<PAGE>
As filed with the Securities and Exchange Commission on February 28, 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. 9 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [_]
AMENDMENT NO. 11 [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):
[X] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)
[_] on (date) pursuant to paragraph (a), 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, 1993 ON OR ABOUT FEBRUARY 28, 1994.
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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 Informa- Fund Expenses; Financial Highlights;
tion................................... How the Fund Calculates Performance
Item 4. General Description of Regis- Cover Page; Fund Highlights; How the
trant.................................. Fund Invests; General Information
Item 5. Management of the Fund......... Financial Highlights; How the Fund is
Managed
Item 6. Capital Stock and Other Securi- Taxes, Dividends and Distributions;
ties................................... General Information
Item 7. Purchase of Securities Being Shareholder Guide; How the Fund Values
Offered................................ its 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 Histo-
ry..................................... General Information
Item 13. Investment Objectives and Poli- Investment Objective and Policies;
cies................................... 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 Manager; Distributor, Custodian,
Services............................... Transfer and Dividend Disbursing Agent
and Independent Accountants
Item 17. Brokerage Allocation and Other
Practices.............................. Portfolio Transactions
Item 18. Capital Stock and Other Securi-
ties................................... Not Applicable
Item 19. Purchase, Redemption and Pric- Purchase and Redemption of Fund
ing of Securities Being Offered........ Shares; Shareholder Investment
Account; Net Asset Value
Item 20. Tax Status..................... Taxes
Item 21. Underwriters................... Distributor
Item 22. Calculation of Performance Da-
ta..................................... 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>
(ART)
(ART)
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PROSPECTUS DATED [ ], 1994
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Prudential-Bache Structured Maturity Fund, Inc., doing business as Prudential
Structured Maturity Fund (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 MUNICIPAL SECURITIES 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. 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?
Prudential Structured Maturity Fund 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 5.
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 8.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the Manager
of the Fund and is compensated for its services at an annual rate of .40 of 1%
of the Portfolio's average daily net assets. As of January 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 12.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor of
the Portfolio's Class A shares. The Portfolio compensates PMFD for expenses
relating to the distribution of Class A shares at an annual rate of .30 of 1%
of the average
2
<PAGE>
daily net assets of the Class A shares. PMFD has agreed to limit its
distribution fee 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 Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Portfolio's Class B shares. Prudential Securities is
compensated for its expenses related to the distribution of Class B shares at
an annual rate of .75 of 1% (including a service fee of .25 of 1%) of the
average daily net assets of the Class B shares. Prudential Securities has
agreed to limit its distribution fee to .60 of 1% (including a service fee of
.10 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" at
page 12.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000. Thereafter, the minimum investment
is $100. There is no minimum investment requirement for certain retirement
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 19 and "Shareholder Guide--Shareholder Services" at page 26.
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 at the time of purchase or on a deferred
basis. See "How the Fund Values Its Shares" at page 15 and "Shareholder Guide--
How to Buy Shares of the Fund" at page 19.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Portfolio offers two classes of shares which may be purchased at the next
determined NAV plus a sales charge which, at your election, may be imposed
either at the time of purchase (Class A shares) or on a deferred basis (Class B
shares).
. Class A shares are sold with an initial sales charge of up to 3.25% of the
offering price.
. Class B shares are 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.
You should understand that over time the deferred sales charge plus
distribution fee of the Class B shares will exceed the initial sales charge
plus the distribution fee of the Class A shares.
See "Shareholder Guide--Alternative Purchase Plan" at page 20.
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.
Although Class B shares are sold without an initial sales charge, the proceeds
of redemptions of Class B shares held for four years or less may be subject to
a contingent deferred sales charge declining from 3% to zero. See "Shareholder
Guide--How to Sell Your Shares" at page 22.
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 16.
3
<PAGE>
FUND EXPENSES
(MUNICIPAL INCOME PORTFOLIO)
<TABLE>
<CAPTION>
CLASS A SHARES
(INITIAL SALES CLASS B SHARES (DEFERRED SALES
CHARGE ALTERNATIVE) CHARGE ALTERNATIVE)
------------------- --------------------------------
<S> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Sales Load
Imposed on Purchases (as
a percentage of offering
price).................. 3.25% None
Maximum Sales Load or
Deferred Sales Load
Imposed on Reinvested
Dividends............... None None
Deferred Sales Load (as
a percentage of original
purchase price or
redemption proceeds,
whichever is lower)..... None 3% during the first year,
decreasing 1% annually to
1% in the third year and
1% in the fourth year and
0% the fifth year and thereafter
Redemption Fees......... None None
Exchange Fee............ None None
<CAPTION>
ANNUAL FUND OPERATING
EXPENSES*
(AS A PERCENTAGE OF Class A Class B
AVERAGE NET ASSETS) ------- -------
<S> <C> <C>
Management Fees (after
waiver)................. .0% .0%
12b-1 Fees+............. .10++ .60+++
Other Expenses (after
subsidy)................ .0 .0
---- ----
Total Fund Operating
Expenses................ .10% .60%
==== ====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual
return and (2) redemption at the end of each
time period:
Class A..................................... $33 $36 $38 $45
Class B..................................... $36 $29 $33 $75
You would pay the following expenses on the
same investment assuming no redemption:
Class A..................................... $33 $36 $38 $45
Class B..................................... $ 6 $19 $33 $75
</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.
- ------------
* 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 both
Class A and B and Total Fund Operating Expenses would be 1.03% for Class A
and 1.53% for Class B. 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 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 Distribution and Service Plan provides that the Fund
may pay a distribution fee of .30 of 1% per annum of the average daily net
assets of the Class A shares of the Portfolio, the Distributor has agreed
to limit its distribution fees to .10 of 1% of the average daily net assets
of the Class A shares of the Portfolio 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 .60 of 1% (including a service
fee of .10 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.
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
5
<PAGE>
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
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circumstances: (i) 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; (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
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a loss resulting from the default of a single issuer may represent a greater
portion of the total assets of a non-diversified portfolio.
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.
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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, 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
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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.
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 illiquid
securities, including securities that are illiquid by virtue of legal or
contractual restrictions on resale. 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 effect 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. See "Investment Objective and Policies--Other Investments
Applicable to the Municipal Income Portfolio--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 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.
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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
cannot 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 January 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.
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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.
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
SHARES OF THE PORTFOLIO. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF
PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN AND THE
CLASS B 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
AND CLASS B SHARES, RESPECTIVELY. 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 Fund shares, including lease, utility, communications and
sales promotion expenses. The State of Texas requires that shares of the Fund
may be sold in that state only by dealers or other financial institutions
which are registered there as broker-dealers.
UNDER THE CLASS A PLAN, THE PORTFOLIO COMPENSATES 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) .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%. 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. It is
expected that, in the case of Class A shares, proceeds from the distribution
fee will be used primarily to pay account servicing fees to financial
advisers. Unlike the Class B Plan, there are no carry-forward amounts under
the Class A Plan, and interest expenses are not incurred under the Class A
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Plan. PMFD has advised the Fund that distribution-related expenses under the
Class A Plan will not exceed .10 of 1% of the average daily net assets of the
Class A shares for the fiscal year ending December 31, 1994.
UNDER THE CLASS B PLAN, THE PORTFOLIO COMPENSATES PRUDENTIAL SECURITIES FOR
ITS DISTRIBUTION-RELATED EXPENSES WITH RESPECT TO CLASS B SHARES AT AN ANNUAL
RATE OF .75 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS B SHARES. THE
CLASS B PLAN PROVIDES FOR THE PAYMENT TO PRUDENTIAL SECURITIES OF (I) AN
ASSET-BASED SALES CHARGE AT A RATE OF .50 OF 1% AND (II) A SERVICE FEE AT A
RATE OF .25 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS B 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 FEES TO .60 OF 1% (INCLUDING A SERVICE FEE OF .10 OF 1%) OF THE
AVERAGE DAILY NET ASSETS OF THE CLASS B SHARES FOR THE FISCAL YEAR ENDING
DECEMBER 31, 1994.
No Class A or Class B shares of the Portfolio were outstanding for the
fiscal year ended December 31, 1993. The Fund records all payments made under
the Plans as expenses in the calculation of net investment income.
Distribution expenses attributable to the sale of both Class A and Class B
shares will be allocated to each class based upon the ratio of sales of each
class to the sales of all shares of the Portfolio. The distribution fee and
initial sales charge in the case of Class A shares will not be used to
subsidize the sale of Class B shares. Similarly, the distribution fee and
contingent deferred sales charge in the case of Class B shares will not be
used to subsidize the sale of Class A shares.
Under the Class A and Class B Plans, the Portfolio is obligated to pay
distribution and service fees to PMFD and Prudential Securities as
compensation for their distribution and service activities, not as
reimbursement for specific expenses incurred. If the Distributor's expenses
exceed their 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, they will retain their full fees
and realize a profit.
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.
In addition to distribution and service fees paid by the Fund under the
Class A and Class B Plans, the Manager (or one of its affiliates) may make
payments to dealers and other persons who distribute shares of the Fund. 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 and Class B 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 .60 of 1%
of the average daily net assets of the Class B shares for the fiscal year
ending December 31, 1994. Fee waivers and expense subsidies will increase the
Portfolio's yield and total return.
14
<PAGE>
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 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 Class A and Class B shares are substantially
identical, the different expenses borne by each class will result in different
dividends. As long as the Portfolio declares dividends daily, the NAV of Class
A and Class B shares 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.
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 AND
CLASS B 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
15
<PAGE>
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 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 both Class A and Class B shares of the Portfolio
in any advertisement or information including performance data of the
Portfolio. Further performance information is contained in the Fund's semi-
annual report 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
16
<PAGE>
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."
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.
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 AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY NET CAPITAL
GAINS. Dividends and distributions paid by the Portfolio with respect to Class
A and Class B 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, resulting in lower dividends for Class B
shares. Distributions of net capital gains, if any, will be paid in the same
amount for Class A and Class B 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 NET ASSET VALUE 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. If you hold shares through
Prudential Securities, you should contact your financial adviser to elect to
receive dividends and distributions in cash. The Fund will notify each
shareholder after the close of the Fund's taxable year both of the dollar
amount and the taxable status of that year's dividends and distributions.
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 TWO CLASSES FOR EACH PORTFOLIO, DESIGNATED CLASS A AND
CLASS B COMMON STOCK, EACH OF WHICH CONSISTS OF 125 MILLION AUTHORIZED SHARES.
Both Class A and Class B common stock represent an interest in the same assets
of the Fund and are identical in all respects except that each class bears
different distribution expenses and has exclusive voting rights with respect
to its distribution plan. 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 Portfolio is offering only
two classes of shares designated Class A and Class B 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 class represents an interest in the same assets of the Portfolio
and is identical in all respects, except that each class bears the expenses
related to the distribution of its 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
shares bear higher distribution expenses, the liquidation proceeds to Class B
shareholders 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.
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
18
<PAGE>
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 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 is $1,000, 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). The
minimum initial investment is $1,000. The minimum subsequent investment is
$100. 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
THE OPTION OF THE PURCHASER, MAY BE IMPOSED AT THE TIME OF PURCHASE OR ON A
DEFERRED BASIS. 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.
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<PAGE>
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 made through dealers other than Prudential
Securities or Prusec may be subject to postage and handling charges imposed by
the dealer, however, you may avoid such charges by placing orders directly
with the Fund's Transfer Agent, Prudential Mutual Fund Services, Inc.,
Attention: Investment Services, P.O. Box 15020, New Brunswick, New Jersey
08906-5020.
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 (Municipal
Income Portfolio), 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
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 (Municipal Income Portfolio), Class A or Class B 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 TWO CLASSES OF 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. You may purchase shares at the next
determined NAV plus a sales charge which at your election, may be imposed
either at the time of purchase (the Class A shares or the initial sales charge
alternative) or on a deferred basis (the Class B shares or the deferred sales
charge alternative) (the Alternative Purchase Plan).
CLASS A SHARES ARE SUBJECT TO AN INITIAL SALES CHARGE OF UP TO 3.25% OF THE
OFFERING PRICE AND AN ANNUAL DISTRIBUTION AND SERVICE FEE CURRENTLY BEING
CHARGED AT A RATE OF .10 OF 1% OF THE AVERAGE DAILY NET ASSET VALUE OF THE
CLASS A SHARES. Certain purchases of Class A shares may qualify for reduction
or waiver of initial sales charges. See "Initial Sales Charge Alternative--
Class A Shares--Reduction or Waiver of Initial Sales Charges" below.
CLASS B SHARES DO NOT INCUR A SALES CHARGE WHEN THEY ARE PURCHASED BUT ARE
SUBJECT TO A CONTINGENT DEFERRED SALES CHARGE (DECLINING FROM 3% TO ZERO OF
THE LESSER OF THE AMOUNT INVESTED OR THE REDEMPTION PROCEEDS), WHICH WILL BE
IMPOSED ON CERTAIN REDEMPTIONS MADE WITHIN FOUR YEARS OF PURCHASE AND AN
ANNUAL DISTRIBUTION AND SERVICE FEE CURRENTLY BEING CHARGED AT A RATE OF .60
OF 1% OF THE AVERAGE DAILY NET ASSET VALUE OF THE CLASS B SHARES. Certain
redemptions of Class B shares may qualify for waiver or reduction of the
contingent deferred sales charge. See "How to Sell Your Shares--Waiver of
Contingent Deferred Sales Charge."
The two 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 and (ii) each class has exclusive voting rights with respect to such a
plan. The two classes also have separate exchange privileges. See
20
<PAGE>
"How to Exchange Your Shares" below. The net 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 shares bear the expenses
of a higher distribution fee which will cause the Class B shares to have a
higher expense ratio and to pay lower dividends than the Class A shares.
Financial advisers will receive different compensation for selling Class A
and Class B shares.
The following illustrations are provided to assist you in determining which
method of purchase best suits your individual circumstances:
If you qualify for a reduced sales charge, you might elect the initial sales
charge alternative because a similar sales charge reduction is not available
for purchases under the deferred sales charge alternative. However, because
the initial sales charge is deducted at the time of purchase, you would not
have all of your money invested initially.
If you do not qualify for a reduced initial sales charge and expect to
maintain your investment in the Portfolio for a long period of time, you might
also elect the initial sales charge alternative because over time the
accumulated continuing distribution charges of Class B shares will exceed the
initial sales charge plus distribution fees of Class A shares. Again, however,
you must weigh this consideration against the fact that not all of your money
will be invested initially. Furthermore, the ongoing distribution charges
under the deferred sales charge alternative will be offset to the extent any
return is realized on the additional funds. However, there can be no assurance
that any return will be realized on the additional funds.
On the other hand, you might determine that it is more advantageous to have
all of your money invested initially, although it is subject to a distribution
and service fee of .75 of 1% (.60 of .1% for the current year), and, for a
four-year period, a contingent deferred sales charge of up to 3%. For example,
based on current fees and expenses, if you purchase Class A shares you would
have to hold your investment more than six years for the Class B distribution
fee to exceed the initial sales charge plus distribution fee of the Class A
shares. In this example, if you intend to maintain your investment in the Fund
for more than six years, you should consider purchasing Class A shares.
However, this example does not take into account the time value of your money
which further reduces the impact of the distribution fee on the investment,
fluctuations in net asset value or the effect of the return on the investment
over this period of time or redemptions while the contingent deferred sales
charge is applicable.
INITIAL SALES CHARGE ALTERNATIVE--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 $100,000 3.25% 3.36% 3.00%
$100,000 to $249,999 2.75 2.83 2.50
$250,000 to $499,999 2.25 2.30 2.00
$500,000 to $999,999 1.75 1.78 1.55
$1,000,000 to $2,499,999 1.00 1.01 .80
$2,500,000 and above .50 .50 .40
</TABLE>
Selling dealers may be deemed to be underwriters, as that term is defined
under federal securities laws.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Sales charges are reduced
under Rights of Accumulation and Letters of Intent. Class A shares are offered
at NAV to participants in certain retirement and deferred compensation plans,
including
21
<PAGE>
qualified or non-qualified plans under the Internal Revenue Code and certain
affinity group and group savings plans, provided that the plan has existing
assets of at least $10 million or 2,500 eligible employees or members.
Additional information concerning the reduction and waiver of initial sales
charges is set forth in the Statement of Additional Information. In the case
of pension, profit-sharing or stock bonus plans 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) 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 Prudential Securities or its subsidiaries (PSI
or Subsidiary Prototype Benefit Plans). Class A shares are offered at NAV to
participants who are repaying loans made from such plans to the participant.
Class A shares are offered at NAV to Directors and officers of the Fund and
other Prudential Mutual Funds, to employees of Prudential Securities and PMF
and their subsidiaries and to members of the families of such persons who
maintain an "employee related" account at Prudential Securities or the
Transfer Agent. Class A shares are offered at NAV to employees and special
agents of Prudential and its subsidiaries and to all persons who have retired
directly from active service with Prudential or one of its subsidiaries.
Class A shares are offered at NAV to an investor who has a business
relationship with a financial adviser who joined Prudential Securities from
another investment firm provided (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 investment company sponsored by the financial adviser's
previous employer (other than a money market fund or other no-load 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 purchase.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation
of your entitlement. No initial sales charges are imposed upon Class A shares
purchased upon the reinvestment of dividends and distributions. See "Purchase
and Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--
Class A Shares" in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
The offering price of Class B shares for investors choosing the deferred
sales charge alternative 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 shares
may be subject to a contingent deferred sales charge. See "How to Sell Your
Shares--Contingent Deferred Sales Charge--Class B Shares."
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--Class B Shares" 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
22
<PAGE>
NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES, MUST BE RECEIVED BY THE
TRANSFER AGENT IN ORDER FOR THE REDEMPTION REQUEST TO BE PROCESSED. IF
REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR FIDUCIARY,
WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST BE
SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and
documents concerning redemptions should be sent to the Fund in care of its
Transfer Agent, Prudential Mutual Fund Services, Inc., Attention: Redemption
Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the
redemption request and on the certificates, if any, or stock power must be
guaranteed by an "eligible guarantor institution." An "eligible guarantor
institution" includes any bank, broker, dealer or credit union. The Transfer
Agent reserves the right to request additional information from, and make
reasonable inquiries of, any eligible guarantor institution. For clients of
Prusec, a signature guarantee may be obtained from the agency or office
manager of most Prudential Insurance and Financial Services or Prudential
Preferred Financial Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR
WRITTEN REQUEST EXCEPT AS INDICATED BELOW. Such payment may be postponed or
the right of redemption suspended at times (a) when the New York Stock
Exchange is closed for other than customary weekends and holidays, (b) when
trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or (d) during any other period when
the SEC, by order, so permits; provided that applicable rules and regulations
of the SEC shall govern as to whether the conditions prescribed in (b), (c) or
(d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL
THE FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS
BEEN HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE
CHECK BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY
WIRE OR BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the 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 a regular redemption. See "How the Fund Values
Its Shares." If your shares are redeemed in kind, you will 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 Class B 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
23
<PAGE>
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 CHARGE--CLASS B SHARES
If you have elected to purchase shares without an initial sales charge
(Class B), a contingent deferred sales charge or CDSC (declining from 3% to
zero), will be imposed at the time of redemption. 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 shares to an amount which is lower than the dollar amount of all
payments by you for the purchase of Class B shares during the preceding four
years. 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 Charge"
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 Class B 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:
<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.......................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in NAV above the total amount of payments
for the purchase of Fund shares; then of amounts representing the cost of
shares purchased more than four years prior to the redemption; and finally, of
amounts representing the cost of shares held for the longest period of time
within the applicable four-year period.
For example, assume you purchased 100 shares at $10 per share for a cost of
$1,000. Subsequently, you acquired 5 additional 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 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 CHARGE. 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
24
<PAGE>
waiver is available for total or partial redemptions of shares owned by a
person, either individually or in joint tenancy (with rights of survivorship),
or a trust, at the time of death or initial determination of disability.
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. 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.
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 AND
CLASS B SHARES MAY BE EXCHANGED FOR CLASS A AND CLASS B 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 shares may not be exchanged into money market funds other than
Prudential Special Money Market Fund. 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. 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.
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.
25
<PAGE>
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 sixty
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.
. 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, your 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 for
shareholders having Class A or Class B shares of the Portfolio with a minimum
value of $10,000. Such withdrawal plan provides for monthly or quarterly
checks in any amount, not less than $100 (which amount is not necessarily
recommended). Withdrawals of Class B shares may be subject to a CDSC. See "How
to Sell Your Shares--Contingent Deferred Sales Charge--Class B Shares" above.
See also "Shareholder Investment Account--Systematic Withdrawal Plan" in the
Statement of Additional Information.
. 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.
26
<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 Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Adjustable Rate Securities
Fund, Inc.
Prudential GNMA Fund
Prudential Government Plus Fund Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Government Securities Prudential FlexiFund
Trust Intermediate Term Series Conservatively Managed Portfolio
Prudential High Yield Fund Strategy Portfolio
Prudential Structured Maturity Fund Prudential Growth Fund, Inc.
Income Portfolio Prudential Growth Opportunity Fund
Prudential IncomeVertible(R) Fund,
Municipal Income Portfolio Inc.
Prudential U.S. Government Fund
The BlackRockGovernment Income Trust Prudential Multi-Sector Fund, Inc.
Prudential Utility Fund
TAX-EXEMPT BOND Nicholas-Applegate Fund, Inc.
FUNDS Nicholas-Applegate Growth Equity
Fund
Prudential California Municipal Fund MONEY MARKET FUNDS
California Series
California Income Series . Taxable Money Market Funds
Prudential Municipal Bond Fund Prudential Government Securities
High Yield Series Trust
Insured Series Money Market Series
Modified Term Series U.S. Treasury Money Market Series
Prudential Municipal Series Fund Prudential Special Money Market Fund
Arizona Series Money Market Series
Florida Series Prudential MoneyMart Assets
Georgia Series
Maryland Series . Tax-Free Money Market Funds
Massachusetts Series Prudential Tax-Free Money Fund
Michigan Series Prudential California Municipal Fund
Minnesota Series California Money Market Series
New Jersey Series Prudential Municipal Series Fund
New York Series Connecticut Money Market Series
North Carolina Series Massachusetts Money Market Series
Ohio Series New Jersey Money Market Series
Pennsylvania Series New York Money Market Series
Prudential National Municipals Fund
Prudential Structured Maturity Fund . Command Funds
Municipal Income Portfolio Command Money Fund
Command Government Fund
GLOBAL FUNDS Command Tax-Free Fund
. Institutional Money Market Funds
Prudential Global Fund, Inc. Prudential Institutional Liquidity
Prudential Global Genesis Fund Portfolio, Inc. Institutional
Money Market Series
Prudential Global Natural Resources
Fund
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
B-1
<PAGE>
P
R
O
S
P
E
C
T
U
S
, 1993
- --------------------------------------------------------------------------------
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...................... 14
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.................................................... 18
SHAREHOLDER GUIDE.......................................................... 19
How to Buy Shares of the Fund............................................. 19
Alternative Purchase Plan................................................. 20
How to Sell Your Shares................................................... 22
How to Exchange Your Shares............................................... 25
Shareholder Services...................................................... 26
DESCRIPTION OF SECURITY RATINGS............................................ A-1
THE PRUDENTIAL MUTUAL FUND FAMILY.......................................... B-1
</TABLE>
- --------------------------------------------------------------------------------
MF 140A 444131D
<TABLE>
<S> <C>
CUSIP Nos.: Class A: 74430R105
Class B: 74430R204
</TABLE>
ART
<PAGE>
(ART)
(ART)
- -------------------------------------------------------------------------------
PROSPECTUS DATED FEBRUARY 28, 1994
- -------------------------------------------------------------------------------
Prudential-Bache Structured Maturity Fund, Inc., doing business as Prudential
Structured Maturity Fund (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 February 28, 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?
Prudential Structured Maturity Fund 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 6.
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 6.
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 January 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 14.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor of
the Portfolio's Class A shares. The Portfolio currently reimburses PMFD for
expenses relating to the distribution of Class A shares at an annual rate of up
to .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 shares. Prudential Securities is reimbursed for its
expenses related to the distribution of Class B shares at an annual rate of up
to 1% of the average daily net assets of the Class B shares.
2
<PAGE>
Prudential Securities has agreed that this reimbursement will not exceed .85 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" at page
14.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000. Thereafter, the minimum investment
is $100. There is no minimum investment requirement for certain retirement
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 20 and "Shareholder Guide--Shareholder Services" at page 26.
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 at the time of purchase or on a deferred
basis. See "How the Fund Values its Shares" at page 17 and "Shareholder Guide--
How to Buy Shares of the Fund" at page 20.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Portfolio offers two classes of shares which may be purchased at the next
determined NAV plus a sales charge which, at your election, may be imposed
either at the time or purchase (Class A shares) or on a deferred basis (Class B
shares).
.Class A shares are sold with an initial sales charge of up to 3.25% of the
offering price.
. Class B shares are 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 five years of
purchase.
You should understand that over time the deferred sales charge plus the
distribution fee of the Class B shares will exceed the initial sales charge
plus the distribution fee of the Class A shares.
See "Shareholder Guide--Alternative Purchase Plan" at page 20.
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.
Although Class B shares are sold without an initial sales charge, the proceeds
of redemptions of Class B shares held for five years or less may be subject to
a contingent deferred sales charge declining from 3% to zero. See "Shareholder
Guide--How to Sell Your Shares" at page 23.
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 18.
3
<PAGE>
FUND EXPENSES
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
(INITIAL SALES (DEFERRED SALES
CHARGE ALTERNATIVE) CHARGE ALTERNATIVE)
------------------- --------------------------------
<S> <C> <C>
SHAREHOLDER TRANSACTION EX-
PENSES
Maximum Sales Load Imposed
on Purchases (as a per-
centage of offering
price)................... 3.25% None
Maximum Sales Load or De-
ferred Sales Load Imposed
on Reinvested Dividends.. None None
Deferred Sales Load (as a
percentage of original
purchase price or
redemption proceeds,
whichever is lower)...... None 3% during the first year,
decreasing by 1% annually to
1% in the third year and
1% in the fourth year and
0% the fifth year and thereafter
Redemption Fees........... None None
Exchange Fee.............. None None
<CAPTION>
ANNUAL FUND OPERATING EX-
PENSES
(AS A PERCENTAGE OF AVERAGE CLASS A CLASS B
NET ASSETS) ------- -------
<S> <C> <C>
Management Fees........... .40% .40%
12b-1 Fees+............... .10 .85*
Other Expenses............ .30 .30
--- -------
Total Fund Operating Ex-
penses................... .80% 1.55%
==== =======
</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 $185
You would pay the following expenses on the
same investment assuming no redemption:
Class A....................................... $40 $57 $75 $128
Class B....................................... $16 $49 $84 $185
</TABLE>
The above examples 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
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.
- ------------
* Although the Class B Distribution and Service Plan provides that the
Portfolio may pay a service fee of up to .25 of 1% of the average daily net
assets of the Class B shares, the Distributor has agreed to limit such
service fees to no more than .10 of 1% for the fiscal year ending December
31, 1994. The 12b-1 fees for the Class B shares include an asset-based sales
charge of .75 of 1% of the average daily net assets of the Class B shares and
a service fee of up to .10 of 1% of the average daily net assets of the Class
B shares.
+ 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 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."
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 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.
<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, begin-
ning 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 transac-
tions.................. .12 (.08) .56 .04 .03 .12 --
-------- -------- -------- -------- ------- -------- -------
Total from investment
operations............ .83 .78 1.49 1.04 .38 .74 .04
-------- -------- -------- -------- ------- -------- -------
Less distributions:
Dividends from net in-
vestment 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 DA-
TA:
Net assets, end of pe-
riod (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.
6
<PAGE>
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
7
<PAGE>
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,
IF NOT RATED, ARE 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. 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 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
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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
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investment techniques and risks different from those associated with ordinary
portfolio transactions. If the investment adviser 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 EXISTING FUTURES
AND OPTIONS ON FUTURES 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.
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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 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.
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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 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 15% 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 15% 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.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company
Act. See "Investment Restrictions" in the Statement of Additional Information.
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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."
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.
As of January 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
SHARES OF THE FUND. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN AND THE
CLASS B PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER RULE 12B-1
UNDER THE INVESTMENT COMPANY ACT AND SEPARATE DISTRIBUTION AGREEMENTS (THE
DISTRIBUTION AGREEMENTS), PMFD AND PRUDENTIAL SECURITIES (COLLECTIVELY, THE
DISTRIBUTOR) INCUR THE EXPENSES OF DISTRIBUTING THE FUND'S CLASS A AND CLASS B
SHARES, RESPECTIVELY. 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, interest and/or carrying
charges on those unreimbursed distribution costs incurred in connection with
the asset-based sales charges (Class B only), advertising expenses, the cost
of printing and mailing prospectuses to potential investors and indirect and
overhead costs of Prudential Securities and Prusec associated with the sale of
Fund shares, including lease, utility, communications and sales promotion
expenses. The State of Texas requires that shares of the Fund may be sold in
that state only by dealers or other financial institutions which are
registered there as broker-dealers.
UNDER THE CLASS A PLAN, THE FUND REIMBURSES PMFD FOR ITS DISTRIBUTION-
RELATED EXPENSES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE OF UP TO .10
OF 1% OF THE AVERAGE DAILY NET ASSET VALUE OF THE CLASS A SHARES. 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 fee
(including the service fee of up to .10 of 1%) may not exceed .10 of 1% of the
average daily net assets of the Class A shares. It is expected that, in the
case of Class A shares, proceeds from the distribution fee will be used
primarily to pay account servicing fees to financial advisers. Unlike the
Class B Plan, there are no carry forward amounts under the Class A Plan, and
interest expenses are not incurred under the Class A Plan.
For the year ended December 31, 1993, PMFD incurred distribution expenses of
$114,728 under the Plan, all of which was recovered by the distribution fee
paid by the Fund to PMFD. In addition, for the year ended December 31, 1993,
PMFD received approximately $669,100 in initial sales charges.
UNDER THE CLASS B PLAN, THE FUND REIMBURSES PRUDENTIAL SECURITIES FOR ITS
DISTRIBUTION-RELATED EXPENSES WITH RESPECT TO CLASS B SHARES (ASSET-BASED
SALES CHARGES) AT AN ANNUAL RATE OF UP TO .75 OF 1% OF THE AVERAGE DAILY NET
ASSETS OF THE CLASS B SHARES. Prudential Securities recovers the distribution
expenses it incurs through the receipt of reimbursement payments from the Fund
under the Class B Plan and the receipt of contingent deferred sales charges
from certain redeeming shareholders. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charge--Class B Shares." For the fiscal year
ended December 31, 1993, Prudential Securities received approximately $86,000
in contingent deferred sales charges.
THE CLASS B PLAN ALSO PROVIDES FOR THE PAYMENT OF A SERVICE FEE TO
PRUDENTIAL SECURITIES AT A RATE NOT TO EXCEED .25 OF 1% OF THE AVERAGE DAILY
NET ASSET VALUE OF THE CLASS B SHARES. The service fee is used to pay
financial advisers for personal service and/or the maintenance of shareholder
accounts. The service fee is currently being charged at an annual rate of up
to .10 of 1% of the average daily net asset value of the Class B shares.
Actual distribution expenses (asset-based sales charges) for Class B shares
for any given year may exceed the fees received pursuant to the Class B Plan
and will be carried forward and paid by the Fund in future years so long as
the Class B Plan is in effect. Interest is accrued monthly on such carry
forward amounts at a rate not to exceed that of the prime rate plus 1%. See
"Distributor" in the Statement of Additional Information.
THE AGGREGATE DISTRIBUTION FEE FOR CLASS B SHARES (ASSET-BASED SALES CHARGES
PLUS SERVICE FEE) WILL NOT EXCEED 1% OF THE AVERAGE DAILY NET ASSET VALUE OF
THE CLASS B SHARES UNDER THE CLASS B PLAN.
15
<PAGE>
For the year ended December 31, 1993, Prudential Securities received
$589,173 from the Fund under the Class B Plan. It is estimated that Prudential
Securities spent approximately $2,786,300 on behalf of the Fund during such
period. At December 31, 1993, the aggregate amount of distribution expenses
incurred by Prudential Securities and not yet reimbursed by the Fund or
recovered through contingent deferred sales charges was approximately
$2,318,000 or 1.9% of the net assets of the Class B shares. These unreimbursed
amounts may be recovered by the Distributor through future payments under the
Class B Plan or contingent deferred sales charges.
For the fiscal year ended December 31, 1993, the Fund 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.
Distribution expenses attributable to the sale of both Class A and Class B
shares will be allocated to each class based upon the ratio of sales of each
class to the sales of all shares of the Fund. The distribution fee and initial
sales charge in the case of Class A shares will not be used to subsidize the
sale of Class B shares. Similarly, the distribution fee and contingent
deferred sales charge in the case of Class B shares will not be used to
subsidize the sale of Class A shares.
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 Fund. In the event of termination or non-continuation of the Class B
Plan, the Board of Directors may consider the appropriateness of having the
Fund reimburse Prudential Securities for the outstanding carry forward amounts
plus interest thereon.
In addition to distribution and service fees paid by the Fund under the
Class A and Class B Plans, the Manager (or one of its affiliates) may make
payments to dealers and other persons which distribute shares of the Fund.
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 Fund, 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 Fund's portfolio securities
and cash and, in that capacity, maintains certain financial and accounting
books and records pursuant to an agreement with the Fund. Its mailing address
is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services, Inc. (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.
16
<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 Class A and Class B shares are substantially
identical, the different expenses borne by each class will result in different
dividends. As long as the Fund declares dividends daily, the NAV of Class A
and Class B shares 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.
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 AND CLASS B 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 both Class A and Class B shares of the Fund in any
advertisement or information including performance data of the Fund.
17
<PAGE>
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 of 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.
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 Class A and Class B 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, resulting in lower
dividends for Class B shares. Distributions of net capital gains, if any, will
be paid in the same amount for Class A and Class B 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
18
<PAGE>
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. If you hold shares through Prudential
Securities you should contact your financial adviser to elect to receive
dividends and distributions in cash. The Fund will notify each shareholder
after the close of the Fund's taxable year both of the dollar amount and the
taxable status of that year's dividends and distributions on a per share
basis.
WHEN THE FUND GOES "EX-DIVIDEND," ITS NAV IS REDUCED BY THE AMOUNT OF THE
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 TWO CLASSES FOR EACH PORTFOLIO, DESIGNATED CLASS A AND
CLASS B COMMON STOCK, EACH OF WHICH CONSISTS OF 125 MILLION AUTHORIZED SHARES.
Both Class A and Class B common stock represent an interest in the same assets
of the Fund and are identical in all respects except that each class bears
different distribution expenses and has exclusive voting rights with respect
to its distribution plan. 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 only two
classes designated as Class A and Class B 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 Class A and Class B 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. 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 shares bear higher distribution expenses, the liquidation
proceeds to Class B shareholders 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.
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.
19
<PAGE>
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). The minimum initial investment is
$1,000. The minimum subsequent investment is $100. 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 Accumulated 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
THE OPTION OF THE PURCHASER, MAY BE IMPOSED AT THE TIME OF PURCHASE OR ON A
DEFERRED BASIS. 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 made through dealers other than Prudential
Securities or Prusec may be subject to postage and handling charges imposed by
the dealer; however, you may avoid such charges by placing orders directly
with the Fund's Transfer Agent, Prudential Mutual Fund Services, Inc.,
Attention: Investment Services, P.O. Box 15020, New Brunswick, New Jersey
08906-5020.
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, 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, Class A or Class B shares and your name and individual account
number. It is not necessary to call PMFS to make subsequent purchase orders
utilizing Federal Funds. The minimum amount which may be invested by wire is
$1,000.
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS TWO CLASSES OF 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
20
<PAGE>
SHARES AND OTHER RELEVANT CIRCUMSTANCES. You may purchase shares at the next
determined NAV plus a sales charge which at your election, may be imposed
either at the time of purchase (the Class A shares or the initial sales charge
alternative) or on a deferred basis (the Class B shares or the deferred sales
charge alternative) (the Alternative Purchase Plan).
CLASS A SHARES ARE SUBJECT TO AN INITIAL SALES CHARGE OF UP TO 3.25% OF THE
OFFERING PRICE AND AN ANNUAL DISTRIBUTION FEE OF UP TO .10 OF 1% OF THE
AVERAGE DAILY NET ASSET VALUE OF THE CLASS A SHARES. Certain purchases of
Class A shares may qualify for reduction or waiver of initial sales charges.
See "Initial Sales Charge Alternative--Class A Shares--Reduction or Waiver of
Initial Sales Charges" below.
CLASS B SHARES DO NOT INCUR A SALES CHARGE WHEN THEY ARE PURCHASED BUT ARE
SUBJECT TO A CONTINGENT DEFERRED SALES CHARGE (DECLINING FROM 3% TO ZERO OF
THE LESSER OF THE AMOUNT INVESTED OR THE REDEMPTION PROCEEDS) WHICH WILL BE
IMPOSED ON CERTAIN REDEMPTIONS MADE WITHIN FIVE YEARS OF PURCHASE AND AN
ANNUAL DISTRIBUTION FEE OF UP TO 1% (CURRENTLY BEING CHARGED AT A RATE OF UP
TO .85 OF 1%) OF THE AVERAGE DAILY NET ASSET VALUE OF THE CLASS B SHARES.
Certain redemptions of Class B shares may qualify for waiver or reduction of
the contingent deferred sales charge. See "How to Sell Your Shares--Waiver of
Contingent Deferred Sales Charge."
The two classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that each class bears
the separate expenses of its Rule 12b-1 distribution plan and has exclusive
voting rights with respect to such a plan. The two classes also have separate
exchange privileges. See "How to Exchange Your Shares" below. The net 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 shares bear the expenses of a higher distribution fee which will cause
the Class B shares to have a higher expense ratio and to pay lower dividends
than the Class A shares.
Financial advisers will receive different compensation for selling Class A
and Class B shares.
The following illustrations are provided to assist you in determining which
method of purchase best suits your individual circumstances:
If you qualify for a reduced sales charge, you might elect the initial sales
charge alternative because a similar sales charge reduction is not available
for purchases under the deferred sales charge alternative. However, because
the initial sales charge is deducted at the time of purchase, you would not
have all of your money invested initially.
If you do not qualify for a reduced initial sales charge and expect to
maintain your investment in the Fund for a long period of time, you might also
elect the initial sales charge alternative because over time the accumulated
continuing distribution charges of Class B shares will exceed the initial
sales charge plus distribution fees of Class A shares. Again, however, you
must weigh this consideration against the fact that not all of your money will
be invested initially. Furthermore, the ongoing distribution charges under the
deferred sales charge alternative will be offset to the extent any return is
realized on the additional funds. However, there can be no assurance that any
return will be realized on the additional funds.
On the other hand, you might determine that it is more advantageous to have
all of your money invested initially, although it is subject to a distribution
fee of up to 1% (currently being charged at a rate of .85 of 1%), and, for a
four-year period, a contingent deferred sales charge of up to 3%. For example,
based on current fees and expenses, if you purchase Class A shares you would
have to hold your investment more than four years for the Class B asset-based
sales charge and service fee to exceed the initial sales charge plus account
servicing fee of the Class A shares. In this example, if you intend to
maintain your investment in the Fund for more than four years, you should
consider purchasing Class A shares. However, this example does not take into
account the time value of your money which further reduces the impact of the
distribution fee on the investment, fluctuations in net asset value or the
effect of the return on the investment over this period of time or redemptions
while the contingent deferred sales charge is applicable.
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<PAGE>
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The offering price of Class A shares for investors choosing the initial
sales charge alternative is the next determined NAV per share 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 $100,000...... 3.25% 3.36% 3.00%
$100,000 to $249,999.... 2.75 2.83 2.50
$250,000 to $499,999.... 2.25 2.30 2.00
$500,000 to $999,999.... 1.75 1.78 1.55
$1,000,000 to
$2,499,999............. 1.00 1.01 .80
$2,500,000 to
$4,999,999............. .50 .50 .40
$5,000,000 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. Sales charges are reduced
under Rights of Accumulation and Letters of Intent. Class A shares are offered
at NAV to participants in certain retirement and deferred compensation plans,
including qualified or non-qualified plans under the Internal Revenue Code and
certain affinity group and group savings plans, provided that the plan has
existing assets of at least $10 million or 2,500 eligible employees or
members. Additional information concerning the reduction and waiver of initial
sales charges is set forth in the Statement of Additional Information. In the
case of pension, profit-sharing or stock bonus plans under Section 401 of the
Internal Revenue Code and deferred compensation and annuity plans under
Section 457 and 403(b)(7) of the Internal Revenue Code (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 are offered at NAV to participants
who are repaying loans made from such plans to the participant.
Class A shares are offered at NAV to Directors and officers of the Fund and
other Prudential Mutual Funds, to employees of Prudential Securities and PMF
and their subsidiaries and to members of the families of such persons who
maintain an "employee related" account at Prudential Securities or the
Transfer Agent. Class A shares are offered at NAV to employees and special
agents of Prudential and its subsidiaries and to all persons who have retired
directly from active service with Prudential or one of its subsidiaries.
Class A shares are offered at NAV to an investor who has 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 investment company sponsored by the financial adviser's
previous employer (other than a money market fund or other no-load 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 purchase.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation
of your entitlement. No initial sales charges are imposed upon Class A shares
purchased upon the reinvestment of dividends and distributions. See "Purchase
and Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--
Class A Shares" in the Statement of Additional Information.
22
<PAGE>
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
The offering price of Class B shares for investors choosing the deferred
sales charge alternative 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 shares
may be subject to a contingent deferred sales charge. An account servicing fee
is also paid to financial advisers and sales representatives whose customers
hold shares of the Fund. See "How to Sell Your Shares--Contingent Deferred
Sales Charge--Class B Shares."
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 Charge--Class
B Shares" below.
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM YOUR SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION
SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD
CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE
CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE
REDEMPTION REQUEST TO BE PROCESSED. IF REDEMPTION IS REQUESTED BY A
CORPORATION, PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY
ACCEPTABLE TO THE TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH REQUEST WILL BE
ACCEPTED. All correspondence and documents concerning redemptions should be
sent to the Fund in care of its Transfer Agent, Prudential Mutual Fund
Services, Inc., Attention: Redemption Services, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the
redemption request and on the certificates, if any, or stock power must be
guaranteed by an "eligible guarantor institution." An "eligible guarantor
institution" includes any bank, broker, dealer or credit union. The Transfer
Agent reserves the right to request additional information from, and make
reasonable 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 Prudential
Preferred Financial Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR
WRITTEN REQUEST EXCEPT AS INDICATED BELOW. Such payment may be postponed or
the right of redemption suspended at times (a) when the New York Stock
Exchange is closed for other than customary weekends and holidays, (b) when
trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or (d) during any other period when
the SEC, by order, so permits; provided that applicable rules and regulations
of the SEC shall govern as to whether the conditions prescribed in (b), (c) or
(d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL
THE FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS
BEEN HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE
CHECK BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY
WIRE OR BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the 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
23
<PAGE>
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 Class B 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 CHARGE--CLASS B SHARES
If you have elected to purchase shares without an initial sales charge
(Class B), a contingent deferred sales charge or CDSC (declining from 3% to
zero) will be imposed at the time of redemption. 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 shares of the Fund to an amount which is lower than the dollar amount
of all payments by you for the purchase of Class B shares during the preceding
four years. 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
Charge" 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 Class B 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:
<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.......................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in NAV above the
24
<PAGE>
total amount of payments for the purchase of Fund shares made during the
preceding four years; then of amounts representing the cost of shares
purchased four years prior to the redemption; and finally, of amounts
representing the cost of shares held for the longest period of time within the
applicable four-year period.
For example, assume you purchased 100 shares at $10 per share for a cost of
$1,000. Subsequently, you acquired 5 additional 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 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 CHARGE. The CDSC will be waived in
the case of a redemption following the death or disability of a shareholder
or, in the case of a trust account, following the death or disability of the
grantor. The waiver is available for total or partial redemptions of shares
owned by a person, either individually or in joint tenancy (with rights of
survivorship), or a trust, at the time of death or initial determination of
disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include a lump-sum or other
distribution after retirement, or for an IRA or Section 403(b) custodial
account, after attaining age 59 1/2, a tax-free return of an excess
contribution or plan distributions following the death or disability of the
shareholder. 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.
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 AND CLASS B SHARES MAY BE EXCHANGED FOR CLASS A AND
CLASS B SHARES, RESPECTIVELY, 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 were initially purchased and 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
shares may not be exchanged into money market funds other than Prudential
Special Money Market Fund. 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
25
<PAGE>
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. 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.
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.
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 sixty
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 for
shareholders having Class A or Class B shares of the Fund. Such withdrawal
plan provides for monthly or quarterly checks in any amount, not less than
$100 (which amount is not necessarily recommended). Withdrawals of Class B
shares may be subject to a CDSC. See "How to Sell Your
26
<PAGE>
Shares--Contingent Deferred Sales Charge--Class B Shares" above. See also
"Shareholder Investment Account--Systematic Withdrawal Plan" in the Statement
of Additional Information.
. 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.
27
<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 EQUITY FUNDS
Prudential Adjustable Rate Securities Fund, Inc.
Prudential GNMA Fund Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Government Plus Fund Prudential FlexiFund
Prudential Government Securities Trust Conservatively Managed Portfolio
Intermediate Term Series Strategy Portfolio
Prudential High Yield Fund Prudential Growth Fund, Inc.
Prudential Structured Maturity Fund Prudential Growth Opportunity Fund
Prudential IncomeVertible (R)
Income Portfolio Fund, Inc.
Prudential U.S. Government Fund
The BlackRock Government Income Trust Prudential Multi-Sector Fund, Inc.
Prudential Utility Fund
TAX-EXEMPT BOND FUNDS Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity
Fund
Prudential California Municipal Fund
California Series MONEY MARKET FUNDS
California Income Series . Taxable Money Market Funds
Prudential Municipal Bond Fund Prudential Government Securities
High Yield Series Trust
Insured Series Money Market Series
Modified Term Series U.S. Treasury Money Market
Prudential Municipal Series Fund Series
Arizona Series Prudential Special Money Market
Florida Series Fund
Georgia Series Money Market Series
Maryland Series Prudential MoneyMart Assets
Massachusetts Series
Michigan Series . Tax-Free Money Market Funds
Minnesota Series Prudential Tax-Free Money Fund
New Jersey Series Prudential California Municipal
New York Series Fund
North Carolina Series California Money Market Series
Ohio Series Prudential Municipal Series Fund
Pennsylvania Series Connecticut Money Market Series
Prudential National Municipals Fund Massachusetts Money Market
Series
GLOBAL FUNDS New Jersey Money Market Series
New York Money Market Series
Prudential Global Fund, Inc. . Command Funds
Prudential Global Genesis Fund Command Money Fund
Prudential Global Natural Resources Fund Command Government Fund
Command Tax-Free Fund
Prudential Intermediate Global income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
. Institutional Money Market Funds
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio Prudential Institutional Liquidity
Short-Term Global Income Portfolio Portfolio, Inc.
Global Utility Fund, Inc. Institutional Money Market
Series
28
<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.................................................... 19
SHAREHOLDER GUIDE.......................................................... 20
How to Buy Shares of the Fund............................................. 20
Alternative Purchase Plan................................................. 20
How to Sell Your Shares................................................... 23
How to Exchange Your Shares............................................... 25
Shareholder Services...................................................... 26
THE PRUDENTIAL MUTUAL FUND FAMILY.......................................... 28
</TABLE>
- --------------------------------------------------------------------------------
444131D MF 140A
CUSIP Nos.: Class A: 743924-102
Class B: 743924-201
ART
P
R
O
S
P
E
C
T
U
S
, 1993
<PAGE>
PRUDENTIAL STRUCTURED MATURITY FUND
Statement of Additional Information
dated February 28, 1994
Prudential-Bache Structured Maturity Fund, Inc., doing business as
Prudential Structured Maturity Fund (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".
Each Portfolio offers two classes of shares which may be purchased at the
next determined net asset value per share plus a sales charge which, at the
election of the investor, may be imposed (i) at the time of purchase (the
Class A shares) or (ii) on a deferred basis (the Class B shares). These
alternatives permit an investor to choose the method of purchasing shares that
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other circumstances.
Each share of Class A and Class B common stock of each Portfolio represents
an identical legal interest in the investment portfolios of the Fund and has
the same rights, except that the Class B shares bear the expenses of a higher
distribution fee which will cause the Class B shares to have a higher expense
ratio and to pay lower dividends than the Class A shares. Each class will have
exclusive voting rights with respect to its distribution and service plan.
Although the legal rights of holders of Class A and Class B shares are
identical, the different expenses borne by each class will result in different
dividends. The two classes also have different exchange privileges.
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
February 28, 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-17 14 12
Manager............................................... B-19 14 12
Distributor........................................... B-20 14 13
Portfolio Transactions................................ B-22 16 15
Purchase and Redemption of Fund Shares................ B-23 20 19
Shareholder Investment Account........................ B-24 26 26
Net Asset Value....................................... B-27 17 15
Dividends and Distributions........................... B-28 18 16
Taxes................................................. B-28 18 16
Performance Information............................... B-31 17 15
Custodian, Transfer and Dividend Disbursing Agent and
Independent Accountants.............................. B-32 16 15
Independent Auditors' Report.......................... B-33 -- --
Financial Statements.................................. B-34 -- --
</TABLE>
- --------------------------------------------------------------------------------
B-2
<PAGE>
GENERAL INFORMATION
On March 15, 1991, the Board of Directors approved an amendment to the
Fund's Articles of Incorporation to change the Fund's name to Prudential
Structured Maturity Fund, Inc. and authorized the Fund to do business under
the name of Prudential Structured Maturity Fund until the next annual or
special meeting of shareholders at which time the amendment will be submitted
to shareholders for their approval.
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
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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
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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.
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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
B-9
<PAGE>
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.
B-10
<PAGE>
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.
B-11
<PAGE>
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 shares
represented at a meeting at which more than 50% of the outstanding shares are
present in person or represented by proxy or (ii) more than 50% of the
outstanding 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 15% (20% in the case of the Municipal Income
Portfolio) 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 a transaction) and may pledge up to 15% (20% in the case of the
Municipal Income Portfolio) 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 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. Except with respect to Municipal Income Portfolio, purchase securities
for which there are legal or contractual restrictions on resale or invest in
securities for which there is no readily available market, including
repurchase agreements having maturities of more than seven days, if more than
10% of the Portfolio's net assets would be invested in such securities.
10. Invest in securities of other registered investment companies, except by
purchases in the open market involving only customary brokerage commissions
and as a result of which not more than 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.
11. 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.
12. 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).
13. Purchase common stock or other voting securities, preferred stock,
warrants or other equity securities, except as may be permitted by restriction
number 10.
14. 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.
The Board of Directors of the Fund has recommended, subject to shareholder
approval, (i) deletion of the Fund's Investment Restriction No. 9 relating to
illiquid securities (this fundamental policy would be replaced with a non-
fundamental policy which permits the Fund to invest up to 15% of its net
assets in illiquid securities), and (ii) modification of the Fund's investment
restrictions regarding borrowings to permit the Fund to borrow up to 20% of
its net assets and to clarify that collateral arrangements with respect to
interest rates swap transactions, repurchase agreements and dollar roll
transactions are not deemed to be the issuance of a senior security or a
pledge of assets. There can be no assurance that these changes will be
approved by shareholders.
B-16
<PAGE>
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.
Delayne D. 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.
</TABLE>
B-17
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE FUND DURING PAST 5 YEARS
- ---------------- ------------- ---------------------
<S> <C> <C>
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.
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.
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 in installments 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 February 11, 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 February 11, 1994, Prudential Securities was record holder of
8,026,721 Class A shares (78.8% of the outstanding shares) and 8,701,517 Class
B shares (80% 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.
B-18
<PAGE>
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 January 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 June 30, 1993, the Prudential Mutual Funds were the 10th 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 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. 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 as a broker or dealer 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
B-19
<PAGE>
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. 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, 1992, was the
largest insurance company in the United States and the second largest
insurance company in the world. 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 shares of each Portfolio of the Fund.
Pursuant to separate Distribution and Service Plans (the Class A Plans and
the Class B 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 and Class B 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 NASD maximum sales
charge rule described below. As 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 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) an asset-based sales charge at a rate of .50 of 1% and
(ii) a service fee at a rate of .25 of 1% of the average daily net assets of
the Class B shares. 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 .60 of
1% (including a service fee of .10 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.
CLASS A PLAN. For the year ended December 31, 1993, PMFD incurred
distribution expenses in the aggregate of $114,728 on behalf of the Income
Portfolio, all of which were recovered through the distribution fee paid by
the Income Portfolio to PMFD under the Class A Plan of Distribution (the Plan)
under Rule 12b-1 under the Investment Company Act. 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.
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, the Distributor
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 Fund. It is estimated
that of this 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) commission credits to
Prudential
B-21
<PAGE>
Securities branch offices for 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 branch offices of
Prudential Securities and Prusec in connection with the sale of Fund shares,
including lease costs, the salaries and employee benefits of operations and
sales support personnel, utility costs, communications costs and the costs of
stationery and supplies, (b) the costs of client sales seminars, (c) mutual
fund sales coordinator costs, 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 holders of Class B shares upon certain redemptions of Class B
shares. See "Shareholder Guide--How to Sell Your Shares--Contingent Deferred
Sales Charge--Class B Shares" in the Prospectuses. The amount of distribution
expenses reimbursable by the Class B shares of the Income Portfolio is reduced
by the amount of such contingent deferred sales charges.
The Class A and Class B 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 Class A and Class B 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. None of the Plans may be amended to increase materially the amounts to
be spent for the services described therein without approval by the
shareholders, 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 the Class A or Class B Plans 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
the Class A and Class B shares of the Portfolios by PMFD and Prudential
Securities, respectively. 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 Directors
who are not interested persons of the Fund shall be committed to the Directors
who are not interested persons of the Fund.
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 Class A shares and for Class B shares of the
Income Portfolio and Municipal Income Portfolio were last approved by the
Board of Directors, including a majority of the Rule 12b-1 Directors, on June
9, 1993 and September 9, 1993, respectively.
NASD MAXIMUM SALES CHARGE RULE. Pursuant to rules of the National
Association of Securities Dealers, Inc., 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%. 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 either 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 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
B-22
<PAGE>
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 to effect
any portfolio transactions for the Fund, the commissions, fees or other
remuneration received by Prudential Securities 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 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 Directors who are not "interested" persons, has
adopted procedures which are reasonably designed to provide that any
commissions, fees or other remuneration paid to Prudential Securities 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 (the initial sales
charge alternative), or (ii) on a deferred basis (the deferred sales charge
alternative). See "Shareholder Guide--How to Buy Shares of the Fund" in the
Prospectus.
Each Portfolio issues two classes of shares: Class A shares are sold to
investors choosing the initial sales charge alternative and Class B shares are
sold to investors choosing the deferred sales charge alternative. The two
classes of shares represent an interest in the same portfolio of investments
of the Portfolios and have the same rights, except that each class bears the
separate expenses of its Rule 12b-1 distribution plan and service plan and has
exclusive voting rights with respect to such plan. See "Distributor." The
classes also have separate exchange privileges. See "Shareholder Investment
Account--Exchange Privilege."
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares of the Fund are sold at a maximum sales charge of
3.25% and Class B 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)................ .40
------
Maximum offering price to public.............................. $12.18
======
CLASS B
Net asset value, offering price and redemption price per Class
B Share.* $11.78
======
</TABLE>
---------
* Class B shares are subject to a contingent deferred sales charge on
certain redemptions.
See "Shareholder Guide--How to Sell Your Shares" in the Prospectuses.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES
RETIREMENT AND GROUP PLANS. Class A shares are offered at net asset value to
participants in certain retirement, deferred compensation, affinity group and
group savings plans, provided the plan has existing assets of at least $10
million or 2,500 eligible employees or members. The term "existing assets"
includes transferable cash, shares of Prudential Mutual Funds held at the
Transfer Agent and GICs maturing within three years. The retirement and group
plans eligible for this waiver of the initial sales charge include, but are
not limited to, pension, profit-sharing or stock bonus plans qualified or non-
qualified within the meaning of Section 401 of the Internal Revenue Code of
1986, as amended (the Internal Revenue Code), deferred compensation and
annuity plans within the meaning
B-23
<PAGE>
of Sections 403(b)(7) and 457 of the Internal Revenue Code, certain affinity
group plans such as plans of credit unions and trade associations and certain
group savings plans.
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 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
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 reduced sales charges will be granted subject to confirmation of the
investor's holdings. Rights of Accumulation are not available to individual
participants in the retirement and group plans described under "Retirement and
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 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.
Letters of Intent are not available to individual participants in retirement
and group plans described above under "Retirement and 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
B-24
<PAGE>
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.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Class A or Class B 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 the Transfer Agent in writing not
less than five full business days prior to the payment date to have subsequent
dividends and/or distributions sent in cash rather than reinvested. In the
case of recently purchased shares for which registration instructions have not
been received on the record date, cash payment will be made directly to the
dealer. Any shareholder who receives a cash payment representing a dividend or
distribution may reinvest such distribution at net asset value by returning
the check or the proceeds to the Transfer Agent within 30 days after the
payment date. Such investment will be made at the net asset value per Class A
or Class B share next determined after receipt of the check or proceeds by the
Transfer Agent.
EXCHANGE PRIVILEGE
Each Portfolio of the Fund intends to make available to its Class A and
Class B 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 Class A and Class B shares, respectively, 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. Shareholders of each Portfolio of the Fund may exchange their Class
B shares for Class B shares of certain other Prudential Mutual Funds and
shares of Prudential Special Money Market Fund, Inc., a money market fund. If
Class B shares of the Fund are exchanged for Class B shares of other
Prudential Mutual Funds, no contingent deferred sales charge will be payable
upon such exchange of Class B shares, but a contingent deferred sales charge
will be payable upon the redemption of Class B shares
B-25
<PAGE>
acquired as a result of the exchange. The applicable sales charge will be that
imposed by the Fund in which shares were initially purchased and the purchase
date will be deemed to be the date of the initial purchase, rather than the
date of the exchange.
Class B shares of each Portfolio of the Fund may also be exchanged for
shares of Prudential Special Money Market Fund, Inc. without imposition of any
contingent deferred sales charge 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 Class B contingent deferred sales charge
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.
At any time after acquiring shares of other funds participating in the Class
B Exchange Privilege, the shareholder may again exchange those shares (and any
reinvested dividends and distributions) for Class B shares of each Portfolio
of the Fund without subjecting such shares to any contingent deferred sales
charge. Shares of any fund participating in the Class B Exchange Privilege
that were acquired through reinvestment of dividends or distributions may be
exchanged for Class B shares of other funds 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
overall cost 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.
B-26
<PAGE>
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 having Class A or
Class B shares of the Fund held 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 shares may be subject to a CDSC.
See "Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales
Charge--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 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 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
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.
B-27
<PAGE>
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 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.
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 and Class B 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 or Class B 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 shares will be lower than the per share
dividends on Class A shares as a result of the higher distribution fee
applicable with respect to the Class B shares. Distributions of net capital
gains, if any, will be paid in the same amount for Class A and Class B shares.
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
B-28
<PAGE>
contracts and foreign currencies held for less than three months; and (c) the
Portfolio diversifies its holdings so that, at the end of 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-29
<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-30
<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
YIELD. Each Portfolio of the Fund may from time to time advertise its yield
as calculated over a 30-day period. Yield is determined separately for Class A
and Class B 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) TO THE SIXTH POWER -1 ]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
The yield for the 30-day period ended 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.
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.
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> <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.
AVERAGE ANNUAL TOTAL RETURN. Each Portfolio may also advertise its average
annual total return. Average annual total return is determined separately for
Class A and Class B 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 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 four and one-third year periods ended on 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 year ended
December 31, 1993 was 3.38% and for the period December 9, 1992 (commencement
of offering of Class B shares) to December 31, 1993 was 4.45%. As of December
31, 1993, there were no shares outstanding for the Municipal Income Portfolio.
B-31
<PAGE>
AGGREGATE TOTAL RETURN. Each Portfolio may also advertise its aggregate
total return. Aggregate total return is determined separately for Class A and
Class B 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 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 four and one-third year 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 year ended December 31, 1993 and the period
December 9, 1992 (commencement of offering of Class B shares) to 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.
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/
A LOOK AT PERFORMANCE OVER THE LONG-TERM (1926-1992)
(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.
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-32
<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>
See Notes to Financial Statements.
B-33
<PAGE>
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (Note 1)
<S> <C> <C> <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>
See Notes to Financial Statements.
B-34
<PAGE>
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (Note 1)
<S> <C> <C> <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>
See Notes to Financial Statements.
B-35
<PAGE>
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (Note 1)
<S> <C> <C> <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
------------
------------
- ------------------
F.R.N.-Floating Rate Note.
N.R.-Not Rated.
</TABLE>
See Notes to Financial Statements.
B-36
<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 3 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-37
<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-38
<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-39
<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
vices, Inc. (``PMFS''), a Transactions
wholly-owned subsidiary of with Affiliates
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-40
<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.
B-41
<PAGE>
PRUDENTIAL STRUCTURED MATURITY FUND
INCOME PORTFOLIO
Financial Highlights
<TABLE>
<CAPTION>
Class A Class B
------------------------------------------------------------ ----------------------------
September 1, December 9,
1989* 1992++
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+ .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%
<CAPTION>
- ---------------
</TABLE>
<TABLE>
<C> <S>
* Commencement of investment operations.
** Annualized.
+ Net of expense subsidy and/or fee waiver.
++ 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.
</TABLE>
See Notes to Financial Statements.
B-42
<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
B-43
<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).
2. 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).
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.*
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) Distribution Agreement between the Registrant and Prudential
Mutual Fund Distributors Inc., incorporated by reference to Exhibit
No. 6(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) 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).
(c) 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).
(d) Amended and Restated Distribution Agreement (Class A Shares)
between the Fund and Prudential Mutual Fund Distributors, Inc.,
(Income Portfolio).*
(e) Amended and Restated Distribution Agreement (Class B Shares)
between the Fund and Prudential Securities Incorporated, (Income
Portfolio).*
(f) Form of Distribution Agreement (Class A Shares) between the Fund
and Prudential Mutual Fund Distributors (Municipal Income Portfolio)*
(g) Form of Distribution Agreement (Class B Shares) between the Fund
and Prudential Securities Incorporated (Municipal Income Portfolio)*
(h) Form of Subscription Offering Agreement between the Registrant and
Prudential Securities Incorporated (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) Plan of Distribution pursuant to Rule 12b-1, incorporated by
reference to Exhibit No. 15 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 and Service Plan for Class B shares filed October 5,
1992, 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).
(c) Amended and Restated Distribution and Service Plan pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (Class A Shares).
(Income Portfolio)*
(d) Amended and Restated Distribution and Service Plan pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (Class B Shares).
(Income Portfolio)*
(e) Form of Distribution and Service Plan pursuant to Rule 12b-1 under
the Investment Company Act of 1940 (Class A Shares). (Municipal Income
Portfolio)*
(f) Form of Distribution and Service Plan pursuant to Rule 12b-1 under
the Investment Company Act of 1940 (Class B Shares). (Municipal Income
Portfolio)*
C-2
<PAGE>
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 February 11, 1994, there were 11,588 and 11,166 record holders of
Class A and Class B shares of common stock, $.01 par value per share, of the
Income Portfolio. As of February 11, 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.
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.
C-3
<PAGE>
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 on November 13, 1987).
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>
Maureen Behning-Doyle Executive Vice Executive Vice President, PMF; Senior Vice President,
President Prudential
Securities Incorporated (Prudential Securities)
John D. Brookmeyer, Jr. Director Senior Vice President, PIC; Senior Vice President, The
Two Gateway Center Prudential Insurance Company of America
Newark, NJ 07102 (Prudential)
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 Administrative
President, Chief Officer, Chief Financial Officer, Treasurer and
Administrative Director, PMF; Senior Vice President, Prudential
Officer, Chief Securities
Financial Officer,
Treasurer and
Director
Eugene B. Heimberg Director Senior Vice President, Prudential
Prudential Plaza
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)
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PMF PRINCIPAL OCCUPATIONS
- ---------------- ------------------ ---------------------
<S> <C> <C>
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
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.
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ---------------- ------------------ ---------------------
<S> <C> <C>
Martin A. Berkowitz Senior Vice Senior Vice President, Chief Financial and Compliance
President, Chief Officer, PIC; Vice President, Prudential
Financial and
Compliance Officer
William M. Bethke Senior Vice Senior Vice President, Prudential
Two Gateway Center President
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 Senior Vice Senior Vice President, Prudential
President and
Director
Garnett L. Keith, Jr. President and Vice Chairman and Director, Prudential
Director
William P. Link Executive Vice Executive Vice President, Prudential
Four Gateway Center President
Newark, NJ 07102
Robert E. Riley Executive Vice Executive Vice President, Prudential; Director PSG
500 Boylston Avenue President
Boston, MA 02199
James W. Stevens Executive Vice Executive Vice President, Prudential; Director, PSG
Four Gateway Center President
Newark, NJ 07102
Robert C. Winters Director Chairman of the Board and Chief Executive Officer,
Prudential; Chairman of the Board and Director, PSG
Claude J. Zinngrabe, Jr. Vice President Vice President, Prudential
</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 for Class B shares of Prudential
Adjustable Rate Securities Fund, Inc., The BlackRock Government Income Trust,
Prudential California Municipal Fund and (California Series and California
Income Series), Prudential Equity Fund, Inc., Prudential Equity Income Fund,
Prudential FlexiFund, Prudential Global Fund, Inc., Prudential-Bache Global
Genesis Fund, Inc. (d/b/a Prudential Global Genesis Fund), Prudential-Bache
Global Natural Resources Fund, Inc. (d/b/a Prudential Global Natural Resources
Fund), Prudential-Bache GNMA Fund, Inc. (d/b/a Prudential GNMA Fund),
Prudential-Bache Government Plus Fund, Inc. (d/b/a Prudential Government Plus
Fund), Prudential Growth Fund, Inc., Prudential-Bache Growth Opportunity Fund,
Inc. (d/b/a Prudential Growth Opportunity Fund), Prudential-Bache High Yield
Fund, Inc. (d/b/a/ Prudential High Yield Fund), Prudential IncomeVertible (R)
Fund, Inc., Prudential Intermediate Global Income Fund, Inc., Prudential
Multi-Sector Fund, Inc., Prudential Municipal Bond Fund, Prudential Municipal
Series Fund (except Connecticut Money Market Series, Massachusetts Money
Market Series, New York Money Market Series, New Jersey Money Market Series
and Florida Series), Prudential-Bache National Municipals Fund, Inc. (d/b/a
Prudential National Municipals Fund), Prudential Pacific Growth Fund, Inc.,
Prudential Short-Term Global Income Fund, Inc., Prudential U.S. Government
Fund, Prudential-Bache Utility Fund, Inc. (d/b/a Prudential Utility Fund),
Global Utility Fund, Inc. and Nicholas-Applegate Fund, Inc. (Nicholas-
Applegate Growth Equity Fund) and the Target Portfolio Trust, 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 Structured Maturity Fund, Inc. (d/b/a Prudential Structured
Maturity Fund), Prudential-Bache Tax-Free Money Fund, Inc. (d/b/a Prudential
Tax-Free Money Fund), and for Class A shares of The BlackRock Government
Income Trust, Prudential Adjustable Rate Securities Fund, Inc., Prudential
California Municipal Fund (California Series), Prudential Equity Fund, Inc.,
Prudential Equity Income Fund, Prudential FlexiFund, Prudential Global Fund,
Inc., Prudential-Bache Global Genesis Fund, Inc. (d/b/a Prudential Global
Genesis Fund), Prudential-Bache Global Natural Resources Fund, Inc. (d/b/a
Prudential Global Natural Resources Fund), Prudential-Bache GNMA Fund, Inc.
(d/b/a Prudential GNMA Fund), Prudential-Bache Government Plus Fund, Inc.
(d/b/a Prudential Government Plus Fund), Prudential Growth Fund, Inc.,
Prudential-Bache Growth Opportunity Fund, Inc. (d/b/a Prudential Growth
Opportunity Fund), Prudential-Bache High Yield Fund, Inc. (d/b/a Prudential
High Yield Fund), Prudential IncomeVertible(R) Fund, Inc., Prudential
Intermediate Global Income Fund, Inc., Prudential Multi-Sector Fund, Inc.,
Prudential Municipal Bond Fund, Prudential Municipal Series Fund (Arizona
Series, 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-Bache
National Municipals Fund, Inc. (d/b/a Prudential National Municipals Fund),
Prudential Pacific Growth Fund, Inc., Prudential Short-Term Global Income
Fund, Inc., Prudential-Bache Structured Maturity Fund, Inc. (d/b/a Prudential
Structured Maturity Fund) Prudential U.S. Government Fund, Prudential-Bache
Utility Fund, Inc. (d/b/a Prudential Utility Fund), Global Utility Fund, Inc.,
and Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth Equity Fund).
C-6
<PAGE>
(b)(i) Prudential Securities Incorporated:
<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
Lee Spenser................ Interim General Counsel None
Hardwick Simmons........... Chief Executive Officer, President None
and Director
</TABLE>
(ii) Prudential Mutual Fund Distributors, Inc.:
<TABLE>
<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
Andrew J. Varley.......... Vice President None
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 certifies that it meets all the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Post-
Effective Amendment to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of New York, and
State of New York, on the 28th day of February, 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.
SIGNATURE TITLE DATE
/s/ Susan C. Cote Treasurer and Principal February 28, 1994
- ------------------------------ Financial and Accounting
SUSAN C. COTE Officer
/s/ Robert R. Fortune Director February 28, 1994
- ------------------------------
ROBERT R. FORTUNE
/s/ Delayne D. Gold Director February 28, 1994
- ------------------------------
DELAYNE D. GOLD
/s/ Harry A. Jacobs, Jr. Director February 28, 1994
- ------------------------------
HARRY A. JACOBS, JR.
/s/ Lawrence C. McQuade President and Director February 28, 1994
- ------------------------------
LAWRENCE C. MCQUADE
/s/ Thomas A. Owens, Jr. Director February 28, 1994
- ------------------------------
THOMAS A. OWENS, JR.
/s/ Robert J. Schultz Director February 28, 1994
- ------------------------------
ROBERT J. SCHULTZ
/s/ Merle T. Welshans Director February 28, 1994
- ------------------------------
MERLE T. WELSHANS
/s/ Richard A. Redeker Director February 28, 1994
- ------------------------------
RICHARD A. REDEKER
C-8
<PAGE>
PRUDENTIAL-BACHE STRUCTURED MATURITY FUND, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ------
<C> <S> <C>
1 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 24, 1993 (File No. 33-22363).
2 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).
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 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 the 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 the Registration Statement
on Form N-1A filed on July 16, 1993 (File No. 33-22363).
4(e) Instruments defining rights of shareholders.*
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 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) Distribution Agreement between the Registrant and Prudential --
Mutual Fund Distributors Inc., incorporated by reference to
Exhibit No. 6(a) 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) 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(c) 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).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ------
<C> <S> <C>
6(d) Amended and Restated Distribution Agreement (Class A Shares)
between the Fund and Prudential Mutual Fund Distributors,
Inc. (Income Portfolio).*
6(e) Amended and Restated Distribution Agreement (Class B Shares) --
between the Fund and Prudential Securities Incorporated
(Income Portfolio).*
6(f) Form of Distribution Agreement (Class A Shares) between the
Fund and Prudential Mutual Fund Distributors, Inc. (Municipal
Income Portfolio).*
6(g) Form of Distribution Agreement (Class B Shares) between the
Fund and Prudential Securities Incorporated (Municipal Income
Portfolio).*
6(h) Form of Subscription Offering Agreement between the
Registrant and Prudential Securities Incorporated (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) Plan of Distribution pursuant to Rule 12b-1, incorporated by --
reference to Exhibit No. 15 to Post-Effective Amendment No. 1
to the Registration Statement on Form N-1A filed on January
25, 1990 (File No. 33-22363).
15(b) Amended and Restated Distribution and Service Plan for Class --
B shares filed October 5, 1992, 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(c) Amended and Restated Distribution and Service Plan pursuant --
to Rule 12b-1 under the Investment Company Act of 1940 (Class
A Shares) (Income Portfolio).*
15(d) Amended and Restated Distribution and Service Plan pursuant --
to Rule 12b-1 under the Investment Company Act of 1940 (Class
B Shares) (Income Portfolio).*
15(e) Form of Distribution and Service Plan pursuant to Rule 12b-1
under the Investment Company Act of 1940 (Class A Shares)
(Municipal Income Portfolio).*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ------
<C> <S> <C>
15(f) Form of Distribution and Service Plan pursuant to Rule 12b-1
under the Investment Company Act of 1940 (Class B Shares)
(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 16(B) to Post-Effective
Amendment No. 8 to the Registration Statement on Form N-1A
filed on September 24, 1993 (File No. 33-22363).
</TABLE>
- -------
* Filed herewith
<PAGE>
Exhibit 4(e)
INSTRUMENTS DEFINING RIGHTS OF SHAREHOLDERS
The following is a list of the provisions of the Articles of Incorporation,
as amended, and By-Laws of Prudential-Bache Structured Maturity Fund, Inc.
setting forth the rights of shareholders.
I. Relevant Provisions of Articles of Incorporation:
ARTICLE V - Common Stock
ARTICLE VII - Miscellaneous
ARTICLE VIII - Amendments
II. Relevant Provisions of By-Laws:
ARTICLE I - Stockholders
ARTICLE IV - Capital Stock
ARTICLE VII - Indemnification
ARTICLE IX - Amendment of By-Laws
<PAGE>
Exhibit 6 (d)
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.
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
<PAGE>
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
<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.
Section 6. Duties of the Distributor
-------------------------
<PAGE>
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 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
<PAGE>
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 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
<PAGE>
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 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.
<PAGE>
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 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
<PAGE>
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 (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.
<PAGE>
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: ________________________
Robert F. Gunia
Executive Vice President
Prudential-Bache Structured
Maturity Fund, Inc.
By: _______________________
Lawrence C. McQuade
President
<PAGE>
Exhibit 6(e)
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.
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
<PAGE>
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, so permits.
Section 5. Duties of the Fund
------------------
<PAGE>
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
<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.
<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;
<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.
<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 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
<PAGE>
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 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
<PAGE>
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 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
<PAGE>
Incorporated
By: ________________________
Robert F. Gunia
Senior Vice President
Prudential-Bache Structured
Maturity Fund, Inc.
By: _______________________
Lawrence C. McQuade
President
<PAGE>
Exhibit 6(f)
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(g)
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(h)
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>
Exhibit 11
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Post-Effective Amendment No. 9 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.
Deloitte & Touche
New York, New York
February 24, 1994
<PAGE>
Exhibit 15(c)
PRUDENTIAL-BACHE STRUCTURED MATURITY FUND, INC.
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-Bache Structured Maturity Fund, Inc.
(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 intends to reimburse the Distributor for costs incurred by
the Distributor in distributing Class A shares of the Fund and to pay the
Distributor a service fee for the maintenance of Class A shareholder accounts.
A majority of the Board of Directors or Trustees of the Fund, including a
majority of those Directors or Trustees who are not
<PAGE>
"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 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
<PAGE>
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. Payment of Service Fee
-----------------------
The Fund shall reimburse the Distributor for costs incurred by it in
providing personal service and/or maintaining shareholder accounts at a rate not
to exceed .10 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
reimbursable 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 or Trustees
may determine. Costs of the Distributor subject to reimbursement hereunder
include account servicing fees and indirect and overhead costs associated with
providing personal service and/or maintaining shareholder accounts.
3. Payment for Distribution Activities
-----------------------------------
The Fund shall reimburse the Distributor for costs incurred by it in
performing Distribution Activities at a rate which, together with the service
fee (described in Section 2 hereof), shall not exceed .10 of 1% per annum of the
average daily net assets of the Class A shares of the Fund. The Fund shall
calculate and accrue daily amounts reimbursable by the Class A shares of the
Fund hereunder and shall pay such amounts monthly or at such other
<PAGE>
intervals as the Board of Directors or Trustees may determine.
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 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
or Trustees. The allocation of distribution expenses among Classes will be
subject to the review of the Board of Directors or Trustees. Payments hereunder
will be applied to distribution expenses in the order in which they are
incurred, unless otherwise determined by the Board of Directors or Trustees.
Costs of the Distributor subject to reimbursement hereunder are costs of
performing Distribution Activities 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 Class A shares of the
Fund, including sales commissions and trailer commissions paid to, or
on account of, agents and indirect and
<PAGE>
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. 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
<PAGE>
selected dealer agreements with the Distributor.
5. Effectiveness; Continuation
---------------------------
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class A shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities of
the Class A shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such
continuance is specifically approved at least annually by a majority of the
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 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
<PAGE>
Act) of the Class A shares of the Fund. All material amendments of the Plan,
including the addition or deletion of categories of expenditures which are
reimbursable hereunder, 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. Non-interested Directors or Trustees
------------------------------------
While the Plan is in effect, the selection and nomination of the Directors
or Trustees who are not "interested persons" of the Fund (non-interested
Directors or Trustees) shall be committed to the discretion of the non-
interested 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.
Dated July 25, 1989 and
amended and restated as of July 1, 1993.
<PAGE>
Exhibit 15(d)
PRUDENTIAL-BACHE STRUCTURED MATURITY FUND, INC.
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-Bache Structured Maturity Fund, Inc.
(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 reimburse the Distributor for costs incurred by the Distributor in
distributing Class B shares of the Fund and to pay the Distributor a service fee
for the maintenance of Class B shareholder accounts. A majority of the Board of
Directors or Trustees of the Fund including a majority who are not "interested
<PAGE>
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 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 reimburse the Distributor for costs incurred by it in
providing personal service and/or maintaining shareholder accounts at a rate not
to exceed .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
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 or Trustees
may determine. Costs of the Distributor subject to reimbursement hereunder
include account servicing fees and indirect and overhead costs associated with
providing personal service and/or maintaining shareholder accounts.
3. Payment for Distribution Activities
-----------------------------------
The Fund shall reimburse the Distributor at a rate which, together with the
service fee (described in Section 2 hereof), shall not exceed 1% per annum of
the average daily net assets of the Class B shares of the Fund for costs
incurred by it in performing 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 or Trustees may determine.
<PAGE>
Proceeds from contingent deferred sales charges will be applied to reduce the
costs incurred in performing Distribution Activities. The Fund shall carry
forward amounts reimbursable that are not paid because they exceed .75 of 1% per
annum of the average daily net assets of the Class B shares of the Fund (Carry
Forward Amounts) and shall pay such amounts within the .75 of 1% per annum
payment rate limitation so long as this Plan, including any amendments hereto,
is in effect, subject to the limitations of Article III, Section 26 of the NASD
Rules of Fair Practice. Although the Fund is not liable for unreimbursed
distribution expenses, in the event of termination or discontinuation of the
Plan, the Board of Directors or Trustees may consider the appropriateness of
having the Class B shares of the Fund reimburse the Distributor for the then
outstanding Carry Forward Amounts plus interest thereon to the extent permitted
by applicable law or regulation from the effective date of the Plan.
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 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
or Trustees. The allocation of distribution expenses among Classes will be
subject to the review of the Board of Directors or Trustees. Payments hereunder
will be applied to
<PAGE>
distribution expenses in the order in which they are incurred, unless otherwise
determined by the Board of Directors or Trustees.
Costs of the Distributor subject to reimbursement hereunder are all costs
of performing Distribution Activities and 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;
(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;
(f) to the extent permitted by law, interest on unreimbursed Carry
Forward Amounts as defined in Section 3 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,
<PAGE>
Section 26, of the NASD Rules of Fair Practice; and
(g) unreimbursed distribution expenses incurred with respect to
the sale of Class B shares which have been exchanged into 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 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
<PAGE>
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 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, including the addition or deletion of categories of expenditures which are
reimbursable hereunder, 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.
<PAGE>
8. Non-interested Directors or Trustees
------------------------------------
While the Plan is in effect, the selection and nomination of the Directors
or Trustees who are not "interested persons" of the Fund (non-interested
Directors or Trustees) shall be committed to the discretion of the non-
interested 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.
Dated December 9, 1992 and
amended and restated as of July 1, 1993
<PAGE>
Exhibit 15(e)
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(f)
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
