Prospectuses of each Portfolio.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the
Fund. It 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 year ended December 31, 1993, the Income
Portfolio of the Fund incurred fees of approximately $169,000 for the services
of PMFS.
Deloitte & Touche, 1633 Broadway, New York, New York 10019, serves as the
Fund's independent accountants and in that capacity audits the Fund's annual
financial statements.
B-34
<PAGE>
Commentary on Presentation of Portfolio of Investments:
The Portfolio of Investments, following hereto, is presented in a ``laddered''
maturity structure. The Income Portfolio invests in investment grade corporate
debt securities and in obligations of the U.S. Government, its agencies and
instrumentalities with maturities of six years or less. These securities are
categorized within six annual maturity categories.
- --------------------------------------------------------------------------------
PRUDENTIAL STRUCTURED MATURITY FUND Portfolio of Investments
INCOME PORTFOLIO December 31, 1993
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (Note 1)
<C> <C> <S> <C>
5-6 Years--16.2%
Federal Express Corp.
(Consumer Services)
Baa3 $ 1,000 10.05%, 6/15/99......... $ 1,173,330
United States Treasury
Note
36,300 6.375%, 7/15/99......... 38,109,192
------------
39,282,522
------------
4-5 Years--16.2%
Aristar, Inc.
(Financial Services)
Baa1 2,000 5.75%, 7/15/98.......... 1,999,560
Associates Corp. of
North America
(Consumer Finance)
A1 200 8.375%, 1/15/98......... 220,538
Carnival Cruise Lines,
Inc.
(Leisure)
Baa1 2,500 5.75%, 3/15/98.......... 2,491,875
Countrywide Funding
Corp.
(Financial Services)
Baa1 3,000 6.88%, 8/3/98........... 3,141,060
First Union Corp.
(Banking)
Baa1 2,000 6.75%, 1/15/98.......... 2,077,360
Ford Motor Credit Co.
(Consumer Finance)
A2 2,000 6.25%, 2/26/98.......... 2,048,640
Goldman Sachs Group,
L.P.
(Financial Services)
A1 1,500 6.10%, 4/15/98.......... 1,513,605
Hospitality Franchise
Systems, Inc.
(Industrial Services)
Baa3 $ 2,000 5.875%, 12/15/98........ $ 1,993,560
Korea Development Bank
(Banking)
A1 1,200 5.875%, 12/1/98......... 1,198,188
NationsBank Corp.
(Financial Services)
A3 1,500 6.625%, 1/15/98......... 1,560,450
Southern California
Edison Co.
(Utilities)
A1 2,000 5.875%, 2/1/98.......... 2,027,340
Texas Utilities Electric
Co.
(Utilities)
Baa2 3,000 5.875%, 4/1/98.......... 3,037,800
United States Treasury
Note
14,300 8.25%, 7/15/98.......... 16,096,366
------------
39,406,342
------------
3-4 Years--16.2%
Coca-Cola Enterprises,
Inc.
(Beverages)
A3 1,000 6.50%, 11/15/97......... 1,037,860
Comdisco, Inc.
(Leasing)
Baa2 1,500 9.75%, 1/15/97.......... 1,669,800
General Motors
Acceptance Corp.
(Financial Services)
Baa1 2,000 7.50%, 11/4/97.......... 2,117,940
Greyhound Financial
Corp.
(Industrial Finance)
Baa2 2,100 9.67%, 7/1/97........... 2,381,253
</TABLE>
B-35 See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (Note 1)
<C> <C> <S> <C>
3-4 Years (cont'd.)
International Bank for
Reconstruction &
Development
(Financial Services)
Aaa $ 1,000 9.61%, 12/3/97.......... $ 1,158,110
International Lease
Finance Corp.
(Equipment Leasing)
A2 2,000 5.54%, 5/27/97.......... 2,013,560
Korea Development Bank
(Banking)
A1 1,200 7.71%, 5/5/97........... 1,278,132
MBNA Master Card Trust
(Asset Backed)
(Average Life 3.4
Years)
Aaa 4,000 7.25%, 6/15/99.......... 4,263,720
Mellon Financial Co.
(Financial Services)
Baa1 1,000 6.50%, 12/1/97.......... 1,040,050
Potomac Capital
Investment Corp.
(Financial Services)
A3 3,500 6.19%, 4/28/97.......... 3,536,540
Sears Roebuck & Co.
(Retail Services)
Baa1 2,000 9.25%, 8/1/97........... 2,241,100
Tenneco Credit Corp.
(Financial Services)
Baa2 1,850 10.125%, 12/1/97........ 2,122,283
United States Treasury
Note
12,990 8.50%, 7/15/97.......... 14,534,640
------------
39,394,988
------------
2-3 Years--16.1%
Ashland Oil, Inc.
(Oil)
Baa1 1,000 8.95%, 1/17/96.......... 1,072,490
Associates Corp. of
North America
(Consumer Finance)
A1 3,500 4.56%, 10/29/96......... 3,466,645
Bausch & Lomb, Inc.
(Consumer Products)
A2 $ 3,500 6.80%, 12/12/96......... $ 3,673,355
Centex Corp.
(Industrial Finance)
Baa2 4,000 9.05%, 5/1/96........... 4,316,040
CIT Group Holdings, Inc.
(Financial Services)
A1 1,000 8.75%, 2/15/96.......... 1,069,240
Federal Farm Credit Bank
1,000 7.90%, 3/1/96........... 1,069,190
Georgia Power Co.
(Utility)
A3 2,000 4.75%, 3/1/96........... 1,980,600
Grand Metropolitan
Investment Corp.
(Industrial Finance)
A2 2,195 8.125%, 8/15/96......... 2,361,052
Hanson Overseas
(Diversified
Industrial)
A1 2,000 5.50%, 1/15/96.......... 2,008,320
Mobil Corp.
(Oil)
Aa2 2,000 6.50%, 12/17/96......... 2,090,680
New Zealand Government
(Foreign Government)
Aa3 4,300 8.25%, 9/25/96.......... 4,640,259
Norwest Financial, Inc.
(Consumer Finance)
A1 2,000 4.85%, 11/15/96......... 1,998,580
TransAmerica Finance
Corp.
(Financial Services)
A2 2,000 5.85%, 7/15/96.......... 2,043,080
Union Bank Finland, Ltd.
(Banking)
A3 1,500 5.25%, 6/15/96.......... 1,498,875
Virginia Electric &
Power Co.
(Utility)
A2 1,350 9.70%, 5/6/96........... 1,487,471
</TABLE>
B-36 See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (Note 1)
<C> <C> <S> <C>
2-3 Years (cont'd.)
Westinghouse Credit
Corp.
(Financial Services)
Baa3 $ 4,000 8.75%, 6/3/96........... $ 4,286,090
------------
39,061,967
------------
1-2 Years--17.9%
Alcan Aluminum Ltd.
(Aluminum)
A2 1,000 9.40%, 6/1/95........... 1,066,100
Cemex S.A.
(Industrial Services)
NR 1,000 6.25%, 10/25/95......... 1,028,750
Central Fidelity Bank
(Financial Services)
A2 1,000 4.70%, 2/15/95.......... 1,005,530
Chrysler Financial Corp.
(Financial Services)
Baa3 1,300 5.26%, 7/6/95........... 1,314,768
Citicorp
(Financial Services)
Baa1 1,000 7.80%, 3/24/95.......... 1,041,130
Comdisco, Inc.
(Leasing)
Baa2 1,000 8.95%, 5/15/95.......... 1,050,770
Commonwealth Edison Co.
(Utility)
A3 2,500 6.125%, 5/15/95......... 2,543,750
Federal National
Mortgage
Association
(Average Life 1.9
Years)
4,000 11.00%, 11/1/00......... 4,490,000
General Motors
Acceptance Corp.
(Financial Services)
A1 2,000 7.05%, 4/13/95.......... 2,062,660
Greyhound Financial
Corp.
(Industrial Finance)
Baa2 2,000 4.625%, 4/19/95......... 2,006,080
International Lease
Finance Corp.
(Equipment Leasing)
A2 $ 1,000 9.80%, 7/31/95.......... $ 1,081,100
Mellon Financial Co.
(Financial Services)
Baa1 1,500 6.125%, 11/15/95........ 1,542,135
Merrill Lynch & Co.,
Inc.
(Financial Services)
A1 1,500 5.50%, 7/28/95.......... 1,524,150
Morgan Stanley Group,
Inc.
(Financial Services)
A1 1,000 9.875%, 5/1/95.......... 1,068,900
Norwest Financial, Inc.
(Consumer Finance)
Aa3 2,500 7.25%, 11/1/95.......... 2,618,600
Occidental Petroleum
Corp.
(Oil)
Baa2 3,750 5.37%, 9/11/95.......... 3,784,612
Pacific-Tel Capital
Resources Group
(Utility)
A1 2,000 8.95%, 6/20/95.......... 2,129,860
PaineWebber Group, Inc.
(Financial Services)
A3 3,000 9.625%, 5/1/95.......... 3,183,360
Philip Morris Cos., Inc.
(Tobacco)
A2 1,000 9.20%, 11/2/95.......... 1,078,670
Sears Roebuck & Co.
(Retail Services)
Baa1 1,000 5.60%, 7/17/95.......... 1,016,140
Standard Credit Card
Trust
(Asset Backed)
(Average Life 1.2
Years)
A2 2,000 9.375%, 3/10/96......... 2,118,125
Union Pacific Corp.
(Oil)
A2 1,750 9.33%, 10/12/95......... 1,891,015
Waste Management, Inc.
(Chemicals)
A1 2,700 4.875%, 7/1/95.......... 2,717,523
------------
43,363,728
------------
</TABLE>
B-37 See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (Note 1)
<C> <C> <S> <C>
Within 1 Year--16.3%
American Express Credit
Corp.
(Financial Services)
A1 $ 1,000 8.625%, 7/15/94......... $ 1,024,730
Bancomer S.A.
(Banking)
NR 4,000 Zero Coupon, 4/5/94..... 3,948,140
Bank of Delaware
(Banking)
Aa3 3,000 3.30%, 6/10/94.......... 2,975,812
Bank of New York, Master
Credit Card Trust
(Asset Backed)
(Average Life 0.4
Years)
Aaa 3,833 7.95%, 4/15/96.......... 3,895,625
Beneficial Corp.
(Financial Services)
A2 1,650 9.85%, 2/1/94........... 1,656,881
Eastman Kodak Co.
(Chemicals)
A3 1,000 10.05%, 3/15/94......... 1,011,210
Federal Express Corp.
(Consumer Services)
Baa3 1,000 9.75%, 10/3/94.......... 1,039,200
Baa3 1,475 9.20%, 11/15/94......... 1,534,723
First Chicago Corp.
(Banking)
Baa1 1,750 9.20%, 2/18/94.......... 1,761,165
General Electric Capital
Corp.
(Industrial Finance)
Aaa 2,000 5.64%, 3/4/94........... 2,007,520
Aaa 1,000 8.60%, 11/15/94......... 1,039,380
Hydro Quebec
(Utility)
A1 2,000 3.44%, 3/15/94, F.R.N... 1,740,000
Nordstrom Credit, Inc.
(Consumer Finance)
A2 2,000 8.60%, 7/15/94.......... 2,051,480
Philip Morris Cos., Inc.
(Tobacco)
A2 $ 2,000 8.70%, 8/1/94........... $ 2,053,340
Salomon, Inc.
(Financial Services)
A3 2,500 4.22%, 6/6/94........... 2,504,625
Society National Bank of
Cleveland
(Banking)
A1 2,500 3.25%, 4/21/94.......... 2,495,475
Texas Utilities Electric
Co.
(Utility)
Baa2 1,500 9.625%, 9/30/94......... 1,558,125
Union Oil of California
(Oil)
Baa2 1,000 9.75%, 3/1/94........... 1,007,900
Westinghouse Credit
Corp.
(Financial Services)
Baa3 1,000 8.73%, 8/8/94........... 1,023,780
Joint Repurchase
Agreement Account
3.15%, 1/3/94 (Note
3,362 5).................... 3,362,000
------------
39,691,111
------------
Total Investments--98.9%
(cost $239,764,237; Note
4).................... 240,200,658
Other assets in excess
of
liabilities--1.1%..... 2,554,922
------------
Net Assets--100%........ $242,755,580
------------
------------
</TABLE>
- ------------------
F.R.N.-Floating Rate Note.
N.R.-Not Rated.
B-38 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL STRUCTURED MATURITY FUND
INCOME PORTFOLIO
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
December 31,
Assets 1993
------------
<S> <C>
Investments, at value (cost $239,764,237)...................................................... $240,200,658
Cash........................................................................................... 1,221,715
Interest receivable............................................................................ 5,022,040
Receivable for Fund shares sold................................................................ 1,634,502
Deferred organization expenses and other assets................................................ 57,816
------------
Total assets............................................................................... 248,136,731
------------
Liabilities
Payable for investments purchased.............................................................. 4,527,500
Payable for Fund shares reacquired............................................................. 634,967
Due to Distributors............................................................................ 95,474
Due to Manager................................................................................. 79,564
Dividends payable.............................................................................. 43,646
------------
Total liabilities.......................................................................... 5,381,151
------------
Net Assets..................................................................................... $242,755,580
------------
------------
Net assets were comprised of:
Common stock, at par......................................................................... $ 206,037
Paid-in capital in excess of par............................................................. 242,331,397
------------
242,537,434
Accumulated net realized losses.............................................................. (218,275)
Net unrealized appreciation on investments................................................... 436,421
------------
Net assets at December 31, 1993.............................................................. $242,755,580
------------
------------
Class A:
Net asset value and redemption price per share
($119,449,469 / 10,138,402 shares of common stock issued and outstanding).................. $11.78
Maximum sales charge (3.25% of offering price)............................................... 0.40
------------
Maximum offering price to public............................................................. $12.18
------------
------------
Class B:
Net asset value, offering price and redemption price per share
($123,306,111 / 10,465,300 shares of common stock issued and outstanding).................. $11.78
------------
------------
</TABLE>
See Notes to Financial Statements.
B-39
<PAGE>
PRUDENTIAL STRUCTURED MATURITY FUND
INCOME PORTFOLIO
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
December
31,
Net Investment Income 1993
-----------
<S> <C>
Income
Interest................................ $12,297,193
-----------
Expenses
Management fee.......................... 736,171
Distribution fee--Class A............... 114,728
Distribution fee--Class B............... 589,173
Transfer agent's fees and expenses...... 212,000
Custodian's fees and expenses........... 80,000
Registration fees....................... 53,000
Legal fees and expenses................. 50,000
Reports to shareholders................. 49,000
Directors' fees......................... 36,000
Audit fees.............................. 34,000
Amortization of deferred organization
expenses................................ 32,000
Miscellaneous........................... 5,456
-----------
Total expenses........................ 1,991,528
-----------
Net investment income..................... 10,305,665
-----------
Realized and Unrealized Gain (Loss) on
Investments
Net realized gain on investments.......... 1,676,837
Net change in unrealized appreciation of
investments............................. (1,001,998)
-----------
Net gain on investments................... 674,839
-----------
Net Increase in Net Assets
Resulting from Operations................. $10,980,504
-----------
-----------
</TABLE>
See Notes to Financial Statements.
PRUDENTIAL STRUCTURED MATURITY FUND
INCOME PORTFOLIO
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended December 31,
Increase (Decrease) ------------------------------
in Net Assets 1993 1992
------------- -------------
<S> <C> <C>
Operations
Net investment income..... $ 10,305,665 $ 7,736,396
Net realized gain on
investments............. 1,676,837 2,200,151
Net change in unrealized
appreciation of
investments............. (1,001,998) (2,953,610)
------------- -------------
Net increase in net assets
resulting from
operations.............. 10,980,504 6,982,937
------------- -------------
Dividends and distributions (Note 1)
Dividends to shareholders
from net investment
income
Class A................. (6,786,531) (7,715,627)
Class B................. (3,519,134) (20,769)
------------- -------------
(10,305,665) (7,736,396)
------------- -------------
Distributions to
shareholders from net
realized gains
Class A................. (1,295,162) (2,339,842)
Class B................. (1,027,120) --
------------- -------------
(2,322,282) (2,339,842)
------------- -------------
Fund share transactions
(Note 6)
Net proceeds from shares
subscribed.............. 155,140,884 36,953,072
Net asset value of shares
issued
to shareholders in
reinvestment
of dividends and
distributions........... 8,391,229 6,394,139
Cost of shares
reacquired................ (40,937,219) (28,443,145)
------------- -------------
Net increase in net assets
from Fund share
transactions............ 122,594,894 14,904,066
------------- -------------
Total increase.............. 120,947,451 11,810,765
Net Assets
Beginning of year........... 121,808,129 109,997,364
------------- -------------
End of year................. $ 242,755,580 $ 121,808,129
------------- -------------
------------- -------------
</TABLE>
See Notes to Financial Statements.
B-40
<PAGE>
PRUDENTIAL STRUCTURED MATURITY FUND
INCOME PORTFOLIO
Notes to Financial Statements
Prudential Structured Maturity Fund (the ``Fund''), is registered under the
Investment Company Act of 1940, as a diversified, open-end management investment
company. The Fund consists of two portfolios--the Income Portfolio (the
``Portfolio'') and the Municipal Income Portfolio. The Municipal Income
Portfolio has not yet begun operations. The Fund was incorporated in Maryland on
June 8, 1988 and had no operations until July 1989 when 8,613 shares of the
Portfolio's common stock was sold for $100,000 to Prudential Mutual Fund
Management, Inc. (``PMF''). Investment operations commenced on September 1,
1989. The Portfolio's investment objective is high current income consistent
with the preservation of principal. The ability of issuers of debt securities
held by the Portfolio to meet their obligations 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 Portfolio in the preparation
of its financial statements.
Securities Valuation: The Board of Directors has authorized the use of an
independent pricing service to determine valuations of U.S. Government and
corporate obligations. 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. When market quotations
are not readily available, a security is valued by appraisal at its fair value
as determined in good faith under procedures established under the general
supervision and responsibility of the Board of Directors.
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.
In connection with transactions in repurchase agreements, the Portfolio's
custodian takes possession of the underlying collateral securities, the value of
which at least equals 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.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities 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 Portfolio'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 and capital gains, if
any, to its shareholders. Therefore, no federal income tax provision is
required.
Dividends and Distributions: The Portfolio declares daily and pays monthly
dividends of net investment income. Distributions of net capital gains, if any,
are made at least annually. Dividends and distributions are recorded on the
ex-dividend date.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles.
Deferred Organization Expenses: Approximately $160,000 of expenses were incurred
in connection with the organization and initial registration of the Portfolio.
These expenses have been deferred and are being amortized over the period of
benefit not to exceed 60 months from the date of commencement of investment
operations.
Note 2. Agreements The Fund has a management
agreement with 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 and
employees 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 .40 of 1% of the average daily net assets of the Portfolio.
B-41
<PAGE>
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as distributor of the Class A shares
of the Fund, and with Prudential Securities Incorporated (``PSI''), which acts
as distributor of the Class B shares of the Fund (collectively the
``Distributors''). To reimburse the Distributors for their expenses incurred in
distributing and servicing the Fund's Class A and B shares, the Fund, pursuant
to plans of distribution, pays the Distributors a reimbursement, accrued daily
and payable monthly.
Pursuant to the Class A Plan, the Portfolio reimburses PMFD for its
distribution-related expenses with respect to Class A shares at an annual rate
of .10 of 1% of the average daily net assets of the Class A shares. PMFD pays
various broker-dealers, including PSI and Pruco Securities Corporation
(``Prusec''), affiliated broker-dealers, for account servicing fees and other
expenses incurred by such broker-dealers.
Pursuant to the Class B Plan, the Portfolio reimburses PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to 1% of the average daily net assets of the Class B shares. Such expenses
under the Class B Plan were .85 of 1% of the average daily net assets of the
Class B shares for the year ended December 31, 1993.
The Class B distribution expenses include commission credits for payment of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution-related expenses, interest and/or carrying
charges, the cost of printing and mailing prospectuses to potential investors
and of advertising incurred in connection with the distribution of shares.
The Distributors recover the distribution expenses and service fees incurred
through the receipt of reimbursement payments from the Portfolio under the plans
and the receipt of initial sales charges (Class A only) and contingent deferred
sales charges (Class B only) from shareholders.
PMFD has advised the Portfolio that it has received approximately $669,100 in
front-end sales charges resulting from sales of Class A shares during the year
ended December 31, 1993. From these fees, PMFD paid such sales charges to
dealers (PSI and Prusec) which in turn paid commissions to salespersons.
With respect to the Class B Plan, at any given time, the amount of expenses
incurred by PSI in distributing the Portfolio's shares and not recovered through
the imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total reimbursement made by the Portfolio
pursuant to the Class B Plan. PSI advised the Portfolio that for the year ended
December 31, 1993, it received approximately $86,000 in contingent deferred
sales charges imposed upon certain redemptions by investors. PSI, as
distributor, has also advised the Portfolio that at December 31, 1993, the
amount of distribution expenses incurred by PSI and not yet reimbursed by the
Fund or recovered through contingent deferred sales charges approximated
$2,318,100. This amount may be recovered through future payments under the Class
B Plan or contingent deferred sales charges.
In the event of termination or noncontinuation of the Class B Plan, the
Portfolio would not be contractually obligated to pay PSI, as distributor, for
any expenses not previously reimbursed under the Class B Plan or recovered
through contingent deferred sales charges.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Portfolio's transfer agent.
During the year ended December 31, 1993, the Portfolio incurred fees of
approximately $169,000 for the services of PMFS. As of December 31, 1993,
approximately $20,000 of such fees were due to PMFS. Transfer agent fees and
expenses in the Statement of Operations also include certain out-of-pocket
expenses paid to non-affiliates.
Note 4. Portfolio Purchases and sales of port-
Securities folio securities, excluding
short-term investments, for the year ended
December 31, 1993 were $361,710,920 and $245,081,744, respectively.
The federal income tax basis of the Portfolio's investments at December 31,
1993 was $239,784,112 and accordingly, net unrealized appreciation for federal
income tax purposes was $416,546 (gross unrealized appreciation--$2,259,467;
gross unrealized depreciation-- $1,842,921).
The Portfolio elected to treat approximately $249,000 of net capital losses
incurred in the two month period ended December 31, 1993 as having occurred in
the following year.
Note 5. Joint The Portfolio, along with
Repurchase other affiliated registered
Agreement investment companies, trans-
Account fers uninvested cash balances
into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury
B-42
<PAGE>
or federal agency obligations. As of December 31, 1993, the Portfolio had a 0.3%
undivided interest in the repurchase agreements in the joint account. The
undivided interest for the Portfolio represented $3,362,000 in principal amount.
As of such date, each repurchase agreement in the joint account and the
collateral therefor was as follows:
Barclays de Zoete Wedd Securities, Inc., 3.10%, dated 12/31/93, in the
principal amount of $100,000,000, repurchase price $100,025,833, due 1/3/94;
collateralized by $49,000,000 U.S. Treasury Notes, 8.875%, due 11/15/98;
$32,000,000 U.S. Treasury Notes, 7.50%, due 11/15/01 and $7,305,000 U.S.
Treasury Notes, 8.50%, due 2/15/00; approximate aggregate value including
accrued interest--$102,043,014.
Bear Stearns & Co., Inc., 3.18%, dated 12/31/93, in the principal amount of
$323,000,000, repurchase price $323,085,595, due 1/3/94; collateralized by
$200,000,000 U.S. Treasury Notes, 3.875%, due 3/31/95; $80,030,000 U.S. Treasury
Notes, 7.50%, due 11/15/01; $30,000,000 U.S. Treasury Notes, 5.625%, due
1/31/98; $5,745,000 U.S. Treasury Notes, 4.25%, due 7/31/95 and $85,000 U.S.
Treasury Notes, 7.375%, due 5/15/96; approximate aggregate value including
accrued interest--$329,753,949.
Goldman, Sachs & Co., 3.10%, dated 12/31/93, in the principal amount of
$399,000,000, repurchase price $399,103,075, due 1/3/94; collateralized by
$363,720,000 U.S. Treasury Bonds, 7.50%, due 11/15/16; approximate value
including accrued interest-- $408,104,889.
Kidder, Peabody & Co., Inc., 3.20%, dated 12/31/93, in the principal amount
of $375,000,000, repurchase price $375,100,000, due 1/3/94; collateralized by
$200,000,000 U.S. Treasury Bonds, 11.625%, due 11/15/04; $38,000,000 U.S.
Treasury Bonds, 12.75%, due 11/15/10; $90,000 U.S. Treasury Bonds, 9.00%, due
2/15/93; $15,000,000 U.S. Treasury Notes, 7.375%, due 5/15/96 and $11,730,000
U.S. Treasury Notes, 7.25%, due 11/15/96; approximate aggregate value including
accrued interest--$383,014,020.
Note 6. Capital The Portfolio offers both
Class A and Class B shares. Class A shares are
sold with a front-end sales charge of up to 3.25%. Class B shares are sold with
a contingent deferred sales charge which declines from 3% to zero depending on
the period of time the shares are held. Both classes of shares have equal rights
as to earnings, assets and voting privileges except that each class bears
different distribution expenses and has exclusive voting rights with respect to
its distribution plan. Class B shares commenced operations on December 9, 1992.
There are 500 million shares of $.01 par value common stock, divided into two
classes, designated Class A and Class B common stock, each of which consists of
250 million authorized shares. Of the 20,603,702 shares issued and outstanding
at December 31, 1993, PMF owned 8,613 Class A shares. Transactions in shares of
common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- -------------------------------- ---------- ------------
<S> <C> <C>
Year ended December 31, 1993:
Shares sold..................... 2,594,107 $ 31,677,141
Shares issued in reinvestment of
dividends and distributions... 434,693 5,183,611
Shares reacquired............... (2,208,544) (26,405,354)
---------- ------------
Increase in shares
outstanding................... 820,256 $ 10,455,398
---------- ------------
---------- ------------
Year ended December 31, 1992:
Shares sold..................... 2,074,317 $ 24,857,002
Shares issued in reinvestment of
dividends and distributions... 535,228 6,380,724
Shares reacquired............... (2,360,989) (28,308,480)
---------- ------------
Increase in shares
outstanding................... 248,556 $ 2,929,246
---------- ------------
---------- ------------
Class B
- --------------------------------
Year ended December 31, 1993:
Shares sold..................... 10,395,504 $123,463,743
Shares issued in reinvestment of
dividends and distributions... 269,387 3,207,618
Shares reacquired............... (1,216,010) (14,531,865)
---------- ------------
Increase in shares
outstanding................... 9,448,881 $112,139,496
---------- ------------
---------- ------------
December 9, 1992* through
December 31, 1992:
Shares sold..................... 1,026,709 $ 12,096,070
Shares issued in reinvestment of
dividends..................... 1,137 13,415
Shares reacquired............... (11,427) (134,665)
---------- ------------
Increase in shares
outstanding................... 1,016,419 $ 11,974,820
---------- ------------
---------- ------------
</TABLE>
- ---------------
*Commencement of Class B operations.
PRUDENTIAL STRUCTURED MATURITY FUND
INCOME PORTFOLIO
Financial Highlights
<TABLE>
<CAPTION>
Class A Class B
------------------------------------------------------------ ----------------------------
September 1, December 9,
1989* 1992(D)(D)
Years ended December 31, through Year ended through
-------------------------------------------- December 31, December 31, December 31,
PER SHARE OPERATING PERFORMANCE: 1993 1992 1991 1990 1989 1993 1992
-------- -------- -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period.......................... $ 11.79 $ 12.13 $ 11.67 $ 11.63 $ 11.61 $ 11.79 $ 11.79
-------- -------- -------- -------- ------------ ------------ ------------
Income from investment operations:
Net investment income............. .71 .86(D) .93(D) 1.00(D) .35(D) .62 .04
Net realized and unrealized gain
(loss) on
investment transactions......... .12 (.08) .56 .04 .03 .12 --
-------- -------- -------- -------- ------------ ------------ ------------
Total from investment
operations.................... .83 .78 1.49 1.04 .38 .74 .04
-------- -------- -------- -------- ------------ ------------ ------------
Less distributions:
Dividends from net investment
income.......................... (.71) (.86) (.93) (1.00) (.35) (.62) (.04)
Distributions from net realized
gains........................... (.13) (.26) (.10) -- (.01) (.13) --
-------- -------- -------- -------- ------------ ------------ ------------
Total distributions............. (.84) (1.12) (1.03) (1.00) (.36) (.75) (.04)
-------- -------- -------- -------- ------------ ------------ ------------
Net asset value, end of period.... $ 11.78 $ 11.79 $ 12.13 $ 11.67 $ 11.63 $ 11.78 $ 11.79
-------- -------- -------- -------- ------------ ------------ ------------
-------- -------- -------- -------- ------------ ------------ ------------
TOTAL RETURN#:.................... 7.19% 6.67% 13.35% 9.40% 3.30% 6.38% .32%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)... $119,449 $109,828 $109,997 $113,125 $ 98,414 $ 123,306 $ 11,981
Average net assets (000).......... $114,728 $107,937 $113,010 $107,276 $ 89,176 $ 69,314 $ 5,474
Ratios to average net assets:
Expenses, including distribution
fees.......................... .80% .70%(D) .37%(D) .13%(D) 0%**(D) 1.55% 1.67%**
Expenses, excluding distribution
fees.......................... .70% .60%(D) .27%(D) .10%(D) 0%**(D) .70% .82%**
Net investment income........... 5.92% 7.15%(D) 7.89%(D) 8.67%(D) 8.41%**(D) 5.08% 6.31%**
Portfolio turnover................ 137% 91% 117% 46% 69% 137% 91%
</TABLE>
- ---------------
* Commencement of investment operations.
** Annualized.
(D) Net of expense subsidy and/or fee waiver.
(D)(D) Commencement of Class B operations.
# 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 one
year are not annualized.
See Notes to Financial Statements.
B-43
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors of
Prudential Structured Maturity Fund, Income Portfolio
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Prudential Structured Maturity Fund,
Income Portfolio, as of December 31, 1993, the related statements of operations
for the year then ended and of changes in net assets for each of the years in
the two year period then ended, and the financial highlights for each of the
periods in the four year period then ended and for the period September 1, 1989
(commencement of investment operations) to December 31, 1989. These financial
statements and the financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and the 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 at
December 31, 1993 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
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
Structured Maturity Fund, Income Portfolio, as of December 31, 1993, the results
of its operations, the changes in its net assets and the financial highlights
for the respective stated periods in conformity with generally accepted
accounting principles.
Deloitte & Touche
New York, New York
February 3, 1994
TAX INFORMATION
We are required by the Internal Revenue Code to advise you within 60 days of
the Portfolio's fiscal year end (December 31, 1993) as to the federal tax status
of dividends paid by the Portfolio during such fiscal year.
During 1993, dividends paid from net investment income of $.71 per share for
Class A shares and $.62 per share for Class B shares are taxable as ordinary
income. In addition, the Fund paid short-term capital gain distributions of $.08
per share (Class A and Class B shares), which are taxable as ordinary income,
and long-term capital gain distributions of $.055 per share (Class A and Class B
shares), which are taxable as such.
For the purpose of preparing your annual federal income tax return, however,
you should report the amounts as reflected on the appropriate Form 1099-DIV or
substitute Form 1099-DIV.
We are required by Massachusetts and Oregon to inform you that dividends
which have been derived from interest on federal obligations are not taxable to
shareholders. Please be advised that 27.35% of the dividends paid by the Fund
qualify for each of these states' tax exclusion.
We wish to advise you that the corporate dividends received deduction for the
Fund is zero. Only funds that invest in U.S. equity securities are entitled to
pass-through a corporate dividends received deduction.
B-44
<PAGE>
Past performance is no guarantee of future performance, and an investor's
shares when redeemed, may be worth more or less than their original value.
These graphs are furnished to you in accordance with SEC regulations. They
compare a $10,000 investment in Prudential Structured Maturity Fund (Class A and
Class B) with a similar investment in the Lehman Brothers Intermediate
Government/Corporate Bond Index (LIGC) by portraying the initial account values
on September 1, 1989 for Class A shares and December 9, 1992 for Class B shares
and subsequent account values at the end of each fiscal year (December 31), as
measured on a quarterly basis, beginning in 1989 for Class A shares and in 1992
for Class B shares. For purposes of the graphs and, unless otherwise indicated,
the accompanying tables, it has been assumed that (a) the maximum sales charge
was deducted from the initial $10,000 investment in Class A shares; (b) the
maximum applicable contingent deferred sales charge was deducted from the value
of the investment in Class B shares assuming full redemption on December 31,
1993; (c) all recurring fees (including management fees) were deducted; and (d)
all dividends and distributions were reinvested.
The LIGC is a weighted index comprised of securities issued or backed by the
U.S. government and its agencies and securities publicly issued by corporations
with one to 9.99 years remaining to maturity, rated investment grade and have
$50 million or more outstanding. The LIGC is an unmanaged index and includes the
reinvestment of all dividends, but does not reflect the payment of transaction
costs and advisory fees associated with an investment in the Fund. The
securities that comprise the LIGC may differ substantially from the securities
in the Fund's portfolio. The LIGC is not the only index that be used to
characterize performance of bond funds and other indexes may portray different
comparative performance.
B-45
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS:
(1) Financial Statements included in the Prospectus constituting Part A
of this Registration Statement:
Financial Highlights
(2) Financial Statements included in the Statement of Additional
Information constituting Part B of this Registration Statement:
Independent Auditors' Report
Portfolio of Investments at December 31, 1993
Statement of Assets and Liabilities at December 31, 1993
Statement of Operations for the Year ended December 31, 1993
Statement of Changes in Net Assets for the Years Ended December 31,
1993 and 1992
Financial Highlights
Notes to Financial Statements
Independent Auditors' Report
(B) EXHIBITS:
1. (a) Restated Articles of Incorporation of the Registrant
originally filed May 1, 1989, incorporated by reference to Exhibit
1 to the Registration Statement on Form N-1A filed on September 1,
1993 (File No. 33-22363).
(b) Form of Amended and Restated Articles of Incorporation of the
Registrant.*
2. (a) By-Laws of the Registrant, incorporated by reference to Exhibit
No. 2 to the Registration Statement on Form N-1A filed on June 13,
1988 (File No. 33-22363).
(b) Amended and Restated By-Laws of the Registrant.*
3. Not Applicable.
4. (a) Specimen certificate for shares of common stock, $.01 par
value per share, of the Registrant, incorporated by reference to
Exhibit No. 4 to Pre-Effective Amendment No. 2 to the Registration
Statement on Form N-1A filed on July 24, 1989 (File No. 33-22363).
(b) Specimen certificate for Class B shares of common stock filed
October 5, 1992, incorporated by reference to Exhibit No. 4(b) to
Post-Effective Amendment No. 5 to the Registration Statement on
Form N-1A filed on October 5, 1992 (File No. 33-22363).
(c) Specimen certificate for Class A shares of common stock, $.01
par value per share, of the Registrant, for the Municipal Income
Portfolio, incorporated by reference to Exhibit 4(c) to Post-
Effective Amendment No. 7 to Registration Statement on Form N-1A
filed on July 16, 1993 (File No. 33-22363).
(d) Specimen certificate for Class B shares of common stock, $.01
par value per share, of the Registrant, for the Municipal Income
Portfolio, incorporated by reference to Exhibit 4(d) to Post-
Effective Amendment No. 7 to Registration Statement on Form N-1A
filed on July 16, 1993 (File No. 33-22363).
(e) Instruments defining rights of shareholders, incorporated by
reference to Exhibit 4(e) to Post-Effective Amendment No. 9 to the
Registration Statement on Form N-1A via EDGAR filed on February
28, 1994 (File No. 33-22363).
5. (a) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc., incorporated by reference to Exhibit
No. 5(a) to Post-Effective Amendment No. 1 to the Registration
Statement on Form N-1A filed on January 25, 1990 (File No. 33-
22363).
(b) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and The Prudential Investment Corporation,
incorporated by reference to Exhibit No. 5(b) to Post-Effective
Amendment No. 1 to the Registration Statement on Form N-1A filed
on January 25, 1990 (File No. 33-22363).
C-1
<PAGE>
6. (a) Subscription Offering Agreement between the Registrant and
Prudential-Bache Securities Inc., incorporated by reference to
Exhibit No. 6(b) to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A filed on January 25, 1990 (File
No. 33-22363).
(b) Distribution Agreement between the Registrant and Prudential
Securities Incorporated for Class B shares filed October 5, 1992,
incorporated by reference to Exhibit No. 6(c) to Post-Effective
Amendment No. 5 to the Registration Statement on Form N-1A filed on
October 5, 1992 (File No. 33-22363).
(c) Amended and Restated Distribution Agreement (Class A Shares)
between the Fund and Prudential Mutual Fund Distributors, Inc.,
(Income Portfolio).*
(d) Amended and Restated Distribution Agreement (Class B Shares)
between the Fund and Prudential Securities Incorporated (Income
Portfolio).*
(e) Form of Distribution Agreement (Class A Shares) between the
Fund and Prudential Mutual Fund Distributors (Municipal Income
Portfolio).*
(f) Form of Distribution Agreement (Class B Shares) between the
Fund and Prudential Securities Incorporated (Municipal Income
Portfolio).*
(g) Form of Subscription Offering Agreement between the
Registrant and Prudential Securities Incorporated (Municipal
Income Portfolio).*
(h) Form of Distribution and Service Agreement for Class A shares
(Income Portfolio).*
(i) Form of Distribution and Service Agreement for Class B shares
(Income Portfolio).*
(j) Form of Distribution and Service Agreement for Class C shares
(Income Portfolio Municipal Income Portfolio).*
7. Not Applicable.
8. Custodian Contract between the Registrant and State Street Bank and
Trust Company, incorporated by reference to Exhibit No. 8 to Post-
Effective Amendment No. 3 to the Registration Statement on Form
N-1A filed on April 30, 1991 (File No. 33-22363).
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc., incorporated by reference to
Exhibit No. 9 to Post-Effective Amendment No. 1 to the Registration
Statement on Form N-1A filed on January 25, 1990 (File No. 33-
22363).
10. Opinion of Counsel, incorporated by reference to Exhibit No. 10 to
Pre-Effective Amendment No. 2 to the Registration Statement on Form
N-1A filed on July 24, 1989 (File No. 33-22363).
11. Consent of Independent Auditors.*
12. Not Applicable.
13. Purchase Agreement, incorporated by reference to Exhibit No. 13 to
Pre-Effective Amendment No. 2 to the Registration Statement on Form
N-1A filed on July 24, 1989 (File No. 33-22363).
14. Not Applicable.
15. (a) Distribution and Service Plan for Class B shares, incorporated
by reference to Exhibit No. 15(b) to Post-Effective Amendment No. 5
to the Registration Statement on Form N-1A filed on October 5, 1992
(File No. 33-22363).
(b) Amended and Restated Distribution and Service Plan pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (Class A
Shares) (Income Portfolio), incorporated by reference to Exhibit
No. 15(c) to Post-Effective Amendment No. 9 to the Registration
Statement on Form N-1A via EDGAR filed on February 28, 1994 (File
No. 33-22363).
C-2
<PAGE>
(c) Amended and Restated Distribution and Service Plan pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (Class B Shares)
(Income Portfolio), incorporated by reference to Exhibit No. 15(d) to
Post-Effective Amendment No. 9 to the Registration Statement on Form
N-1A via EDGAR filed on February 28, 1994 (File No. 33-22363).
(d) Form of Distribution and Service Plan pursuant to Rule 12b-1 under
the Investment Company Act of 1940 (Class A Shares) (Municipal Income
Portfolio).*
(e) Form of Distribution and Service Plan pursuant to Rule 12b-1 under
the Investment Company Act of 1940 (Class B Shares) (Municipal Income
Portfolio).*
(f) Form of Distribution and Service Plan for Class A shares (Income
Portfolio).*
(g) Form of Distribution and Service Plan for Class B shares (Income
Portfolio).*
(h) Form of Distribution and Service Plan for Class C shares (Income
Portfolio and Municipal Income Portfolio).*
16. (a) Schedule of Computation of Performance Quotations relating to
Average Annual Total Return, incorporated by reference to Exhibit
No. 16 to Post-Effective Amendment No. 1 to the Registration
Statement on Form N-1A filed on January 25, 1990 (File No. 33-
22363).
(b) Schedule of Computation of Performance Quotations relating to
Aggregate Total Return for Class A and Class B shares, incorporated by
reference to Exhibit No. 16(b) to Post-Effective No. 8 to Registration
Statement on Form N-1A filed on September 14, 1993 (File No. 33-
22363).
Other Exhibits
Copies of Powers of Attorney for:
Lawrence C. McQuade
Robert R. Fortune
Delayne D. Gold
Harry A. Jacobs, Jr.
Thomas A. Owens, Jr.
Robert J. Schultz
Merle T. Welshans
Executed copies filed under Other Exhibits to Pre-Effective Amendment No. 2
to the Registration Statement on Form N-1A filed on July 24, 1989 (File No. 33-
22363).
- ------------
* Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of March 31, 1994, there were 1,603 and 3,236 record holders of Class A
and Class B shares of common stock, $.01 par value per share, of the Income
Portfolio. As of March 31, 1994, the Municipal Income Portfolio did not have
any record holders of shares of common stock.
ITEM 27. INDEMNIFICATION.
As permitted by Sections 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 shareholder, 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 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.
C-3
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (Securities Act) may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the 1940 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in connection with the successful
defense of any action, suit or proceeding) is asserted against the Registrant
by such director, officer or controlling person in connection with the shares
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the 1940 Act and will be governed by the
final adjudication of such issue.
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 Section 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, Inc.
See "How the Fund is Managed--Manager" in the Prospectuses 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 in October 1993).
The business and other connections of PMF's directors and principal executive
officers are set forth below. Except as otherwise indicated, the address of
each person is One Seaport Plaza, New York, NY 10292.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PMF PRINCIPAL OCCUPATIONS
- ---------------- ------------------ ---------------------
<S> <C> <C>
Brendan D. Boyle Executive Vice Executive Vice President and Director of Marketing,
President and PMF
Director of
Marketing
John D. Brookmeyer, Jr. Director Senior Vice President, The Prudential Insurance
Two Gateway Center Company of America
Newark, NJ 07102 (Prudential); Senior Vice President, PIC
Susan C. Cote Senior Vice Senior Vice President, PMF; Senior Vice President,
President Prudential Securities
Fred A. Fiandaca Executive Vice Executive Vice President, Chief Operating Officer and
Raritan Plaza One President, Chief Director, PMF; Chairman, Chief Operating Officer and
Edison, NJ 08847 Operating Officer Director,
and Director Prudential Mutual Fund Services, Inc.
Stephen P. Fisher Senior Vice Senior Vice President, PMF; Senior Vice President,
President Prudential Securities
Frank W. Giordano Executive Vice Executive Vice President, General Counsel and
President, General Secretary, PMF; Senior Vice President, Prudential
Counsel and Securities
Secretary
Robert F. Gunia Executive Vice Executive Vice President, Chief Financial and
President, Chief Administrative Officer, Treasurer and Director, PMF;
Financial and Senior Vice President, Prudential Securities
Administrative
Officer, Treasurer
and Director
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PMF PRINCIPAL OCCUPATIONS
- ---------------- ------------------ ---------------------
<S> <C> <C>
Eugene B. Heimberg Director Senior Vice President, Prudential; President, Director
Prudential Plaza and Chief Investment Officer, PIC
Newark, NJ 07101
Lawrence C. McQuade Vice Chairman Vice Chairman, PMF
Leland B. Paton Director Executive Vice President and Director, Prudential
Securities; Director, Prudential Securities Group,
Inc. (PSG)
Richard A. Redeker President, Chief President, Chief Executive Officer and Director, PMF;
Executive Officer Executive Vice President, Director and Member of the
and Director Operating Committee, Prudential Securities; Director,
PSG
S. Jane Rose Senior Vice Senior Vice President, Senior Counsel, and Assistant
President, Senior Secretary, PMF; Senior Vice President and Senior
Counsel and Counsel, Prudential Securities
Assistant
Secretary
Donald G. Southwell Director Senior Vice President, Prudential; Director, PSG
213 Washington Street
Newark, NJ 07102
</TABLE>
(b) Prudential Investment Corporation (PIC)
See "How the Fund Is Managed--Subadviser" in the Prospectus constituting
Part A of this Registration Statement and "Subadviser" in the Statement of
Additional information constituting Part B of this Registration Statement.
The business and other connections of PIC's directors and executive officers
are as set forth below. Except as otherwise indicated, the address of each
person is Prudential Plaza, Newark, NJ 07101.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ---------------- ------------------ ---------------------
<S> <C> <C>
Martin A. Berkowitz Senior Vice Vice President, Prudential; Senior Vice President and
President and Chief Financial and Compliance Officer, PIC
Chief Financial
and Compliance
Officer
William M. Bethke Senior Vice Senior Vice President, Prudential; Senior Vice
Two Gateway Center President President, PIC
Newark, NJ 07102
John D. Brookmeyer, Jr. Senior Vice Senior Vice President, Prudential; Senior Vice
Two Gateway Center President President, PIC
Newark, NJ 07102
Eugene B. Heimberg President, Senior Vice President, Prudential; President; Director
Director and Chief and Chief Investment Officer, PIC
Investment Officer
Garnett L. Keith, Jr. Director Vice Chairman and Director, Prudential, Director, PIC
Harry E. Knapp, Jr. Vice President Vice President, Prudential; Vice President, PIC
Four Gateway Center
Newark, NJ 07102
William P. Link Senior Vice Executive Vice President, Prudential; Senior Vice
Four Gateway Center President President, PIC
Newark, NJ 07102
Robert E. Riley Executive Vice Executive Vice President, Prudential; Executive Vice
500 Boylston Avenue President President, PIC; Director PSG
Boston, MA 02199
James W. Stevens Executive Vice Executive Vice President, Prudential; Executive Vice
Four Gateway Center President President, PIC; Director, PSG
Newark, NJ 07102
Robert C. Winters Director Chairman of the Board and Chief Executive Officer,
Prudential; Director, PIC; Chairman of the Board, PSG
Claude J. Zinngrabe, Jr. Executive Vice Vice President, Prudential; Executive Vice President,
President PIC
</TABLE>
C-5
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a)(i) Prudential Securities Incorporated
Prudential Securities is distributor for Prudential Government Securities
Trust (Intermediate Term Series) and The Target Portfolio Trust and for Class B
shares of The BlackRock Government Income Trust, Prudential Adjustable Rate
Securities Fund, Inc., Prudential California Municipal Fund (California Series
and California Income Series), Prudential Equity Fund, Inc., Prudential Equity
Income Fund, Prudential FlexiFund, 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
Strategist 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, New Jersey Money Market Series and Florida Series),
Prudential National Municipals Fund, Inc., Prudential Pacific Growth Fund,
Inc., Prudential Short-Term Global Income Fund, Inc., Prudential Structured
Maturity Fund, Inc., Prudential U.S. Government Fund, Prudential Utility Fund,
Inc., Global Utility Fund, Inc. and Nicholas-Applegate Fund, Inc. (Nicholas-
Applegate Growth Equity Fund). Prudential Securities is also a depositor for
the following unit investment trusts:
The Corporate Income Fund
Corporate Investment Trust Fund
Equity Income Fund
Government Securities Income Fund
International Bond Fund
Municipal Investment Trust
Prudential Equity Trust Shares
National Equity Trust
Prudential Unit Trusts
Government Securities Equity Trust
National Municipal Trust
(a)(ii) Prudential Mutual Fund Distributors, Inc.
Prudential Mutual Fund Distributors, Inc. is distributor for Command
Government Fund, Command Money Fund, Command Tax-Free Fund, Prudential
California Municipal Fund (California Money Market Series and Class A shares of
the California Series and California Income Series), Prudential Government
Securities Trust (Money Market Series and U.S. Treasury Money Market Series),
Prudential Institutional Liquidity Portfolio, Inc., Prudential-Bache MoneyMart
Assets Inc. (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-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 The BlackRock Government Income Trust,
Prudential Adjustable Rate Securities Fund, Inc., Prudential California
Municipal Fund (California Series and California Income Series), Prudential
Equity Fund, Inc., Prudential Equity Income Fund, Prudential FlexiFund,
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 Strategist 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, Florida Series, Georgia Series, Maryland
Series, Massachusetts Series, Michigan Series, Minnesota Series, New Jersey
Series, New York Series, North Carolina Series, Ohio Series, and Pennsylvania
Series), Prudential National Municipals Fund, Inc., Prudential Pacific Growth
Fund, Inc., Prudential Short-Term Global Income Fund, Inc., Prudential
Structured Maturity Fund, Inc., Prudential U.S. Government Fund, Prudential
Utility Fund, Inc., Global Utility Fund, Inc., and Nicholas-Applegate Fund,
Inc. (Nicholas-Applegate Growth Equity Fund).
C-6
<PAGE>
(b)(i) Information concerning the officers and directors of Prudential
Securities Incorporated is set forth below:
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME UNDERWRITER REGISTRANT
- ---- ------------- --------------
<S> <C> <C>
Alan D. Hogan............. Executive Vice President, Chief None
Administrative Officer and Director
Howard A. Knight.......... Executive Vice President, Director, None
Corporate Strategy and New Business
Development
George A. Murray.......... Executive Vice President and Director None
John P. Murray............ Executive Vice President and Director None
of Risk Management
Leland B. Paton........... Executive Vice President and Director None
Richard A. Redeker........ Director Director
Hardwick Simmons.......... Chief Executive Officer, President None
and Director
Lee Spencer............... Interim General Counsel None
(ii) Information concerning the officers and directors of Prudential Mutual
Fund Distributors, Inc. is set forth below:
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME/(1)/ UNDERWRITER REGISTRANT
- --------- ------------- --------------
<S> <C> <C>
Joanne Accurso-Soto....... Vice President None
Dennis Annarumma.......... Vice President, Assistant Treasurer None
and Assistant Comptroller
Phyllis J. Berman......... Vice President None
Fred A. Fiandaca.......... President, Chief Executive Officer None
Raritan Plaza One and Director
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 President
Comptroller and Director
Anita L. Whelan........... Vice President and Assistant None
Secretary
</TABLE>
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
- -----------
/(1)/The address of each person named is One Seaport Plaza, New York, NY 10292
unless otherwise indicated.
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, the Registrant, One Seaport Plaza, New York,
New York, and Prudential Mutual Fund Services, Inc., Raritan Plaza One, Edison,
New Jersey. Documents required by Rules 31a-1(b)(5), (6), (7), (9), (10) and
(11) and 31a-1(f) will be kept at Two Gateway Center, documents required by
Rules 31a-1(b)(4) and (11) and 31a-1(d) at One Seaport Plaza and the remaining
accounts, books and other documents required by such other pertinent provisions
of Section 31(a) and the Rules promulgated thereunder will be kept by State
Street Bank and Trust Company and Prudential Mutual Fund Services, Inc.
ITEM 31. MANAGEMENT SERVICES
Other than as set forth under the captions "How the Fund Is Managed--Manager"
and "How the Fund Is Managed--Distributor" in the Prospectuses 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 hereby undertakes to furnish each person to whom a Prospectus
is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Post-Effective
Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, and State of
New York, on the 11th day of May, 1994.
PRUDENTIAL-BACHE STRUCTURED MATURITY
FUND, INC. D/B/A
PRUDENTIAL STRUCTURED MATURITY 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/ Susan C. Cote Treasurer and Principal May 11, 1994
- ------------------------------ Financial and Accounting
SUSAN C. COTE Officer
/s/ Robert R. Fortune Director May 11, 1994
- ------------------------------
ROBERT R. FORTUNE
/s/ Delayne D. Gold Director May 11, 1994
- ------------------------------
DELAYNE D. GOLD
/s/ Harry A. Jacobs, Jr. Director May 11, 1994
- ------------------------------
HARRY A. JACOBS, JR.
/s/ Lawrence C. McQuade President and Director May 11, 1994
- ------------------------------
LAWRENCE C. MCQUADE
/s/ Thomas A. Owens, Jr. Director May 11, 1994
- ------------------------------
THOMAS A. OWENS, JR.
/s/ Robert J. Schultz Director May 11, 1994
- ------------------------------
ROBERT J. SCHULTZ
/s/ Merle T. Welshans Director May 11, 1994
- ------------------------------
MERLE T. WELSHANS
/s/ Richard A. Redeker Director May 11, 1994
- ------------------------------
RICHARD A. REDEKER
</TABLE>
C-8
<PAGE>
PRUDENTIAL-BACHE STRUCTURED MATURITY FUND, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ------
<C> <S> <C>
1(a) Restated Articles of Incorporation of the Registrant
originally filed May 1, 1989, incorporated by reference to
Exhibit 1 to the Registration Statement on Form N-1A filed on
September 1, 1993 (File No. 33-22363). --
1(b) Form of Amended and Restated Articles of Incorporation of the
Registrant.* --
2(a) By-Laws of the Registrant, incorporated by reference to
Exhibit No. 2 to the Registration Statement on Form N-1A
filed on June 13, 1988 (File No. 33-22363). --
2(b) Amended and Restated By-Laws of the Registrant.*
3 Not Applicable. --
4(a) Specimen certificate for shares of common stock, $.01 par
value per share, of the Registrant, incorporated by reference
to Exhibit No. 4 to Pre-Effective Amendment No. 2 to the
Registration Statement on Form N-1A filed on July 24, 1989
(File No. 33-22363). --
4(b) Specimen certificate for Class B shares of common stock filed
October 5, 1992, incorporated by reference to Exhibit No.
4(b) to Post-Effective Amendment No. 5 to the Registration
Statement on Form N-1A filed on October 5, 1992 (File No. 33-
22363). --
4(c) Specimen certificate for Class A shares of common stock, $.01
par value per share, of the Registrant, for the Municipal
Income Portfolio, incorporated by reference to Exhibit 4(c)
to Post-Effective Amendment No. 7 to Registration Statement
on Form N-1A filed on July 16, 1993 (File No. 33-22363). --
4(d) Specimen certificate for Class B shares of common stock, $.01
par value per share, of the Registrant, for the Municipal
Income Portfolio, incorporated by reference to Exhibit 4(d)
to Post-Effective Amendment No. 7 to Registration Statement
on Form N-1A filed on July 16, 1993 (File No. 33-22363). --
4(e) Instruments defining rights of shareholders, incorporated by
reference to Exhibit 4(e) to Post-Effective Amendment No. 9
to the Registration Statement on Form N-1A via EDGAR filed on
February 28, 1994 (File No. 33-22363). --
5(a) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc., incorporated by reference to
Exhibit No. 5(a) to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A filed on January 25, 1990
(File No. 33-22363). --
5(b) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and The Prudential Investment Corporation,
incorporated by reference to Exhibit No. 5(b) to Post-
Effective Amendment No. 1 to the Registration Statement on
Form N-1A filed on January 25, 1990 (File No. 33-22363). --
6(a) Subscription Offering Agreement between the Registrant and
Prudential-Bache Securities Inc., incorporated by reference
to Exhibit No. 6(b) to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A filed on January 25, 1990
(File No. 33-22363). --
6(b) Distribution Agreement between the Registrant and Prudential
Securities Incorporated for Class B shares filed October 5,
1992, incorporated by reference to Exhibit No. 6(c) to Post-
Effective Amendment No. 5 to the Registration Statement on
Form N-1A filed on October 5, 1992 (File No. 33-22363). --
6(c) Amended and Restated Distribution Agreement (Class A Shares)
between the Fund and Prudential Mutual Fund Distributors,
Inc., (Income Portfolio).* --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ------
<C> <S> <C>
6(d) Amended and Restated Distribution Agreement (Class B Shares)
between the Fund and Prudential Securities Incorporated,
(Income Portfolio).* --
6(e) Form of Distribution Agreement (Class A Shares) between the
Fund and Prudential Mutual Fund Distributors (Municipal
Income Portfolio).* --
6(f) Form of Distribution Agreement (Class B Shares) between the
Fund and Prudential Securities Incorporated (Municipal Income
Portfolio).* --
6(g) Form of Subscription Offering Agreement between the
Registrant and Prudential Securities Incorporated (Municipal
Income Portfolio).* --
6(h) Form of Distribution and Service Agreement for Class A shares
(Income Portfolio).* --
6(i) Form of Distribution and Service Agreement for Class B shares
(Income Portfolio).* --
6(j) Form of Distribution and Service Agreement for Class C shares
(Income Portfolio and Municipal Income Portfolio).* --
7 Not Applicable. --
8 Custodian Contract between the Registrant and State Street
Bank and Trust Company, incorporated by reference to Exhibit
No. 8 to Post-Effective Amendment No. 3 to the Registration
Statement on Form N-1A filed on April 30, 1991 (File No. 33-
22363). --
9 Transfer Agency and Service Agreement between the Registrant
and Prudential Mutual Fund Services, Inc., incorporated by
reference to Exhibit No. 9 to Post-Effective Amendment No. 1
to the Registration Statement on Form N-1A filed on January
25, 1990 (File No. 33-22363). --
10 Opinion of Counsel, incorporated by reference to Exhibit No.
10 to Pre-Effective Amendment No. 2 to the Registration
Statement on Form N-1A filed on July 24, 1989 (File No. 33-
22363). --
11 Consent of Independent Auditors.* --
12 Not Applicable. --
13 Purchase Agreement, incorporated by reference to Exhibit No.
13 to Pre-Effective Amendment No. 2 to the Registration
Statement on Form N-1A filed on July 24, 1989 (File No. 33-
22363). --
14 Not Applicable. --
15(a) Distribution and Service Plan for Class B shares,
incorporated by reference to Exhibit No. 15(b) to Post-
Effective Amendment No. 5 to the Registration Statement on
Form N-1A filed on October 5, 1992 (File No. 33-22363). --
15(b) Amended and Restated Distribution and Service Plan pursuant
to Rule 12b-1 under the Investment Company Act of 1940 (Class
A Shares) (Income Portfolio), incorporated by reference to
Exhibit No. 15(c) to Post-Effective Amendment No. 9 to the
Registration Statement on Form N-1A via EDGAR filed on
February 28, 1994 (File No. 33-22363). --
15(c) Amended and Restated Distribution and Service Plan pursuant
to Rule 12b-1 under the Investment Company Act of 1940 (Class
B Shares) (Income Portfolio), incorporated by reference to
Exhibit No. 15(d) to Post-Effective Amendment No. 9 to the
Registration Statement on Form N-1A via EDGAR filed on
February 28, 1994 (File No. 33-22363). --
15(d) Form of Distribution and Service Plan pursuant to Rule 12b-1
under the Investment Company Act of 1940 (Class A Shares)
(Municipal Income Portfolio).* --
15(e) Form of Distribution and Service Plan pursuant to Rule 12b-1
under the Investment Company Act of 1940 (Class B Shares)
(Municipal Income Portfolio).* --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ------
<C> <S> <C>
15(f) Form of Distribution and Service Plan for Class A shares
(Income Portfolio).* --
15(g) Form of Distribution and Service Plan for Class B shares
(Income Portfolio).* --
15(h) Form of Distribution and Service Plan for Class C shares
(Income Portfolio and Municipal Income Portfolio).* --
16(a) Schedule of Computation of Performance Quotations relating to
Average Annual Total Return, incorporated by reference to
Exhibit No. 16 to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A filed on January 25, 1990
(File No. 33-22363). --
16(b) Schedule of Computation of Performance Quotations relating to
Aggregate Total Return for Class A and Class B shares,
incorporated by reference to Exhibit No. 16(b) to Post-
Effective No. 8 to Registration Statement on Form N-1A filed
on September 14, 1993 (File No. 33-22363). --
</TABLE>
Other Exhibits
Copies of Powers of Attorney for:
Lawrence C. McQuade
Robert R. Fortune
Delayne D. Gold
Harry A. Jacobs, Jr.
Thomas A. Owens, Jr.
Robert J. Schultz
Merle T. Welshans
Executed copies filed under Other Exhibits to Pre-Effective Amendment No. 2
to the Registration Statement on Form N-1A filed on July 24, 1989 (File No. 33-
22363).
- -----------
* Filed herewith.
<PAGE>
Exhibit 1(b)
ARTICLES OF RESTATEMENT
OF
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
PRUDENTIAL STRUCTURED MATURITY FUND, INC., a Maryland corporation, having
its principal office in the city of Baltimore (hereinafter called the
"Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland, that:
FIRST: The charter of the Corporation is restated as follows:
ARTICLE I
I, the incorporator, KARIN JAGEL FLYNN, whose post office address is Quaker
Tower, 321 North Clark Street, Suite 3300, Chicago, Illinois 60610, being at
least eighteen years of age, am, under and by virtue of the General Laws of the
State of Maryland authorizing the formation of corporations, forming a
corporation.
ARTICLE II
The name of the corporation (hereinafter called the "Corporation") is
Prudential Structured Maturity Fund, Inc.
ARTICLE III
Purposes
--------
The purpose for which the Corporation is formed is to act as an open-end
investment company of the management type registered as such with the Securities
and Exchange Commission pursuant to the Investment Company Act of 1940 and to
exercise and generally to enjoy all of the powers, rights and privileges granted
to, or conferred upon, corporations by the General Laws of the State of Maryland
now or hereinafter in force.
<PAGE>
ARTICLE IV
Address in Maryland
-------------------
The post office address of the place at which the principal office of the
Corporation in the State of Maryland is located is c/o CT Corporation System, 32
South Street, Baltimore, Maryland 21202.
The name of the Corporation's resident agent is The Corporation Trust
Incorporated, and its post office address is 32 South Street, Baltimore,
Maryland 21202. Said resident agent is a corporation of the State of Maryland.
ARTICLE V
Common Stock
------------
Section 1. (a) The total number of shares of capital stock which the
Corporation shall have authority to issue is 500,000,000 shares of the par
value of $.01 per share and of the aggregate par value of $5,000,000 to be
divided initially into two series, the Income Portfolio and the Municipal
Income Portfolio, with each such Series authorized to issue 250,000,000 of
such shares having an aggregate par value of $2,500,000, and each such Series
to be further divided into three classes, consisting as to each such Series of
83,333,333 1/3 shares of Class A Common Stock, 83,333,333 1/3 shares of Class
B Common Stock and 83,333,333 1/3 shares of Class C Common Stock. The Board of
Directors of the Corporation shall have the power and authority to classify or
reclassify any unissued shares from time to time by setting or
changing the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, or terms or
conditions of redemption of such unissued shares. The Board of Directors
shall have the power and authority to increase or decrease the aggregate
number of shares of any Series or class that the Corporation has authority to
issue.
(i) Each share of Class A Common Stock, Class B Common Stock and
Class C Common Stock of a Series shall represent the same interest in the
Series and have identical voting, dividend, liquidation and other
rights except that (A) Expenses related to the distribution of each class
of shares shall be borne solely by such class; (B) The bearing of such
expenses solely by shares of each class shall be appropriately reflected
(in the manner determined by the Board of Directors) in the net asset
value, dividends, distribution and liquidation rights of the shares of
such class; (C) The Class A Common Stock shall be subject to a front-end
sales load and a Rule 12b-1 distribution fee as determined by the Board
of Directors from time to time; (D) The Class B Common Stock shall be
subject to a contingent deferred sales charge and a Rule 12b-1
distribution fee as determined by the Board of Directors from time to
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time; and (E) The Class C Common Stock shall be subject to a contingent
deferred sales charge and a Rule 12b-1 distribution fee as determined by
the Board of Directors from time to time. All shares of each particular
class shall represent an equal proportionate interest in that class, and
each share of any particular class shall be equal to each other share of
that class.
(ii) Each share of the Class B Common Stock of a Series shall be
converted automatically, and without any action or choice on the part of
the holder thereof, into shares (including fractions thereof) of the
Class A Common Stock of the same Series (computed in the manner hereinafter
described), at the applicable net asset value of each Class, at the time
of the calculation of the net asset value of such Class B Common Stock at
such times, which may vary between shares originally issued for cash and
shares acquired through the automatic reinvestment of dividends and
distributions with respect to Class B Common Stock (each "Conversion
Date") determined by the Board of Directors in accordance with applicable
laws, rules, regulations and interpretations of the Securities and
Exchange Commission and the National Association of Securities Dealers,
Inc. and pursuant to such procedures as may be established from time to
time by the Board of Directors and disclosed in the then current
prospectus for such Class A and Class B Common Stock.
(iii) The number of shares of the Class A Common Stock of a Series
into which a share of the Class B Common Stock is converted pursuant to
Paragraph (1)(a)(ii) hereof shall equal the number (including for this
purpose fractions of a share) obtained by dividing the net asset value
per share of the Class B Common Stock of the same Series for purposes of
sales and redemptions thereof at the time of the calculation of the net
asset value on the Conversion Date by the net asset value per share of
the Class A Common Stock for purposes of sales and redemptions thereof at
the time of the calculation of the net asset value on the Conversion
Date.
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(iv) On the Conversion Date, the shares of the Class B Common Stock
of a Series converted into shares of the Class A Common Stock will cease
to accrue dividends and will no longer be outstanding and the rights of
the holders thereof will cease (except the right to receive declared but
unpaid dividends to the Conversion Date).
(v) The Board of Directors shall have full power and authority to
adopt such other terms and conditions concerning the conversion of shares
of the Class B Common Stock to shares of the Class A Common Stock as they
deem appropriate; provided such terms and conditions are not inconsistent
with the terms contained in this Section 1(a) and subject to any
restrictions or requirements under the Investment Company Act of 1940 and
the rules, regulations and interpretations thereof promulgated or issued
by the Securities and Exchange Commission, any conditions or limitations
contained in an order issued by the Securities and Exchange Commission
applicable to the Corporation, or any restrictions or requirements under
the Internal Revenue Code of 1986, as amended, and the rules, regulations
and interpretations promulgated or issued thereunder.
(vi) To the extent appropriate under the circumstances, taking into
account prevailing practices in the investment company industry,
references to "Class" in subsection (b) of this Section 1 shall be deemed
to be references to "Series" as used in this subsection(a).
(b) A description of the relative preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption of all of Shares is
as follows, unless otherwise set forth in the Articles Supplementary
filed with the Maryland State Department of Assessments and Taxation
describing any further Class or Classes from time to time created by the
Board of Directors:
(i) Assets Belonging to Class. All consideration received by the
-------------------------
Corporation for the issue or sale of Shares of a particular Class,
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 Class for all purposes, subject only to the
rights of creditors, and shall be so recorded upon the books of
account of the Corporation. Such consideration, assets, income,
earnings, profits and proceeds, 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
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form the same may be, together with any General Items (as hereinafter
defined) allocated to that Class as provided in the following
sentence, are herein referred to as "assets belonging to" that Class.
In the event that there are any assets, income, earnings, profits or
proceeds thereof, funds or payments which are not readily identifiable
as belonging to any particular Class (collectively "General Items"),
the Board of Directors shall allocate such General Items to and among
any one or more of the Classes created from time to time, in such
manner and on such basis as the Board of Directors in its sole
discretion deems fair and equitable; and any General Items so
allocated to a particular Class shall belong to that Class. Each such
allocation by the Board of Directors shall be conclusive and binding
upon the stockholders of all Classes for all purposes.
(ii) Liabilities Belonging to Class. The assets belonging to each
------------------------------
particular Class shall be charged with the liabilities of the
Corporation in respect of that Class and with all expenses, costs,
charges and reserves attributable to that Class, and shall be so
recorded upon the books of account of the Corporation. Such
liabilities, expenses, costs, charges and reserves, together with any
General Items (as hereinafter defined) allocated to that Class as
provided in the following sentence, so charged to that Class are
herein referred to as "liabilities belonging to" that Class. In the
event there are any general liabilities, expenses, costs, charges or
reserves of the Corporation which are not readily identifiable as
belonging to any particular Class (collectively "General Items"), the
Board of Directors shall allocate and charge such General Items to and
among any one or more of the Classes created from time to time, in
such manner and on such basis as the Board of Directors in its sole
discretion deems fair and equitable; and any General Items so
allocated and charged to a particular Class shall belong to that
Class. Each such allocation by the Board of Directors shall be
conclusive and binding upon the stockholders of all Classes for all
purposes.
(iii) Dividends. Dividends and distributions on Shares of a
---------
particular Class may be paid to the holders of Shares of that Class at
such times, in such manner and from such of the income and capital
gains accrued or realized from the assets belonging to that Class
after providing for actual and accrued liabilities belonging to that
Class as the Board of Directors may determine.
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(iv) Liquidation. In the event of the liquidation or dissolution of
-----------
the Corporation, the stockholders of each Class that has been created
shall be entitled to receive, as a Class, when and as declared by the
Board of Directors, the excess of the assets belonging to that Class
over the liabilities belonging to that Class. The assets so
distributable to the stockholders of any particular Class shall be
distributed among such stockholders in proportion to the number of
Shares of that Class held by them and recorded on the books of the
Corporation.
(v) Voting. On each matter submitted to a vote of the stockholders,
------
each holder of a Share shall be entitled to one vote for each Share
standing in such holder's name on the books of the Corporation
irrespective of the Class thereof and all Shares of all Classes shall
vote as a single Class ("Single Class Voting"); provided, however,
that (A) as to any matter with respect to which a separate vote of any
Class is required by the Investment Company Act of 1940 or would be
required under the Maryland General Corporation Law, such requirements
as to a separate vote by that Class shall apply in lieu of Single
Class Voting as described above: (B) in the event that the separate
vote requirements referred to in (A) above apply with respect to one
or more Classes, then, subject to (C) below, the Shares of all other
Classes shall vote as a single Class and (C) as to any matter which
does not affect the interest of a particular Class, including but not
limited to any proposal to liquidate any other Class, only the holders
of Shares of the one or more affected Classes shall be entitled to
vote.
(vi) Quorum. The presence in person or by proxy of the holders of
------
record of one-third of the Shares of all Classes issued and
outstanding and entitled to vote thereat shall constitute a quorum for
the transaction of any business at all meetings of the stockholders
except as otherwise provided by law or in these Articles of
Incorporation and except that where the holders of Shares of any Class
are entitled to a separate vote as a class (a "Separate Class") or
where the holders of Shares of two or more (but not all) classes are
required to vote as a single class (a "Combined Class"), the presence
in person or by proxy of the holders of record of one-third of the
Shares of that Separate Class or Combined Class, as the case may be,
issued and outstanding and entitled to vote thereat shall constitute a
quorum for such vote.
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(vii) Equality. Each Share of any particular Class shall represent
--------
an equal and proportionate interest in the assets belonging to that
Class (subject to the liabilities belonging to that Class): however,
the provisions of this sentence shall not restrict any distinctions
permissible pursuant to subsection (iii) of this Section 1(b) or
otherwise under these Articles of Incorporation that may exist with
respect to stockholder elections to receive dividends or distributions
in cash or Shares of the same Class or that may otherwise exist with
respect to dividends and distributions on Shares of the same Class.
Section 2. Each Share shall also be subject to the following provisions:
(a) The net asset value per Share of a particular Class shall be the
quotient obtained by dividing the value of the net assets of that Class
(being the value of the total assets belonging to that Class less the
liabilities belonging to that Class) by the total number of Shares of
that Class outstanding. Subject to subsection (b) of this Section 2, the
value of the total assets belonging to each Class shall be determined by,
determined pursuant to the direction of, or determined pursuant to
procedures or methods (which procedures or methods may differ from Class
to Class) prescribed or approved by the Board of Directors in its sole
discretion, and shall be so determined at the time or times (which time
or times may differ from Class to Class) prescribed or approved by the
Board of Directors in its sole discretion.
(b) The net asset value of each Share of a particular Class, for the
purpose of the issue, redemption or repurchase of such Share, shall be
determined in accordance with any
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applicable provision of the Investment Company Act of 1940, any
applicable rule, regulation or order of the Securities and Exchange
Commission thereunder, and any applicable rule or regulation made or
adopted by any securities association registered under the Securities
Exchange Act of 1934.
(c) All Shares now or hereafter authorized shall be subject to
redemption and redeemable at the option of the stockholder, in the sense
used in the General Laws of the State of Maryland authorizing the
formation of corporations. Each holder of a Share of any Class, upon
request to the Corporation accompanied by surrender of the appropriate
stock certificate or certificates, if any, in proper form for transfer,
shall be entitled to require the Corporation to redeem all or any part of
the Shares of that Class standing in the name of such holder on the books
of the Corporation at a redemption price per Share equal to the net asset
value per Share of that Class determined in accordance with subsection
(a) of this Section 2.
(d) Notwithstanding subsection (c) of this Section 2, the Board of
Directors of the Corporation may suspend the right of the holders of
Shares of any or all Classes to require the Corporation to redeem such
Shares or may suspend any voluntary purchase of such Shares:
(i) for any period (A) during which the New York Stock
Exchange is closed other than customary weekend and holiday
closings, or (B) during which trading on the New York Stock Exchange
is restricted;
(ii) for any period during which an emergency, as defined by the
rules of the Securities and Exchange Commission or any successor
thereto, exists as a result of which (A) disposal by the Corporation
of securities owned by it and belonging to the affected Class or
Classes is not reasonably practicable, or (B) it is not reasonably
practicable for the Corporation fairly to determine the value of the
net assets of the affected Class or Classes; or
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<PAGE>
(iii) for such periods as the Securities and Exchange
Commission or any successor thereto may by order permit for the
protection of security holders of the Corporation.
(e) All Shares now or hereafter authorized shall be subject to
redemption and redeemable at the option of the Corporation. The Board of
Directors may by resolution from time to time authorize the Corporation
to require the redemption of all or any part of the outstanding Shares of
any Class upon the sending of written notice thereof to each stockholder
any of whose Shares are so redeemed and upon such terms and conditions as
the Board of Directors shall deem advisable, out of funds legally
available therefor, at net asset value per Share of that Class determined
in accordance with subsection (a) of this Section 2 and to take all other
steps deemed necessary or advisable in connection therewith.
(f) The Board of Directors may by resolution from time to time
authorize the purchase by the Corporation, either directly or through an
agent, of Shares of any Class upon such terms and conditions and for such
consideration as the Board of Directors shall deem advisable out of funds
legally available therefor at prices per Share not in excess of their net
asset value per Share of that Class determined in accordance with
subsection (a) of this Section 2 and to take all other steps deemed
necessary or advisable in connection therewith.
(g) Except as otherwise permitted by the Investment Company Act of
1940, payment of the redemption price of Shares of any Class surrendered
to the Corporation for redemption pursuant to the provisions of
subsection (c) or (e) of this Section 2 or for purchase by the
Corporation pursuant to the provisions of subsection (f) of this Section
2 shall be made by the Corporation within seven days after surrender of
such Shares to the Corporation for such purpose. Any such payment may be
made in whole or in part in portfolio securities or in cash, as the Board
of Directors shall deem advisable, belonging to
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such Class, and no stockholder shall have the right, other than as
determined by the Board of Directors, to have his Shares redeemed in
portfolio securities.
(h) In the absence of any specification as to the purposes for which
Shares are redeemed or repurchased by the Corporation, all Shares so
redeemed or repurchased shall be deemed to be acquired for retirement in
the sense contemplated by the laws of the State of Maryland. Shares of
any Class retired by repurchase or redemption shall thereafter have the
status of authorized but unissued Shares of that Class.
Section 3. Notwithstanding any provision of law requiring action to be
taken or authorized by the affirmative vote of the holders of a designated
proportion greater than a majority of the outstanding Shares of all Classes or
of the outstanding Shares of a particular Class or Classes, as the case may be,
such action shall be valid and effective if taken or authorized by the
affirmative vote of the holders of a majority of the total number of Shares of
all Classes or of the total number of Shares of such Class or Classes, as the
case may be, outstanding and entitled to vote thereupon pursuant to the
provisions of these Articles of Incorporation.
Section 4. No holder of Shares of any Class shall, as such holder, have
any preemptive right to purchase or subscribe for any Shares of that or any
other Class which the Corporation may issue or sell (whether out of the number
of Shares authorized by the Articles of Incorporation, or out of any Shares
acquired by the Corporation after the issue thereof, or otherwise).
Section 5. All persons who shall acquire Shares in the Corporation shall
acquire the same subject to the provisions of these Articles of Incorporation.
ARTICLE VI
Directors
---------
The initial number of directors of the Corporation shall be two, and the
names of those who shall act as such until the first meeting of stockholders and
until their successors are duly elected and qualify are as follows:
Michael J. Downey
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Lawrence C. McQuade
However, the By-Laws of the Corporation may fix the number of directors at no
less than three and may authorize the Board of Directors, by the vote of a
majority of the entire Board of Directors, to increase or decrease the number of
directors within a limit specified in the By-Laws (provided that, if there are
no Shares outstanding, the number of directors may be less than three but not
less than one), and to fill the vacancies created by any such increase in the
number of directors. Unless otherwise provided by the By-Laws of the
Corporation, the directors of the Corporation need not be stockholders.
The By-Laws of the Corporation may divide the directors of the Corporation
into classes and prescribe the tenure of office of the several classes; but no
class shall be elected for a period shorter than one year or for a period longer
than five years, and the term of office of at least one class shall expire each
year.
ARTICLE VII
Indemnification of Directors and Officers
-----------------------------------------
The Corporation shall indemnify to the fullest extent permitted by law
(including the Investment Company Act of 1940), as currently in effect or as the
same may hereafter be amended, any person made or threatened to be made a party
to any action, suit or proceeding, whether criminal, civil, administrative or
investigative, by reason of the fact that such person or such person's testator
or intestate is or was a director or officer of the Corporation or serves or
served at the request of the Corporation any other enterprise as a director or
officer. To the fullest extent permitted by law (including the Investment
Company Act of 1940), as currently in effect or as the same may hereafter be
amended, expenses incurred by any such person in defending any such action, suit
or proceeding shall be paid or reimbursed by the Corporation promptly upon
receipt by it of an undertaking of such person to repay such expenses if it
shall ultimately be determined that such person is not entitled to be
indemnified by the Corporation. The rights provided to any person by this
Article VII shall be enforceable against the Corporation
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<PAGE>
by such person who shall be presumed to have relied upon it in serving or
continuing to serve as a director or officer as provided above. No amendment
of this Article VII shall impair the rights of any person arising at any time
with respect to events occurring prior to such amendment. For purposes of this
Article VII, the term "Corporation" shall include any predecessor of the
Corporation and any constituent corporation (including any constituent of a
constituent) absorbed by the Corporation in a consolidation or merger; the
term "other enterprise" shall include any corporation, partnership, joint
venture, trust or employee benefit plan; service "at the request of the
Corporation" shall include service as a director or officer of the Corporation
which imposes duties on, or involves services by, such director or officer
with respect to an employee benefit plan, its participants or beneficiaries;
any excise taxes assessed on a person with respect to an employee benefit plan
shall be deemed to be indemnifiable expenses; and action by a person with
respect to any employee benefit plan which such person reasonably believes to
be in the interest of the participants and beneficiaries of such plan shall be
deemed to be action not opposed to the best interests of the Corporation.
ARTICLE VIII
Miscellaneous
-------------
The following provisions are inserted for the management of the business
and for the conduct of the affairs of the Corporation, and for creating,
defining, limiting and regulating the powers of the Corporation, the directors
and the stockholders.
Section 1. The Board of Directors shall have the management and control of
the property, business and affairs of the Corporation and is hereby vested with
all the powers possessed by the Corporation itself so far as is not inconsistent
with law or these Articles of Incorporation. In furtherance and without
limitation of the foregoing provisions, it is expressly declared that, subject
to these Articles of Incorporation, the Board of Directors shall have power:
(a) To make, alter, amend or repeal from time to time the By-Laws
of the Corporation except as such power may otherwise be limited in the By-
Laws.
(b) To issue Shares of any Class of the Corporation.
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(c) To authorize the purchase of Shares of any Class in the open
market or otherwise, at prices not in excess of their net asset value for
Shares of that Class determined in accordance with subsection (a) of
Section 2 of Article V hereof, provided that the Corporation has assets
legally available for such purpose, and to pay for such Shares in cash,
securities or other assets then held or owned by the Corporation.
(d) To declare and pay dividends and distributions from funds legally
available therefor on Shares of such Class or Classes, in such amounts,
if any, and in such manner (including declaration by means of a formula
or other similar method of determination whether or not the amount of the
dividend or distribution so declared can be calculated at the time of
such declaration) and to the stockholders of record as of such date, as
the Board of Directors may determine.
Section 2. Any determination made in good faith and, so far as accounting
matters are involved, in accordance with generally accepted accounting
principles by or pursuant to the direction of the Board of Directors, shall be
final and conclusive, and shall be binding upon the Corporation and all holders
of Shares, past, present and future, of each Class, and Shares are issued and
sold on the condition and undertaking, evidenced by acceptance of certificates
for such Shares by, or confirmation of such Shares being held for the account
of, any stockholder, that any and all such determinations shall be binding as
aforesaid.
Subject to Article VII, nothing in this Section 2 shall be construed to
protect any director or officer of the Corporation against any liability to the
Corporation or its stockholders to which such director or officer would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his or
her office.
Section 3. The directors of the Corporation may receive compensation for
their services, subject, however, to such limitations with respect thereto as
may be determined from time to time by the stockholders.
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Section 4. Except as required by law, the holders of Shares shall have
only such right to inspect the records, documents, accounts and books of the
Corporation as may be granted by the Board of Directors of the Corporation.
Section 5. Any vote of stockholders authorizing liquidation of the
Corporation or proceedings for its dissolution may authorize the Board of
Directors to determine, as provided herein, or if provision is not made herein,
in accordance with generally accepted accounting principles, which assets are
the assets belonging to each Class available for distribution to stockholders of
that Class and may divide, or authorize the Board of Directors to divide, such
assets among the stockholders of that Class in such manner as to ensure that
each stockholder will receive an equal and proportionate amount of the value of
such assets (determined as aforesaid) belonging to such Class upon such
liquidation or dissolution.
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ARTICLE IX
Amendments
----------
The Corporation reserves the right from time to time to amend, alter or
repeal any of the provisions of these Articles of Incorporation (including any
amendment that changes the terms of any of the outstanding Shares by
classification, reclassification or otherwise), and to add or insert any other
provisions that may, under the statutes of the State of Maryland at the time in
force, be lawfully contained in articles of incorporation, and all rights at any
time conferred upon the stockholders of the Corporation by these Articles of
Incorporation are subject to the provisions of this Article IX.
The term "Articles of Incorporation" as used herein and in the By-Laws of
the Corporation shall be deemed to mean these Articles of Incorporation as from
time to time amended and restated.
SECOND: The provisions set forth in these Articles of Restatement
constitute all of the provisions of the charter of the Corporation as hereby
amended and currently in effect. These Articles do not amend the charter of the
Corporation.
THIRD: The restatement of the charter of the Corporation has been approved
by the affirmative vote of a majority of the Directors at a meeting duly called
and held on ________, 1994. The Corporation has eight Directors, Robert R.
Fortune, Delayne Dedrick Gold, Harry A. Jacobs, Jr., Lawrence C. McQuade, Thomas
A. Owens, Jr., Richard A. Redeker, Robert J. Schultz and Merle T. Welshans,
currently in office.
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IN WITNESS WHEREOF, the Articles of Restatement have been executed on
behalf of Prudential Structured Maturity Fund, Inc. this ____ day of June,
1994.
PRUDENTIAL STRUCTURED
MATURITY FUND, INC.
By:
------------------------------------
Lawrence C. McQuade
President
Attest
[Seal]
- ----------------------------------
Marguerite E.H. Morrison
Assistant Secretary
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<PAGE>
The undersigned, President of Prudential Structured Maturity Fund, Inc.,
who executed on behalf of said Corporation the foregoing Articles of
Restatement, of which this certificate is made a part, hereby acknowledges
that these Articles of Restatement are the act of the Corporation and affirms
that to the best of his knowledge, information and belief all matters and
facts set forth therein relating to the authorization and approval of the
Articles of Restatement are true in all material respects and that this
statement is made under the penalties of perjury.
---------------------------------
Lawrence C. McQuade
President
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<PAGE>
Exhibit 2(b)
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
Restated By-Laws
ARTICLE I.
Stockholders
------------
Section 1. Place of Meeting. All meetings of the stockholders shall be
----------------
held at the principal office of the Corporation in the State of Maryland or at
such other place within the United States as may from time to time be
designated by the Board of Directors and stated in the notice of such meeting.
Section 2. Annual Meetings. The annual meeting of the stockholders of the
---------------
Corporation shall be held in the month of __________ of each year, on such date
and at such hour as may from time to time be designated by the Board of
Directors and stated in the notice of such meeting, or in such other month as
the Board of Directors shall select, for the transaction of such business as may
properly be brought before the meeting; provided, however, that an annual
--------
meeting shall not be required to be held in any year in which none of the
following is required to be acted on by stockholders under the Investment
Company Act of 1940: election of directors; approval of the investment advisory
agreement; ratification of the selection of independent public accountants; and
approval of a distribution agreement.
Section 3. Meetings of the stockholders for any purpose or purposes may be
called by the Chairman of the Board, the President or a majority of the Board of
Directors, and shall be called by the Secretary upon receipt of the request in
writing signed by stockholders holding not less than 25% of the common stock
issued and outstanding and entitled to vote thereat. Such request shall state
the purpose or purposes of the proposed meeting. The Secretary shall inform
such stockholders of the reasonably estimated costs of preparing and mailing
such notice of meeting and upon payment to the Corporation of such costs, the
Secretary shall give notice
<PAGE>
stating the purpose or purposes of the meeting as required in this Article and
by-law to all stockholders entitled to notice of such meeting. No meeting need
be called upon the request of the holders of shares entitled to cast less than
a majority of all votes entitled to be cast at such meeting to consider any
matter which is substantially the same as a matter voted upon at any meeting
of stockholders held during the preceding twelve months.
Section 4. Notice of Meetings of Stockholders. Not less than ten days'
----------------------------------
and not more than ninety days' written or printed notice of every meeting of
stockholders, stating the time and place thereof and the general nature of the
business proposed to be transacted thereat, shall be given to each stockholder
entitled to vote thereat by leaving the same with such stockholder or at such
stockholder's residence or usual place of business or by mailing it, postage
prepaid, and addressed to such stockholder at such stockholder's address as it
appears upon the books of the Corporation. If mailed, notice shall be deemed to
be given when deposited in the United States mail addressed to the stockholder
as aforesaid.
No notice of the time, place or purpose of any meeting of stockholders need
be given to any stockholder who attends in person or by proxy or to any
stockholder who, in writing executed and filed with the records of the meeting,
either before or after the holding thereof, waives such notice.
Section 5. Record Dates. The Board of Directors may fix, in advance, a
------------
date not exceeding ninety days preceding the date of any meeting of
stockholders, any dividend payment date or any date for the allotment of
rights, as a record date for the determination of the stockholders entitled to
notice of and to vote at such meeting or entitled to receive such dividends or
rights, as the case may be; and only stockholders of record on such date shall
be entitled to notice of and to vote at such meeting or to receive such
dividends or rights, as the case may be. In the case of a meeting of
stockholders, such date shall not be less than ten days prior to the date
fixed for such meeting.
Section 6. Quorum, Adjournment of Meetings. The presence in person or by
-------------------------------
proxy of the holders of record of one-third of the shares of the common stock of
the Corporation issued
2
<PAGE>
and outstanding and entitled to vote thereat shall constitute a quorum at all
meetings of the stockholders except as otherwise provided in the Articles of
Incorporation. If, however, such quorum shall not be present or represented at
any meeting of the stockholders, the holders of a majority of the stock
present in person or by proxy shall have power to adjourn the meeting from
time to time, without notice other than announcement at the meeting, until
stockholders owning the requisite amount of stock entitled to vote at such
meeting shall be present. At such adjourned meeting at which stockholders
owning the requisite amount of stock entitled to vote thereat shall be
represented, any business may be transacted which might have been transacted
at the meeting as originally notified.
Section 7. Voting and Inspectors. At all meetings, stockholders of record
---------------------
entitled to vote thereat shall have one vote for each share of common stock
standing in his name on the books of the Corporation (and such stockholders of
record holding fractional shares, if any, shall have proportionate voting
rights) on the date for the determination of stockholders entitled to vote at
such meeting, either in person or by proxy appointed by instrument in writing
subscribed by such stockholder or his duly authorized attorney.
All elections shall be had and all questions decided by a majority of the
votes cast at a duly constituted meeting, except as otherwise provided by
statute or by the Articles of Incorporation or by these By-Laws.
At any election of directors, the Chairman of the meeting may, and upon the
request of the holders of ten percent (10%) of the stock entitled to vote at
such election shall, appoint two inspectors of election who shall first
subscribe an oath or affirmation to execute faithfully the duties of inspectors
at such election with strict impartiality and according to the best of their
ability, and shall after the election make a certificate of the result of the
vote taken. No candidate for the office of director shall be appointed such
inspector.
Section 8. Conduct of Stockholders' Meetings. The meetings of the
---------------------------------
stockholders shall be presided over by the Chairman of the Board, or if he or
she is not present, by the President, or if he or she is not present, by a Vice-
President, or if none of them is present, by a
3
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Chairman to be elected at the meeting. The Secretary of the Corporation, if
present, shall act as a Secretary of such meetings, or if he or she is not
present, an Assistant Secretary shall so act; if neither the Secretary nor the
Assistant Secretary is present, then the meeting shall elect its Secretary.
Section 9. Concerning Validity of Proxies, Ballots, etc. At every meeting
---------------------------------------------
of the stockholders, all proxies shall be received and taken in charge of and
all ballots shall be received and canvassed by the Secretary of the meeting, who
shall decide all questions concerning the qualification of voters, the validity
of the proxies and the acceptance or rejection of votes, unless inspectors of
election shall have been appointed by the Chairman of the meeting, in which
event such inspectors of election shall decide all such questions.
ARTICLE II.
Board of Directors
------------------
Section 1. Number and Tenure of Office. The business and affairs of the
---------------------------
Corporation shall be conducted and managed by a Board of Directors of not less
than three nor more than twelve directors, as may be determined from time to
time by vote of a majority of the directors then in office, provided that if
there is no stock outstanding the number of directors may be less than three but
not less than one. Directors need not be stockholders.
Section 2. Vacancies. In case of any vacancy in the Board of Directors
---------
through death, resignation or other cause, other than an increase in the number
of directors, a majority of the remaining directors, although a majority is less
than a quorum, by an affirmative vote, may elect a successor to hold office
until the next meeting of stockholders or until his successor is chosen and
qualifies.
Section 3. Increase or Decrease in Number of Directors. The Board of
-------------------------------------------
Directors, by the vote of a majority of the entire Board, may increase the
number of directors and may elect directors to fill the vacancies created by
any such increase in the number of directors until the next meeting of
stockholders or until their successors are duly chosen and qualified. The
Board
4
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of Directors, by the vote of a majority of the entire Board, may likewise
decrease the number of directors to a number not less than three.
Section 4. Place of Meeting. The directors may hold their meetings, have
----------------
one or more offices, and keep the books of the Corporation, outside the State of
Maryland, at any office or offices of the Corporation or at any other place as
they may from time to time by resolution determine, or in the case of meetings,
as they may from time to time by resolution determine or as shall be specified
or fixed in the respective notices or waivers of notice thereof.
Section 5. Regular Meetings. Regular meetings of the Board of Directors
----------------
shall be held at such time and on such notice as the directors may from time to
time determine.
Section 6. Special Meetings. Special meetings of the Board of Directors
----------------
may be held from time to time upon call of the Chairman of the Board, the
President, the Secretary or two or more of the directors, by oral or
telegraphic or written notice duly served on or sent or mailed to each
director not less than one day before such meeting. No notice need be given to
any director who attends in person or to any director who, in writing executed
and filed with the records of the meeting either before or after the holding
thereof, waives such notice. Such notice or waiver of notice need not state
the purpose or purposes of such meeting.
Section 7. Quorum. One-third of the directors then in office shall
------
constitute a quorum for the transaction of business, provided that a quorum
shall in no case be less than two directors. If at any meeting of the Board
there shall be less than a quorum present, a majority of those present may
adjourn the meeting from time to time until a quorum shall have been obtained.
The act of the majority of the directors present at any meeting at which there
is a quorum shall be the act of the directors, except as may be otherwise
specifically provided by statute or by the Articles of Incorporation or by these
By-Laws.
Section 8. Executive Committee. The Board of Directors may, by the
-------------------
affirmative vote of a majority of the whole Board, appoint from the directors an
Executive Committee to consist of such number of directors (not less than three)
as the Board may from time to time determine. The Chairman of the Committee
shall be elected by the Board of Directors. The
5
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Board of Directors by such affirmative vote shall have power at any time to
change the members of such Committee and may fill vacancies in the Committee
by election from the directors. When the Board of Directors is not in session,
to the extent permitted by law, the Executive Committee shall have and may
exercise any or all of the powers of the Board of Directors in the management
of the business and affairs of the Corporation. The Executive Committee may
fix its own rules of procedure, and may meet when and as provided by such
rules or by resolution of the Board of Directors, but in every case the
presence of a majority shall be necessary to constitute a quorum. During the
absence of a member of the Executive Committee, the remaining members may
appoint a member of the Board of Directors to act in his place.
Section 9. Other Committees. The Board of Directors, by the affirmative
----------------
vote of a majority of the whole Board, may appoint from the directors other
committees which shall in each case consist of such number of directors (not
less than two) and shall have and may exercise such powers as the Board may
determine in the resolution appointing them. A majority of all the members of
any such committee may determine its action and fix the time and place of its
meetings, unless the Board of Directors shall otherwise provide. The Board of
Directors shall have power at any time to change the members and powers of any
such committee, to fill vacancies and to discharge any such committee.
Section 10. Telephone Meetings. Members of the Board of Directors or a
------------------
committee of the Board of Directors may participate in a meeting by means of a
conference telephone or similar communications equipment if all persons
participating in the meeting can hear each other at the same time.
Participation in a meeting by these means constitutes presence in person at the
meeting unless otherwise provided by the Investment Company Act of 1940.
Section 11. Action Without a Meeting. Any action required or permitted to
------------------------
be taken at any meeting of the Board of Directors or any committee thereof may
be taken without a meeting, if a written consent to such action is signed by all
members of the Board or of such committee, as the case may be, and such written
consent is filed with the minutes of the
6
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proceedings of the Board or such committee, unless otherwise provided by the
Investment Company Act of 1940.
Section 12. Compensation of Directors. No director shall receive any
-------------------------
stated salary or fees from the Corporation for his services as such if such
director is, other than by reason of being such director, an interested person
(as such term is defined by the Investment Company Act of 1940) of the
Corporation or of its investment adviser, administrator or principal
underwriter. Except as provided in the preceding sentence, directors shall be
entitled to receive such compensation from the Corporation for their services
as may from time to time be voted by the Board of Directors.
Section 13. Removal of Directors. No director shall continue to hold
--------------------
office after the holders of record of not less than two-thirds of the
Corporation's outstanding common stock of all series have declared that that
director be removed from office either by declaration in writing filed with
the Corporation's secretary or by votes cast in person or by proxy at a
meeting called for the purpose. The directors shall promptly call a meeting of
stockholders for the purpose of voting upon the question of removal of any
director or directors when requested in writing to do so by the record holders
of not less than 10 percent of the Corporation's outstanding common stock of
all series.
ARTICLE III.
Officers
--------
Section 1. Executive Officers. The executive officers of the Corporation
------------------
shall be chosen by the Board of Directors. These may include a Chairman of the
Board of Directors (who shall be a director) and shall include a President
(who shall be a director), one or more Vice-Presidents (the number thereof to
be determined by the Board of Directors), a Secretary and a Treasurer. The
Board of Directors or the Executive Committee may also in its discretion
appoint Assistant Secretaries, Assistant Treasurers and other officers, agents
and employees, who shall have such authority and perform such duties as the
Board or the Executive Committee may determine. The Board of Directors may
fill any vacancy which may occur in any office. Any
7
<PAGE>
two offices, except those of President and Vice-President, may be held by the
same person, but no officer shall execute, acknowledge or verify any
instrument in more than one capacity, if such instrument is required by law or
these By-Laws to be executed, acknowledged or verified by two or more
officers.
Section 2. Term of Office. The term of office of all officers shall be
--------------
one year and until their respective successors are chosen and qualified. Any
officer may be removed from office at any time with or without cause by the
vote of a majority of the whole Board of Directors.
Section 3. Powers and Duties. The officers of the Corporation shall have
-----------------
such powers and duties as generally pertain to their respective offices, as well
as such powers and duties as may from time to time be conferred by the Board of
Directors or the Executive Committee.
ARTICLE IV.
Capital Stock
-------------
Section 1. Certificates for Shares. Each stockholder of the Corporation
-----------------------
shall be entitled to a certificate or certificates for the full shares of stock
of the Corporation owned by him in such form as the Board from time to time
prescribe.
Section 2. Transfer of Shares. Shares of the Corporation shall be
------------------
transferable on the books of the Corporation by the holder thereof in person or
by his duly authorized attorney or legal representative, upon surrender and
cancellation of certificates, if any, for the same number of shares, duly
endorsed or accompanied by proper instruments of assignment and transfer, with
such proof of the authenticity of the signature as the Corporation or its agents
may reasonably require; in the case of shares not represented by certificates,
the same or similar requirements may be imposed by the Board of Directors.
Section 3. Stock Ledgers. The stock ledgers of the Corporation,
-------------
containing the names and addresses of the stockholders and the number of
shares held by them respectively,
8
<PAGE>
shall be kept at the principal office of the Corporation or, if the
Corporation employs a Transfer Agent, at the office of the Transfer Agent of
the Corporation.
Section 4. Lost, Stolen or Destroyed Certificates. The Board of Directors
--------------------------------------
or the Executive Committee may determine the conditions upon which a new
certificate of stock of the Corporation of any class may be issued in place of
a certificate which is alleged to have been lost, stolen or destroyed; and
may, in its discretion, require the owner of such certificate or such owner's
legal representative to give bond, with sufficient surety, to the Corporation
and each Transfer Agent, if any, to indemnify it and each such Transfer Agent
against any and all loss or claims which may arise by reason of the issue of a
new certificate in the place of the one so lost, stolen or destroyed.
ARTICLE V.
Corporate Seal
--------------
The Board of Directors may provide for a suitable corporate seal, in such
form and bearing such inscriptions as it may determine.
ARTICLE VI.
Fiscal Year
-----------
The fiscal year of the Corporation shall begin on the first day of
January 1 and shall end on the last day of December 31 in each year.
ARTICLE VII.
Indemnification of Directors and Officers
-----------------------------------------
A director of officer of the Corporation shall not be liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director or officer, except to the extent such exemption from
liability or limitation thereof is not permitted by law (including the
Investment Company Act of 1940) as currently in effect or as the same may be
hereafter be amended.
9
<PAGE>
No amendment, modification or repeal of this Article VII shall adversely
affect any right or protection of a director or officer that exists at the time
of such amendment, modification or repeal.
ARTICLE VIII.
Custodian
---------
Section 1. The Corporation shall have as custodian or custodians one or
more trust companies or banks of good standing, each having a capital, surplus
and undivided profits aggregating not less than fifty million dollars
($50,000,000), and, to the extent required by the Investment Company Act of
1940, the funds and securities held by the Corporation shall be kept in the
custody of one or more such custodians, provided such custodian or custodians
can be found ready and willing to act, and further provided that the
Corporation may use as subcustodians, for the purpose of holding any foreign
securities and related funds of the Corporation, such foreign banks as the
Board of Directors may approve and as shall be permitted by law.
Section 2. The Corporation shall upon the resignation or inability to
serve of its custodian or upon change of the custodian:
(i) in case of such resignation or inability to serve, use
its best efforts to obtain a successor custodian;
(ii) require that the cash and securities owned by the
Corporation be delivered directly to the successor custodian; and
(iii) in the event that no successor custodian can be found,
submit to the stockholders before permitting delivery of the cash
and securities owned by the Corporation otherwise than to a
successor custodian, the question whether or not this Corporation
shall be liquidated or shall function without a custodian.
10
<PAGE>
ARTICLE IX.
Amendment of By-Laws
--------------------
The By-Laws of the Corporation may be altered, amended, added to or
repealed by the stockholders or by majority vote of the entire Board of
Directors; but any such alteration, amendment, addition or repeal of the By-
Laws by action of the Board of Directors may be altered or repealed by
stockholders.
11
<PAGE>
PRUDENTIAL-BACHE STRUCTURED MATURITY FUND, INC.
Amended and Restated
Distribution Agreement
(Class A Shares)
----------------
Agreement, dated July 25, 1989, and amended and restated as of July 1,
1993, between Prudential-Bache Structured Maturity Fund, Inc., a Maryland
Corporation (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, 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 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.
2
<PAGE>
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 Board of
Directors. 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
3
<PAGE>
determine the value of its net assets, or during any other period when the
Securities and Exchange Commission, by order, so permits.
Section 5. Duties of the Fund
------------------
5.1 Subject to the possible suspension of the sale of Class A shares as
provided herein, the Fund agrees to sell its Class A shares so long as it has
Class A shares available.
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 Board of Directors 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.
4
<PAGE>
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. Reimbursement of the Distributor under the Plan
-----------------------------------------------
8.1 The Fund shall reimburse the Distributor for costs incurred by it in
performing its duties under the Distribution and Service Plan and this Agreement
including amounts paid on a
5
<PAGE>
reimbursement basis to Prudential Securities Incorporated (Prudential
Securities) and Pruco Securities Corporation (Prusec), affiliates of the
Distributor, under the selected dealer agreements between the Distributor and
Prudential Securities and Prusec, respectively, amounts paid to other securities
dealers or financial institutions under selected dealer agreements between the
Distributor and such dealers and institutions and amounts paid for personal
service and/or the maintenance of shareholder accounts. Amounts reimbursable
under the Plan shall be accrued daily and paid monthly or at such other
intervals as the Board of Directors may determine but shall not be paid at a
rate that exceeds .10 of 1%, which amount includes a service fee of up to .10 of
1%, per annum of the average daily net assets of the Class A shares of the Fund.
Payment of the distribution and service fee 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 Board of Directors 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 Board of Directors 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 Costs of the Distributor subject to reimbursement hereunder are costs
of performing distribution activities with respect to the Class A shares of the
Fund and may include, among others:
(a) amounts paid to Prudential Securities in reimbursement of
costs incurred by Prudential Securities in 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 in reimbursement of costs incurred by
Prusec in performing services under a selected dealer agreement
between Prusec and the Distributor for sale of
6
<PAGE>
Class A shares of the Fund, including sales commissions and trailer
commissions paid to, or on account of, agents and indirect and
overhead costs associated with distribution activities;
(c) sales commissions and trailer commissions paid to, or on
account of, broker-dealers and financial institutions (other than
Prudential Securities and Prusec) which have entered into selected
dealer agreements with the Distributor with respect to Class A shares
of the Fund;
(d) amounts paid to, or an account of, account executives of
Prudential Securities, Prusec, or of other broker-dealers or financial
institutions for personal service and/or the maintenance of
shareholder accounts; and
(e) advertising for the Fund in various forms through any
available medium, including the 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
7
<PAGE>
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.
9.2 If the Plan is terminated or discontinued, the costs previously
incurred by the Distributor in performing the duties set forth in Section 6
hereof shall be borne by the Distributor and will not be subject to
reimbursement by the Fund.
Section 10. Indemnification
---------------
10.1 The Fund agrees to indemnify, defend and hold the Distributor, its
officers and directors and any person who controls the Distributor within the
meaning of Section 15 of the Securities Act, free and harmless from and against
any and all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which the Distributor, its officers,
directors or any such controlling person may incur under the Securities Act, or
under common law or otherwise, arising out of or based upon any untrue statement
of a material fact contained in the Registration Statement or Prospectus or
arising out of or based upon any alleged omission to state a material fact
required to be stated in either thereof or necessary to make the statements in
either thereof not misleading, except insofar as such claims, demands,
liabilities or expenses arise out of or are based upon any such untrue statement
or omission or alleged untrue statement or omission made in reliance upon and in
conformity with information furnished in writing by the Distributor to the Fund
for use in the Registration Statement or Prospectus; provided, however, that
this indemnity agreement shall not inure to the benefit of any such officer,
director, trustee or controlling person unless a court of competent jurisdiction
shall determine in 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 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 any
such controlling person, such
8
<PAGE>
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 Directors 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
Directors 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 Directors or officers or such controlling
person resulting from such claims or demands shall arise out of or be based upon
any alleged untrue statement of a material fact contained in information
furnished in writing by the Distributor to the Fund for use in the Registration
Statement or Prospectus or shall arise out of or be based upon any alleged
omission to state a material fact in connection with such information required
to be stated in the Registration Statement or Prospectus or necessary to make
such information not misleading. The Distributor's agreement to indemnify the
Fund, its officers and Directors 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 Directors 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 Board of Directors 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 Directors 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 Directors), 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 Directors 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
9
<PAGE>
(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 Board of Directors 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 Directors cast in
person at a meeting called for the purpose of voting on such amendment.
Section 13. Governing Law
-------------
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the extent that the
applicable law of the State of New York, or any of the provisions herein,
conflict with the applicable provisions of the Investment Company Act, the
latter shall control.
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
Prudential-Bache Structured
Maturity Fund, Inc.
By: /s/Lawrence C. McQuade
------------------------
Lawrence C. McQuade
President
10
<PAGE>
PRUDENTIAL-BACHE STRUCTURED MATURITY FUND, INC.
Amended and Restated
Distribution Agreement
(Class B Shares)
----------------
Agreement, dated December 9, 1992 and amended and restated as of July 1,
1993, between Prudential-Bache Structured Maturity Fund, Inc., a Maryland
Corporation (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.
2
<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 Board of
Directors. 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
reasonably practicable
3
<PAGE>
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 Board of Directors 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
4
<PAGE>
activities as may be required by the Fund in connection with such
qualifications.
Section 6. Duties of the Distributor
-------------------------
6.1 The Distributor shall devote reasonable time and effort to effect
sales of Class B shares of the Fund, but shall not be obligated to sell any
specific number of Class B shares. Sales of the Class B shares shall be on the
terms described in the Prospectus. The Distributor may enter into like
arrangements with other investment companies. The Distributor shall compensate
the selected dealers as set forth in the Prospectus.
6.2 In selling the Class B shares, the Distributor shall use its best
efforts in all respects duly to conform with the requirements of all federal and
state laws relating to the sale of such securities. Neither the Distributor nor
any selected dealer nor any other person is authorized by the Fund to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the confirmation
of sales to investors and selected dealers, the collection of amounts payable by
investors and selected dealers on such sales and the cancellation of unsettled
transactions, as may be 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.
5
<PAGE>
Section 8. Reimbursement of the Distributor under the Plan
-----------------------------------------------
8.1 The Fund shall reimburse the Distributor for all costs incurred by it
in performing its duties under the Distribution and Service Plan and this
Agreement including amounts paid on a reimbursement basis to Pruco Securities
Corporation (Prusec), an affiliate of the Distributor, under the selected dealer
agreement between the Distributor and Prusec, amounts paid to other securities
dealers or financial institutions under selected dealer agreements between the
Distributor and such dealers and institutions and amounts paid for personal
service and/or the maintenance of shareholder accounts. Reimbursement shall
only be made to the extent that payments by investors pursuant to Section 7
hereof are not sufficient to cover such costs. Amounts reimbursable under the
Plan shall be accrued daily and paid monthly or at such other intervals as the
Board of Directors may determine but shall not be paid at a rate that exceeds
the annual distribution and service fee of 1% (including an asset-based sales
charge of up to .75 of 1% and a service fee of up to .25 of 1%) per annum of the
average daily net assets of the Class B shares of the Fund. Amounts
reimbursable under the Plan that are not paid because they exceed .75 of 1% per
annum of the average daily net assets of the Class B shares (Carry Forward
Amounts) shall be carried forward and paid by the Fund as permitted within such
payment limitation so long as the Plan, including any amendments thereto, is in
effect, 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 Board of Directors 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
Board of Directors 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 Costs of the Distributor subject to reimbursement hereunder are all
costs of performing distribution activities with respect to the Class B shares
of the Fund and include, among others:
(a) sales commissions (including trailer commissions) paid to, or on
account of, account executives of the Distributor;
6
<PAGE>
(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 in reimbursement of all costs incurred by
Prusec in 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 broker-dealers or financial institutions for
personal service and/or the maintenance of shareholder accounts;
(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;
(g) to the extent permitted by applicable law, interest on unreimbursed
Carry Forward Amounts as defined in Section 8.1 at a rate equal to
that paid by Prudential Securities for bank borrowings as such rate
may vary from day to day, not to exceed that permitted under Article
III, Section 26, of the NASD Rules of Fair Practice; and
(h) to the extent permitted by applicable law, unreimbursed distribution
expenses incurred with respect to the sale of Class B shares that
have been exchanged into the Fund.
7
<PAGE>
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.
9.2 Although the Fund is not liable for unreimbursed distribution
expenses, in the event of termination of the Plan, the Board of Directors of the
Fund may consider the appropriateness of having the Class B shares of the Fund
reimburse the Distributor for the then outstanding balance of all unreimbursed
distribution expenses plus interest thereon to the extent permitted by
applicable law from the date of this Agreement.
Section 10. Indemnification
---------------
10.1 The Fund agrees to indemnify, defend and hold the Distributor, its
officers and Directors and any person who controls the Distributor within the
meaning of Section 15 of the Securities Act, free and harmless from and against
any and all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which the Distributor, its officers,
Directors or any such controlling person may incur under the Securities Act, or
under common law or otherwise, arising out of or based upon any untrue statement
of a material fact contained in the Registration Statement or Prospectus
8
<PAGE>
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 Directors 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 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 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 Directors 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 Directors 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
Directors 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 Directors or officers or such controlling
person resulting from such claims or demands shall arise out of or be based upon
any alleged untrue statement of a material fact contained in information
furnished in writing by the Distributor to the Fund for use in the Registration
Statement or Prospectus or shall arise out of or be based upon any alleged
omission to state a material fact in connection with such information required
to be stated in the Registration Statement or Prospectus or necessary to
9
<PAGE>
make such information not misleading. The Distributor's agreement to indemnify
the Fund, its officers and Directors 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 Directors 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 Board of Directors 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 Directors 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 Directors), 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 Directors 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 Board of Directors 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 Board of Directors
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
10
<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.
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-Bache Structured
Maturity Fund, Inc.
By: /s/ Lawrence C. McQuade
------------------------
Lawrence C. McQuade
President
11
<PAGE>
Exhibit 6(e)
PRUDENTIAL STRUCTURED MATURITY FUND
(Municipal Income Portfolio)
Distribution Agreement
(Class A Shares)
----------------
Agreement, dated as of ____________, 1993, between Prudential Structured
Maturity Fund (Municipal Income Portfolio), a Maryland Corporation (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 the Municipal
Income Portfolio's 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, 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 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. 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.
<PAGE>
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 Board of
Directors. 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 the Fund's Articles of Incorporation as amended from
time to time, and in accordance with the applicable provisions of the
Prospectus. The price to be paid to redeem or repurchase the Class A shares
shall be equal to the net asset value determined as set forth in the Prospectus.
All payments by the Fund hereunder shall be made in the manner set forth in
Section 4.2 below.
4.2 The Fund shall pay the total amount of the redemption price as defined
in the above paragraph pursuant to the instructions of the Distributor on or
before the seventh calendar day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of Class A shares
shall be paid by the Fund to or for the account of the redeeming shareholder, in
each case in accordance with applicable provisions of the Prospectus.
4.3 Redemption of Class A shares or payment may be suspended at times when
the New York Stock Exchange is closed for other than customary weekends and
holidays, when trading on said Exchange is restricted, when an emergency exists
as a result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or during any other period
<PAGE>
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 Board of Directors 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 sale 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.
<PAGE>
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. Payment of the Distributor under the Plan
-----------------------------------------
7.1 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%,
which amount includes a service fee of up to .25 of 1%, per annum of the average
daily net assets of the Class A shares of the Fund. Amounts payable under the
Plan shall be accrued daily and paid monthly or at such other intervals as the
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.
7.2 So long as the Plan or any amendment thereto is in effect, the
Distributor shall inform the Board of Directors of the commissions and account
servicing fees to be paid by the
<PAGE>
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
Board of Directors 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.
7.3 Expenses of Distribution with respect to the Class A shares of the
Fund include, among others:
(a) amounts paid to Prudential Securities in reimbursement of
costs incurred by Prudential Securities in performing services under a
selected dealer agreement between Prudential Securities and the
Distributor for sale of Class A shares of the Portfolio, 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 in reimbursement of costs incurred by
Prusec in performing services under a selected dealer agreement
between Prusec and the Distributor for sale of Class A shares of the
Fund, including sales commissions and trailer commissions paid to, or
on account of, agents and indirect and overhead costs associated with
distribution activities;
(c) sales commissions and trailer commissions paid to, or on
account of, broker-dealers and financial institutions (other than
Prudential Securities and Prusec) which have entered into selected
dealer agreements with the Distributor with respect to Class A shares
of the Fund;
(d) amounts paid to, or an account of, account executives of
Prudential Securities, Prusec, or of other broker-dealers or financial
institutions for personal service and/or the maintenance of
shareholder accounts; and
<PAGE>
(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 8. Allocation of Expenses
----------------------
8.1 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 7 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 9. Indemnification
---------------
9.1 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
<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 of the Portfolio; 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 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.
9.2 The Distributor agrees to indemnify, defend and hold the Fund, its
officers and Directors 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
Directors 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 Directors 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
<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
Directors 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 Directors or any such controlling person, such
notification being given to the Distributor at its principal business office.
Section 10. Duration and Termination of this Agreement
------------------------------------------
10.1 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 Board of Directors 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 Directors 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 Directors), cast in person
at a meeting called for the purpose of voting upon such approval.
10.2 This Agreement may be terminated at any time, without the payment of
any penalty, by a majority of the Rule 12b-1 Directors 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.
10.3 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 11. Amendments to this Agreement
----------------------------
This Agreement may be amended by the parties only if such amendment is
specifically approved by (a) the Board of Directors 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 Directors cast in
person at a meeting called for the purpose of voting on such amendment.
<PAGE>
Section 12. Governing Law
-------------
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the extent that the
applicable law of the State of New York, or any of the provisions herein,
conflict with the applicable provisions of the Investment Company Act, the
latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year above written.
Prudential Mutual Fund
Distributors, Inc.
By: ________________________
________________________
(Title)
Prudential Structured Maturity Fund
By: _______________________
(Name)
(Title)
<PAGE>
Exhibit 6(f)
PRUDENTIAL STRUCTURED MATURITY FUND
(Municipal Income Portfolio)
Distribution Agreement
(Class B Shares)
----------------
Agreement, dated ______________, 1993, between Prudential Structured
Maturity Fund, (Municipal Income Portfolio), a Maryland Corporation (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 the Municipal
Income Portfolio's 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. The term "Prospectus" shall mean the Prospectus
and Statement of Additional Information included as part of the Fund's
Registration Statement, as such Prospectus and Statement of Additional
Information may be amended or supplemented from time to time, and the term
"Registration Statement" shall mean the Registration Statement filed by the Fund
with the Securities and Exchange Commission and effective under the Securities
Act of 1933, as amended (the Securities Act), and the Investment Company Act, as
such Registration Statement is amended from time to time.
Section 3. Purchase of Class B Shares from the Fund
----------------------------------------
3.1 The Distributor shall have the right to buy from the Fund the Class B
shares needed, but not more than the Class B shares needed (except for clerical
errors in transmission) to fill unconditional orders for Class B shares placed
with the Distributor by investors or registered and qualified securities dealers
and other financial institutions (selected dealers). The price which the
Distributor shall pay for the Class B shares so purchased from the Fund shall be
the net asset value, determined as set forth in the Prospectus.
3.2 The Class B shares are to be resold by the Distributor or selected
dealers, as described in Section 6.4 hereof, to investors at the offering price
as set forth in the Prospectus.
<PAGE>
3.3 The Fund shall have the right to suspend the sale of its Class B
shares at times when redemption is suspended pursuant to the conditions in
Section 4.3 hereof or at such other times as may be determined by the Board of
Directors. 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 the Fund's 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.
<PAGE>
4.3 Redemption of Class B shares or payment may be suspended at times when
the New York Stock Exchange is closed for other than customary weekends and
holidays, when trading on said Exchange is restricted, when an emergency exists
as a result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or during any other period when the
Securities and Exchange Commission, by order, so permits.
Section 5. Duties of the Fund
------------------
5.1 Subject to the possible suspension of the sale of Class B shares as
provided herein, the Fund agrees to sell its Class B shares so long as it has
Class B shares available.
5.2 The Fund shall furnish the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Class B shares, and this
shall include one certified 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 Board of Directors 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
<PAGE>
qualification may be withheld, terminated or withdrawn by the Fund at any time
in its discretion. As provided in Section 9.1 hereof, the expense of
qualification and maintenance of qualification shall be borne by the Fund. The
Distributor shall furnish such information and other material relating to its
affairs and activities as may be required by the Fund in connection with such
qualifications.
Section 6. Duties of the Distributor
-------------------------
6.1 The Distributor shall devote reasonable time and effort to effect
sales of Class B shares of the Fund, but shall not be obligated to sell any
specific number of Class B shares. Sales of the Class B shares shall be on the
terms described in the Prospectus. The Distributor may enter into like
arrangements with other investment companies. The Distributor shall compensate
the selected dealers as set forth in the Prospectus.
6.2 In selling the Class B shares, the Distributor shall use its best
efforts in all respects duly to conform with the requirements of all federal and
state laws relating to the sale of such securities. Neither the Distributor nor
any selected dealer nor any other person is authorized by the Fund to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the confirmation
of sales to investors and selected dealers, the collection of amounts payable by
investors and selected dealers on such sales and the cancellation of unsettled
transactions, as may be 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. Payment of the Distributor under the Plan
-----------------------------------------
7.1 The Fund shall pay to the Distributor as compensation for services
under the Distribution and Service Plan and this Agreement a fee of .75 of 1%,
including 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
<PAGE>
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.
7.2 So long as the Plan or any amendment thereto is in effect, the
Distributor shall inform the Board of Directors 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
Board of Directors 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.
7.3 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 in reimbursement of all costs incurred
by Prusec in 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;
<PAGE>
(e) amounts paid to, or an account of, account executives of the
Distributor or of other broker-dealers or financial institutions for
personal service and/or the maintenance of shareholder accounts; and
(f) advertising for the Fund in various forms through any
available medium, including the cost of printing and mailing Fund
Prospectuses, and periodic financial reports and sales literature to
persons other than current shareholders of the Fund.
Indirect and overhead costs referred to in clauses (b) and (c) of the
foregoing sentence include (i) lease expenses, (ii) salaries and benefits of
personnel including operations and sales support personnel, (iii) utility
expenses, (iv) communications expenses, (v) sales promotion expenses, (vi)
expenses of postage, stationery and supplies and (vii) general overhead.
Section 8. Allocation of Expenses
----------------------
8.1 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 7 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 9. Indemnification
---------------
9.1 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
<PAGE>
any counsel fees incurred in connection therewith) which the Distributor, its
officers, Directors or any such controlling person may incur under the
Securities Act, or under common law or otherwise, arising out of or based upon
any untrue statement of a material fact contained in the Registration Statement
or Prospectus or arising out of or based upon any alleged omission to state a
material fact required to be stated in either thereof or necessary to make the
statements in either thereof not misleading, except insofar as such claims,
demands, liabilities or expenses arise out of or are based upon any such untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with information furnished in writing by the Distributor
to the Fund for use in the Registration Statement or Prospectus; provided,
however, that this indemnity agreement shall not inure to the benefit of any
such officer, Director 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 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 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 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 Directors in connection with the issue and sale of any
Class B shares.
9.2 The Distributor agrees to indemnify, defend and hold the Fund, its
officers and Directors 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
Directors 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 Directors 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
<PAGE>
contained in information furnished in writing by the Distributor to the Fund for
use in the Registration Statement or Prospectus or shall arise out of or be
based upon any alleged omission to state a material fact in connection with such
information required to be stated in the Registration Statement or Prospectus or
necessary to make such information not misleading. The Distributor's agreement
to indemnify the Fund, its officers and Directors 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
Directors or any such controlling person, such notification to be given to the
Distributor in writing at its principal business office.
Section 10. Duration and Termination of this Agreement
------------------------------------------
10.1 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 Board of Directors 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 Directors 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 Directors), cast in person
at a meeting called for the purpose of voting upon such approval.
10.2 This Agreement may be terminated at any time, without the payment of
any penalty, by a majority of the Rule 12b-1 Directors 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.
10.3 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 11. Amendments to this Agreement
----------------------------
This Agreement may be amended by the parties only if such amendment is
specifically approved by (a) the Board of Directors 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 Board of Directors
cast in person at a meeting called for the purpose of voting on such amendment.
<PAGE>
Section 12. Governing Law
-------------
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the extent that the
applicable law of the State of New York, or any of the provisions herein,
conflict with the applicable provisions of the Investment Company Act, the
latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year above written.
Prudential Securities Incorporated
By: ______________________________
______________________________
(Title)
Prudential Structured Maturity Fund
By: _______________________________
(Name)
(Title)
<PAGE>
Exhibit 6(g)
PRUDENTIAL STRUCTURED MATURITY FUND
(MUNICIPAL INCOME PORTFOLIO)
SUBSCRIPTION OFFERING AGREEMENT
AGREEMENT made as of the __ day of ____, 1993, between PRUDENTIAL
STRUCTURED MATURITY FUND, a Maryland Corporation (the "Fund") and PRUDENTIAL
SECURITIES INCORPORATED, a Delaware Corporation (the "Subscription Agent").
W I T N E S S E T H:
-------------------
WHEREAS, the Fund is registered under the Investment Company Act of 1940,
as amended (the "1940 Act"), as an open-end management investment company and
consists of two series, including the Municipal Income Portfolio (the
"Portfolio"); and
WHEREAS, it is in the best interest of the Fund to offer its shares for
sale to the public; and
WHEREAS, the Fund and the Subscription Agent wish to enter into an
agreement with each other with respect to the initial offering of the
Portfolio's shares of beneficial interest, $.01 par value ("Shares");
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Subscription Agent. The Fund hereby
-------------------------------------
appoints the Subscription Agent its exclusive agent to solicit, and to arrange
for the solicitation of, subscriptions for the Portfolio's Shares, on the terms
and for the period set forth in this Agreement, and the Subscription Agent
hereby accepts such appointment and agrees to act hereunder.
Section 2. Services and Duties of the Subscription Agent.
---------------------------------------------
<PAGE>
(a) The Subscription Agent agrees to solicit, as agent for the Fund,
during the Subscription Period (as defined herein), subscriptions for Shares of
the Portfolio upon the terms described in the Portfolio's Prospectus. As used
in this Agreement, the term "Prospectus" shall mean the Portfolio's 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 most recently
filed from time to time by the Fund with the Securities and Exchange Commission
and effective under the Securities Act of 1933, as amended (the "1933 Act"), and
the 1940 Act, as such Registration Statement is amended by any amendments
thereto at the time in effect.
(b) The Subscription Period shall commence on _________ and shall end
on ______________, provided, however, that any party hereto may change the
commencement or termination date by not less than two days' written notice to
the other party and any such change shall not be deemed an amendment for
purposes of Section 9 hereof. During the Subscription Period, the Subscription
Agent will hold itself available to receive subscriptions, satisfactory to the
Subscription Agent, for the purchase of the Portfolio's Shares and will accept
such subscriptions on behalf of the Fund.
(c) The Subscription Agent may in its discretion enter into
agreements with such registered and qualified retail dealers as it may select
authorizing such dealers to solicit subscriptions
<PAGE>
for the Portfolio's Shares. In making agreements with such dealers, the
Subscription Agent shall act only as principal and not as agent for the Fund.
(d) The maximum public offering price of the Portfolio's shares
subscribed for during the Subscription Period shall be $12.00 per share, or such
other price or prices as the Fund shall specify by written notice to the
Subscription Agent prior to the commencement of the Subscription Period. Shares
subscribed for during the Subscription Period shall be issued with maximum sales
charge of 3.25% for Class A shares and 3.0% for Class B shares, and the
Subscription Agent shall be entitled to payments pursuant to the Plan of
Distribution adopted by the Fund pursuant to Rule 12b-1 under the 1940 Act which
provides for such payments to the Subscription Agent with respect to the
Portfolio's Class B Shares.
(e) The Subscription Agent shall not be obligated to solicit
subscriptions for any certain number of Shares, and nothing herein contained
shall prevent the Subscription Agent from entering into like distribution or
solicitation arrangements with other investment companies so long as the
performance of its obligations hereunder is not impaired thereby.
Section 3. Notification Time; Closing Date; Payment for and Issuance of
------------------------------------------------------------
Shares.
- ------
(a) The Subscription Agent shall, on the first business day
subsequent to the last day of the Subscription Period (the "Notification Time"),
advise the Fund by written notice of the number of Shares for which it has
received subscriptions, including
<PAGE>
the number of Shares which have been subscribed for through dealers with whom
the Subscription Agent has entered into agreements pursuant to Section 2(c)
hereof. Such Shares are hereinafter referred to as the "Closing Shares."
(b) The "Closing Date" shall be the fifth business day subsequent to
the last day of the Subscription Period, or such other date as shall be agreed
in writing between the Subscription Agent and the Fund. The Subscription Agent
shall use its best efforts to obtain payment from subscribers for the Closing
Shares on or prior to the Closing Date. In the event that a Subscription Agent
has not received payment for any portion of the Closing Shares on or prior to
the Closing Date, the Subscription Agent may at its option cancel the
subscription or subscriptions to which the unpaid Closing Shares relate and
advise the Fund by written notice on the Closing Date of the resulting reduction
of the number of Closing Shares.
(c) The Fund shall cause its transfer and dividend disbursing agent
to register Shares evidencing the Closing Shares in such names and amounts as
the Subscription Agent shall have requested in writing, against payment of the
purchase price therefor by wire transfer of federal funds to the account of the
Fund at State Street Bank and Trust Company by the close of business on the next
business day following the Closing Date.
Section 4. Duties of the Fund.
------------------
(a) The Fund shall keep the Subscription Agent fully informed with
regard to its affairs and shall furnish to the
<PAGE>
Subscription Agent copies of all information, financial statements and other
papers which the Subscription Agent may reasonably request for use in connection
with the solicitation of subscriptions for Shares of the Fund, including one
certified copy, upon request by the Subscription Agent, of all financial
statements prepared for the Fund by independent accountants and such reasonable
number of copies of its most current Prospectus as the Subscription Agent may
request, and the Fund shall cooperate fully in the efforts of the Subscription
Agent to solicit and arrange for the solicitation of the subscriptions for
Portfolio's Shares and in the performance of the Subscription Agent under this
Agreement.
(b) The Fund shall take, from time to time, all necessary action to
fix the number of authorized shares and such steps, including payment of the
related filing fee, as may be necessary to register the same under the 1933 Act
to the end that there will be available for sale such number of Shares as to
which the Subscription Agent may be expected to solicit subscriptions. 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 Prospectus, or necessary in order that
there will be no omission to state a material fact in the Registration Statement
or Prospectus which omission would make the statements therein misleading.
(c) The Fund shall use its best efforts to qualify and maintain the
qualification of an appropriate number of its Shares
<PAGE>
for sale under the securities laws of such states as the Subscription Agent and
the Fund may approve and, if necessary or appropriate in connection therewith,
to qualify and maintain the qualification of the Fund as a broker or dealer in
such states; 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 the Portfolio's
Shares in any state from the terms set forth in the Fund's Registration
Statement and Prospectus, to qualify as a foreign entity 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 shares. The Subscription Agent shall furnish
such information and other material relating to its affairs and activities as
may be required by the Fund in connection with such qualifications.
Section 5. Expenses.
--------
(a) The Fund shall bear all costs and expenses of the initial
offering of the Shares in connection with: (i) fees and disbursements of its
counsel and independent accountants, (ii) the preparation, filing and printing
of any registration statements and/or prospectuses required by and under the
federal securities laws and (iii) the qualifications of the Shares for sale and
of the Fund as a broker or dealer under the securities laws of such states or
other jurisdictions as shall be selected by the Fund and the Subscription Agent
pursuant to Section 4(c) hereof and the cost and expenses payable to each such
state for continuing qualification
<PAGE>
therein.
(b) The Subscription Agent shall bear (i) the costs and expenses of
preparing, printing and distributing any materials not prepared by the Fund and
other materials used by the Subscription Agent in connection with its
solicitation of subscriptions for the Portfolio's Shares from the public,
including the additional cost of printing copies of the Prospectus other than
copies thereof required for filing with any federal securities authorities, (ii)
any expenses of advertising incurred by the Subscription Agent in connection
with such solicitation, (iii) the expenses of registration or qualification of
the Subscription Agent as a dealer or broker under federal or state laws and the
expenses of continuing such registration or qualification and (iv) the expenses
of any sales commissions for sale of the Portfolio's Shares (except such
expenses as are specifically undertaken herein by the Fund or are paid by a
purchaser of the Portfolio's Shares). It is understood and agreed that, so long
as the Fund's Plans of Distribution pursuant to Rule 12b-1 under the 1940 Act
continue in effect, any expenses incurred by the Subscription Agent hereunder
may be paid from amounts received by it from the Fund under the Plan of
Distribution for Class B shares.
Section 6. Indemnification. The Fund agrees to indemnify, defend and
---------------
hold the Subscription Agent, its officers and directors and any person who
controls the Subscription Agent within the meaning of Section 15 of the 1933
Act, free and harmless from and
<PAGE>
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 Subscription Agent, its
officers, directors or any such controlling person may incur under the 1933 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 Subscription
Agent to the Fund for use in the Registration Statement or Prospectus; provided,
however, that this indemnity agreement shall not inure to the benefit of 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 his duties, or by reason of his reckless
disregard of his 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) the vote of a
<PAGE>
majority of a quorum of directors who are neither "interested persons" of the
Fund as defined in Section 2(a)(19) of the 1940 Act nor parties to the
proceeding or (b) an independent legal counsel in a written opinion. The Fund's
agreement to indemnify the Subscription Agent, its officers and directors and
any such controlling person as aforesaid is expressly conditioned upon the
Fund's being promptly notified of any action brought against the Subscription
Agent, its officers or directors, 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 Subscription
Agent 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 Shares.
The Subscription Agent agrees to indemnify, defend and hold the Fund, its
officers and directors and any person who controls the Fund, if any, within the
meaning of Section 15 of the 1933 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 directors or
officers or any such controlling person may incur under the 1933 Act or under
common law or otherwise, but only to the extent that such liability or expense
incurred by the Fund, its directors or officers or such controlling person
resulting from such claims or demands shall arise out of or be based upon any
<PAGE>
alleged untrue statement of a material fact contained in information furnished
in writing by the Subscription Agent to the Fund for use in the Registration
Statement or Prospectus or shall arise out of or be based upon any alleged
omission to state a material fact in connection with such information required
to be stated in the Registration Statement or Prospectus or necessary to make
such information not misleading. The Subscription Agent's agreement indemnify
the Fund, its directors and officers and any such controlling person as
aforesaid is expressly conditioned upon the Subscription Agent's being promptly
notified of any action brought against the Fund, its officers or directors or
any such controlling person, such notification being given to the Subscription
Agent at its principal business office.
Section 7. Compliance with Securities Laws. The Fund represents that
-------------------------------
it is registered as an open-end management investment company under the 1940
Act, and agrees that it will comply with all of the provisions of the 1940 Act
and of the rules and regulations thereunder. The Fund and the Subscription
Agent each agree to comply with all of the applicable terms and provisions of
the 1940 Act, the 1933 Act and, subject to the provisions of Section 4(c)
hereof, all applicable state "Blue Sky" laws. The Subscription Agent agrees to
comply with all of the applicable provisions of the Securities Exchange Act of
1934.
Section 8. Effective Date of Agreement; Termination. This Agreement
----------------------------------------
shall become effective at 9:00 a.m., New York time, on ______, 199__ or on such
other commencement date established
<PAGE>
pursuant to Section 2(b) hereof.
The Fund may at any time prior to the Closing Date elect to terminate the
initial offering of the Shares. In such event, this Agreement will be
terminated, without payment of any penalty, and the Subscription Agent shall
return to subscribers, without interest or deduction, any amounts paid by such
subscribers pursuant to Section 3 hereof.
This Agreement may be terminated at any time without the payment of any
penalty by the directors of the Fund, by a majority of the directors of the Fund
who are not interested persons of the Fund and who have no direct or indirect
financial interest in this Agreement or in any agreement related to the Fund's
Plans of Distribution pursuant to Rule 12b-1 under the 1940 Act, or by vote of a
majority of the outstanding voting securities of the Fund, or by the
Subscription Agent, on not more than sixty days' nor less than thirty days'
written notice to the other parties. This Agreement shall automatically
terminate in the event of its assignment.
Section 9. Amendments of this Agreement. This Agreement may be amended
----------------------------
by the parties only if such amendment is specifically approved by (i) the
directors of the Fund, or by the vote of a majority of outstanding voting
securities of the Fund, and (ii) a majority of those directors of the Fund who
are not parties to this Agreement or interested persons of any such party and
who have not direct or indirect financial interest in this
<PAGE>
Agreement or in any Agreement related to the Fund's Plans of Distribution
pursuant to Rule 12b-1 under the 1940 Act, cast in person at a meeting called
for the purpose of voting on such approval.
Section 10. Notices. Any notice required to be given pursuant to this
-------
Agreement shall be deemed duly given if delivered or mailed by registered mail,
postage prepaid, (i) to the Subscription Agent at One Seaport Plaza, New York,
New York 10292, Attention: Prudential Mutual Fund Distributors, Inc. or (ii) to
the Fund at One Seaport Plaza, New York, New York 10292, Attention: President.
Section 11. Entire Agreement. This Agreement contains the entire
----------------
agreement between the parties hereto and supersedes all prior agreements with
respect to the subject matter hereof.
Section 12. Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first above written.
PRUDENTIAL STRUCTURED MATURITY FUND
By:___________________________________
Title:________________________________
PRUDENTIAL SECURITIES INCORPORATED
By:___________________________________
Title:________________________________
<PAGE>
PRUDENTIAL _________ FUND
Form of
Distribution Agreement
(Class A Shares)
----------------
Agreement made as of _____________199_, between Prudential ________
Fund [a Maryland Corporation/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.
2
<PAGE>
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 Board of
Directors. 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 other
period when the Securities and Exchange Commission, by order,
3
<PAGE>
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 Board of Directors 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.
4
<PAGE>
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
5
<PAGE>
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 Directors/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 Board of Directors 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 Board of Directors 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,
6
<PAGE>
or of other broker-dealers or financial institutions for personal
service and/or the maintenance of shareholder accounts; and
(e) advertising for the Fund in various forms through any
available medium, including the 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
7
<PAGE>
otherwise, arising out of or based upon any untrue statement of a material fact
contained in the Registration Statement or Prospectus or arising out of or based
upon any alleged omission to state a material fact required to be stated in
either thereof or necessary to make the statements in either thereof not
misleading, except insofar as such claims, demands, liabilities or expenses
arise out of or are based upon any such untrue statement or omission or alleged
untrue statement or omission made in reliance upon and in conformity with
information furnished in writing by the Distributor to the Fund for use in the
Registration Statement or Prospectus; provided, however, that this indemnity
agreement shall not inure to the benefit of any such officer, director, trustee
or controlling person unless a court of competent jurisdiction shall determine
in 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 Directors 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 Directors 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 Directors 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
Directors 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 Directors 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 Board of Directors 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 Directors 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 Directors), 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 Directors 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 Board of Directors 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 Directors 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 ___________ Trust" is the designation of the
Trustees under a Declaration of Trust dated ______, 19__ and all persons dealing
with the Fund must look solely to the property of the Fund for the enforcement
of any claims against the Fund, and neither the Trustees, officers, agents of
shareholders assume any personal liability for obligations entered into on
behalf of the Fund.]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year above written.
Prudential Mutual Fund
Distributors, Inc.
By: ________________________
________________________
(Title)
Prudential______________Fund
By: _______________________
(Name)
(Title)
*For Massachusetts Business Trusts only.
10
<PAGE>
PRUDENTIAL ___________ FUND
Form of
Distribution Agreement
(Class B Shares)
----------------
Agreement made as of ______ __, 199_, between Prudential ________ Fund, [a
Maryland Corporation/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.
1
<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.
3.3 The Fund shall have the right to suspend the sale of its Class B
shares at times when redemption is suspended pursuant
2
<PAGE>
to the conditions in Section 4.3 hereof or at such other times as may be
determined by the Board of Directors. 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
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,
3
<PAGE>
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 Board of Directors 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 qualifications.
4
<PAGE>
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 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
5
<PAGE>
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 Directors/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 Board of Directors 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
Board of Directors 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 broker-dealers or financial institutions for
6
<PAGE>
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 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 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 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 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 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 Directors 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 Directors 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 Directors 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 Directors or officers or
such controlling person resulting from such claims or demands shall arise out of
or be based upon any alleged untrue statement of a material fact contained in
information furnished in writing by the Distributor to the Fund for use in the
Registration Statement or Prospectus or shall arise out of or be based upon any
alleged omission to state a material fact in connection with such information
required to be stated in the Registration Statement or Prospectus or necessary
to
8
<PAGE>
make such information not misleading. The Distributor's agreement to indemnify
the Fund, its officers and Directors 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 Directors 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 Board of Directors 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 Directors 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 Directors), 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 Directors 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 Board of Directors 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 Board of Directors
cast in person at a meeting called for the purpose of voting on such amendment.
Section 13. Governing Law
-------------
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the extent that the
applicable law of the State of New York, or any of the provisions herein,
conflict
9
<PAGE>
with the applicable provisions of the Investment Company Act, the latter shall
control.
*[Section 14. Liabilities of the Fund
-----------------------
The name "Prudential ___________ Trust" is the designation of the
Trustees under a Declaration of Trust dated ______, 19__ and all persons dealing
with the Fund must look solely to the property of the Fund for the enforcement
of any claims against the Fund, and neither the Trustees, officers, agents of
shareholders assume any personal liability for obligations entered into on
behalf of the Fund.]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year above written.
Prudential Securities
Incorporated
By: ________________________
________________________
(Title)
Prudential ________Fund
By: _______________________
(Name)
(Title)
*For Massachusetts Business Trusts only.
10
<PAGE>
PRUDENTIAL ___________ FUND
Form of
Distribution Agreement
(Class C Shares)
----------------
Agreement made as of ______ __, 199_, between Prudential ________
Fund, [a Maryland Corporation/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.
1
<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.
3.3 The Fund shall have the right to suspend the sale of its Class C
shares at times when redemption is suspended pursuant
2
<PAGE>
to the conditions in Section 4.3 hereof or at such other times as may be
determined by the Board of Directors. 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 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,
3
<PAGE>
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 Board of Directors 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 qualifications.
4
<PAGE>
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 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
5
<PAGE>
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 Directors/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 Board of Directors 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 Board of Directors 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 broker-dealers or financial institutions for
6
<PAGE>
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 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 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 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 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 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 Directors 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 Directors 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 Directors 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 Directors or officers or
such controlling person resulting from such claims or demands shall arise out of
or be based upon any alleged untrue statement of a material fact contained in
information furnished in writing by the Distributor to the Fund for use in the
Registration Statement or Prospectus or shall arise out of or be based upon any
alleged omission to state a material fact in connection with such information
required to be stated in the Registration Statement or Prospectus or necessary
to
8
<PAGE>
make such information not misleading. The Distributor's agreement to indemnify
the Fund, its officers and Directors 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 Directors 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 Board of Directors 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 Directors 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 Directors), 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 Directors 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 Board of Directors 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 Board of Directors
cast in person at a meeting called for the purpose of voting on such amendment.
Section 13. Governing Law
-------------
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the extent that the
applicable law of the State of New York, or any of the provisions herein,
conflict
9
<PAGE>
with the applicable provisions of the Investment Company Act, the latter shall
control.
*[Section 14. Liabilities of the Fund
-----------------------
The name "Prudential ___________ Trust" is the designation of the
Trustees under a Declaration of Trust dated ______, 19__ and all persons dealing
with the Fund must look solely to the property of the Fund for the enforcement
of any claims against the Fund, and neither the Trustees, officers, agents of
shareholders assume any personal liability for obligations entered into on
behalf of the Fund.]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year above written.
Prudential Securities
Incorporated
By: ________________________
________________________
(Title)
Prudential ________Fund
By: _______________________
(Name)
(Title)
*For Massachusetts Business Trusts only.
10
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Post-Effective Amendment No. 10 to Registration
Statement No. 33-22363 of Prudential-Bache Structured Maturity Fund, Inc. of
our report dated February 3, 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
of the Income Portfolio, 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
Deloitte & Touche
New York, New York
May 11, 1994
<PAGE>
Exhibit 15(d)
PRUDENTIAL STRUCTURED MATURITY FUND
(Municipal Income Portfolio)
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 Structured Maturity Fund (Municipal
Income Portfolio) (the Fund) and by Prudential Mutual Fund Distributors, Inc.,
the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement (the 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 Distribution
Agreement, the Distributor will be entitled to receive payments from investors
of front-end sales charges with respect to the sale of Class A shares. Under
the Plan, the Fund wishes to pay the Distributor, as compensation for its
services, a distribution and service fee with respect to Class A shares.
A majority of the Board of Directors of the Fund, including a majority of
those Directors who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no
<PAGE>
direct or indirect financial interest in the operation of this Plan or any
agreements related to it (the Rule 12b-1 Directors), have determined by votes
cast in person at a meeting called for the purpose of voting on this Plan that
there is a reasonable likelihood that adoption of this Plan will benefit the
Fund and its shareholders. Expenditures under this Plan by the Fund for
Distribution Activities (defined below) are primarily intended to result in the
sale of Class 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
<PAGE>
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. 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 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 which, together with the service fee (described in Section 2
hereof), shall not exceed .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 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 A shares of the Fund will not
be used to pay the distribution expenses incurred
<PAGE>
with respect to the Class B 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 Board of Directors. The allocation of distribution expenses
among Classes will be subject to the review of the Board of Directors.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) amounts paid to Prudential Securities in reimbursement of
costs incurred by Prudential Securities in 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 in reimbursement of costs incurred by
Prusec in 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) 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 other financial
<PAGE>
institutions (other than Prudential Securities and Prusec) which have
entered into selected dealer agreements with the Distributor with
respect to 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 Rule 12b-1. The Distributor will
provide to the Board of Directors of the Fund such additional information as the
Board shall from time to time reasonably request, including information about
Distribution Activities undertaken or to be undertaken by the Distributor.
The Distributor will inform the Board of Directors of the Fund of the
commissions and account servicing fees to be paid by the Distributor to account
executives of the Distributor and to broker-dealers and 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,
<PAGE>
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 A shares of the Fund.
7. Amendments
----------
The Plan may not be amended to change the distribution expenses to be paid
as provided for in Section 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 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. Non-interested Directors
------------------------
While the Plan is in effect, the selection and nomination of the Directors
who are not "interested persons" of the Fund (non-interested Directors) shall be
committed to the discretion of
<PAGE>
the non-interested 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.
Dated as of ____________, 1993
<PAGE>
Exhibit 15(e)
PRUDENTIAL STRUCTURED MATURITY FUND
(Municipal Income Portfolio)
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 Structured Maturity Fund (Municipal
Income Portfolio), (the Fund) and by Prudential Securities Incorporated
(Prudential Securities), the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement (the Distribution
Agreement) pursuant to which the Fund will continue to employ the Distributor to
distribute Class B shares issued by the Fund (Class B shares). Under the
Distribution Agreement, the Distributor will be entitled to receive payments
from investors of contingent deferred sales charges imposed with respect to
certain repurchases and redemptions of Class B shares. Under the Plan, the Fund
wishes to pay the Distributor as compensation for its services, a distribution
and service fee with respect to Class B shares.
A majority of the Board of Directors of the Fund including a
<PAGE>
majority who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of this Plan or any agreements related to it (the Rule 12b-1
Directors), have determined by votes cast in person at a meeting called for the
purpose of voting on this Plan that there is a reasonable likelihood that
adoption of this Plan will benefit the Fund and its shareholders. Expenditures
under this Plan by the Fund for Distribution Activities (defined below) are
primarily intended to result in the sale of Class 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
<PAGE>
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 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 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 which, together with the service fee (described in Section 2
hereof), shall not exceed .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 reimbursable by the Class B
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 B shares of the Fund will not
be used to pay the distribution expenses incurred
<PAGE>
with respect to the Class A 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 Board of Directors. The allocation of distribution expenses
among Classes will be subject to the review of the Board of Directors.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities, which include, among others:
(a) sales commissions (including trailer commissions) paid to, or
on account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of distribution activities including central office and
branch expenses;
(c) amounts paid to Prusec in reimbursement of all costs incurred
by Prusec in 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) 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
<PAGE>
entered into selected dealer agreements with the Distributor with
respect to 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 Rule 12b-1. The Distributor will
provide to the Board of Directors of the Fund such additional information as
they shall from time to time reasonably request, including information about
Distribution Activities undertaken or to be undertaken by the Distributor.
The Distributor will inform the Board of Directors of the Fund of the
commissions and account servicing fees to be paid by the Distributor to account
executives of the Distributor and to broker-dealers and other financial
institutions which have selected dealer agreements with the Distributor.
5. Effectiveness; Continuation
---------------------------
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class 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
<PAGE>
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 B shares of the Fund.
7. Amendments
----------
The Plan may not be amended to change the distribution expenses to be paid
as provided for in Section 3 hereof so as to increase materially the amounts
payable under this Plan unless such amendment shall be approved by the vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class B shares of the Fund. All material amendments of the
Plan, shall be approved 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. Non-interested Directors
------------------------
While the Plan is in effect, the selection and nomination of the Directors
who are not "interested persons" of the Fund (non-interested Directors) shall be
committed to the discretion of the non-interested Directors.
<PAGE>
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.
Dated ______________, 1993
<PAGE>
PRUDENTIAL ________ FUND
Form of
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 __________ 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 Board of Directors or Trustees of the Fund, including a
majority of those Directors or 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 Directors or 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
<PAGE>
likelihood that adoption of this Plan will benefit the Fund and its
shareholders. Expenditures under this Plan by the Fund for Distribution
Activities (defined below) are primarily intended to result in the sale of Class
A shares of the Fund within the meaning of paragraph (a)(2) of Rule 12b-1
promulgated under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
The Plan
--------
The material aspects of the Plan are as follows:
1. Distribution Activities
-----------------------
The Fund shall engage the Distributor to distribute Class A shares of the
Fund and to service shareholder accounts using all of the facilities of the
distribution networks of Prudential Securities Incorporated (Prudential
Securities) and Pruco Securities Corporation (Prusec), including sales personnel
and branch office and central support systems, and also using such other
qualified broker-dealers and financial institutions as the Distributor may
select. Services provided and activities undertaken to distribute Class A
shares of the Fund are referred to herein as "Distribution Activities."
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 Board of Directors/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
Board of Directors/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
3
<PAGE>
over the Fund's fiscal year or such other allocation method approved by the
Board of Directors or Trustees. The allocation of distribution expenses among
classes will be subject to the review of the Board of Directors or 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 and 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 shares of the
Fund.
4
<PAGE>
4. Quarterly Reports; Additional Information
-----------------------------------------
An appropriate officer of the Fund will provide to the Board of Directors
or 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 Board of Directors or Trustees of the Fund such
additional information as the Board or 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 Board of Directors or 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
5
<PAGE>
majority of the Board of Directors or Trustees of the Fund and a majority of the
Rule 12b-1 Directors or 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 Directors or Trustees, or by vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Class A shares of
the Fund.
7. Amendments
----------
The Plan may not be amended to change the combined service and distribution
fees to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class A shares of the Fund. All
material amendments of the Plan shall be approved by a majority of the Board of
Directors or the Trustees of the Fund and a majority of the Rule 12b-1 Directors
or Trustees by votes cast in person at a meeting called for the purpose of
voting on the Plan.
8. Rule 12b-1 Directors or Trustees
--------------------------------
While the Plan is in effect, the selection and nomination of the Rule 12b-1
Directors or Trustees shall be committed to the discretion of the Rule 12b-1
Directors or Trustees.
6
<PAGE>
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 ___________ Trust" is the designation of the Trustees
under a Declaration of Trust dated ______, 19__ and all persons dealing with the
Fund must look solely to the property of the Fund for the enforcement of any
claims against the Fund, and neither the Trustees, officers, agents of
shareholders assume any personal liability for obligations entered into on
behalf of the Fund.]
Dated:
7
<PAGE>
PRUDENTIAL ________ FUND
Form of
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 __________ 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 continue to 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 Board of Directors or 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
Directors or 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
<PAGE>
shareholders. Expenditures under this Plan by the Fund for Distribution
Activities (defined below) are primarily intended to result in the sale of Class
B shares of the Fund within the meaning of paragraph (a)(2) of Rule 12b-1
promulgated under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
The Plan
--------
The material aspects of the Plan are as follows:
1. Distribution Activities
-----------------------
The Fund shall engage the Distributor to distribute Class B shares of the
Fund and to service shareholder accounts using all of the facilities of the
Prudential Securities distribution network including sales personnel and branch
office and central support systems, and also using such other qualified broker-
dealers and financial institutions as the Distributor may select, including
Pruco Securities Corporation (Prusec). Services provided and activities
undertaken to distribute Class B shares 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 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 Board of Directors/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 Board of Directors/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 Board of
Directors or Trustees. The allocation of distribution
3
<PAGE>
expenses among classes will be subject to the review of the Board of Directors
or Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) sales commissions (including trailer commissions) paid to, or on
account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of Distribution Activities including central office and
branch expenses;
(c) amounts paid to Prusec for performing services under a selected
dealer agreement between Prusec and the Distributor for sale of Class
B shares of the Fund, including sales commissions 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 shares of the Fund.
4. Quarterly Reports; Additional Information
-----------------------------------------
An appropriate officer of the Fund will provide to the Board of Directors
or 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 Board of Directors or Trustees of
4
<PAGE>
the Fund such additional information as they shall from time to time reasonably
request, including information about Distribution Activities undertaken or to be
undertaken by the Distributor.
The Distributor will inform the Board of Directors or 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 Board of Directors or Trustees of the Fund and a majority of
the Rule 12b-1 Directors or 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 Directors or Trustees, or by vote of a majority of the outstanding voting
securities (as defined in the Investment
5
<PAGE>
Company Act) of the Class B shares of the Fund.
7. Amendments
----------
The Plan may not be amended to change the combined service and distribution
fees to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class B shares of the Fund. All
material amendments of the Plan shall be approved by a majority of the Board of
Directors or Trustees of the Fund and a majority of the Rule 12b-1 Directors or
Trustees by votes cast in person at a meeting called for the purpose of voting
on the Plan.
8. Rule 12b-1 Directors or Trustees
--------------------------------
While the Plan is in effect, the selection and nomination of the Rule 12b-1
Directors or Trustees shall be committed to the discretion of the Rule 12b-1
Directors or 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 ___________ Trust" is the designation of the Trustees
under a Declaration of Trust dated ______, 19__ and all persons dealing with the
Fund must look solely to the property
6
<PAGE>
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.]
Dated:
7
<PAGE>
PRUDENTIAL ________ FUND
Form of
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 __________ 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 continue to 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 or 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
Directors or 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
<PAGE>
shareholders. Expenditures under this Plan by the Fund for Distribution
Activities (defined below) are primarily intended to result in the sale of Class
C shares of the Fund within the meaning of paragraph (a)(2) of Rule 12b-1
promulgated under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
The Plan
--------
The material aspects of the Plan are as follows:
1. Distribution Activities
-----------------------
The Fund shall engage the Distributor to distribute Class C shares of the
Fund and to service shareholder accounts using all of the facilities of the
Prudential Securities distribution network including sales personnel and branch
office and central support systems, and also using such other qualified broker-
dealers and financial institutions as the Distributor may select, including
Pruco Securities Corporation (Prusec). Services provided and activities
undertaken to distribute Class C shares 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 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/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 C shares of the Fund 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/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 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 or Trustees. The allocation of distribution
3
<PAGE>
expenses among classes will be subject to the review of the Board of Directors
or Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) sales commissions (including trailer commissions) paid to, or on
account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of Distribution Activities including central office and
branch expenses;
(c) amounts paid to Prusec for performing services under a selected
dealer agreement between Prusec and the Distributor for sale of Class
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 shares of the Fund.
4. Quarterly Reports; Additional Information
-----------------------------------------
An appropriate officer of the Fund will provide to the Board of Directors
or 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 Board of Directors or Trustees of
4
<PAGE>
the Fund such additional information as they shall from time to time reasonably
request, including information about Distribution Activities undertaken or to be
undertaken by the Distributor.
The Distributor will inform the Board of Directors or 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 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 or Trustees of the Fund and a majority of
the Rule 12b-1 Directors or 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 Directors or Trustees, or by vote of a majority of the outstanding voting
securities (as defined in the Investment
5
<PAGE>
Company Act) of the Class C shares of the Fund.
7. Amendments
----------
The Plan may not be amended to change the combined service and distribution
fees to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class C shares of the Fund. All
material amendments of the Plan shall be approved by a majority of the Board of
Directors or Trustees of the Fund and a majority of the Rule 12b-1 Directors or
Trustees by votes cast in person at a meeting called for the purpose of voting
on the Plan.
8. Rule 12b-1 Directors or Trustees
--------------------------------
While the Plan is in effect, the selection and nomination of the Rule 12b-1
Directors or Trustees shall be committed to the discretion of the Rule 12b-1
Directors or 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 ___________ Trust" is the designation of the Trustees
under a Declaration of Trust dated ______, 19__ and all persons dealing with the
Fund must look solely to the property
6
<PAGE>
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.]
Dated:
7
