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PRUDENTIAL STRUCTURED MATURITY FUND, INC.
Statement of Additional Information
dated March 3, 1997
Prudential Structured Maturity Fund, Inc. (the Fund), is an open-end,
management investment company comprised of two Portfolios--the Income
Portfolio and the Municipal Income Portfolio. Only the Income Portfolio is
offered at this time. The investment objective of the Income Portfolio (the
Portfolio) 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 primarily 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. The Portfolio may also invest up to 10% of
its total assets in securities rated below BBB by Standard & Poor's Ratings
Group or Baa by Moody's Investors Service (or a similar nationally recognized
statistical rating organization), or, if not rated, of comparable quality in
the opinion of the investment adviser. 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 "Investment Objective and Policies."
The Fund's address is Gateway Center Three, Newark, New Jersey 07102, 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 March
3, 1997, a copy of which may be obtained from the Fund upon request.
TABLE OF CONTENTS
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CROSS-REFERENCE
TO PAGE IN
PROSPECTUS
---------------
INCOME
PAGE PORTFOLIO
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<S> <C> <C>
General Information...................................... B-2 22
Investment Objective and Policies........................ B-2 8
Investment Restrictions.................................. B-9 16
Directors and Officers................................... B-11 17
Manager.................................................. B-15 17
Distributor.............................................. B-16 17
Portfolio Transactions................................... B-18 19
Purchase and Redemption of Fund Shares................... B-19 23
Shareholder Investment Account........................... B-21 23
Net Asset Value.......................................... B-25 20
Dividends and Distributions.............................. B-25 21
Taxes.................................................... B-25 21
Performance Information.................................. B-27 20
Custodian, Transfer and Dividend Disbursing Agent and In-
dependent Accountants................................... B-29 20
Financial Statements..................................... B-30 --
Independent Auditors' Report............................. B-39 --
Appendix I--General Investment Information............... I-1 --
Appendix II--Historical Performance Data................. II-1 --
Appendix III--Information Relating to The Prudential..... III-1 --
</TABLE>
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MF140B
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GENERAL INFORMATION
At a special meeting held on July 19, 1994, shareholders approved an
amendment to the Fund's Articles of Incorporation to change the Fund's name
from Prudential-Bache Structured Maturity Fund, Inc. to Prudential Structured
Maturity Fund, Inc.
The Fund initially offered only one series known as Prudential Structured
Maturity Fund. On July 15, 1993, the Board of Directors authorized the
creation of the Municipal Income Portfolio and approved the designation of the
existing shares of the Fund as shares of the Income Portfolio.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Income Portfolio (the Portfolio) is high
current income consistent with the preservation of principal. See "How the
Fund Invests--Investment Objective and Policies" in the Prospectus. The
Portfolio seeks to achieve its objective primarily through structuring its
portfolio by utilizing a "laddered" maturity strategy. The Portfolio invests
primarily 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. The Portfolio may also invest up to 10% of its total assets in
securities rated below BBB by Standard & Poor's Ratings Group (S&P) or Baa by
Moody's Investors Service (Moody's) (or comparably rated by a similar
nationally recognized statistical rating organization), or, if not rated, of
comparable quality in the opinion of the investment adviser. 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
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.
The 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 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
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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 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.
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The underlying mortgages which collateralize the ARMs, collateralized
mortgage obligations (CMOs) and real estate mortgage investment conduits
(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 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 or
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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OTHER INVESTMENTS
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase agreement
transactions. The Portfolio's repurchase agreements will be collateralized by
U.S. Government obligations. The 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, the
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, the Portfolio will suffer a
loss.
The Fund participates in a joint repurchase account with other investment
companies managed by Prudential Mutual Fund Management LLC (PMF) pursuant to
an order of the SEC. On a daily basis, any uninvested cash balances of the
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. The 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
the Portfolio of such obligations, total assets of not less than $1 billion or
its equivalent. The 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
the Portfolio do not exceed 10% of the Portfolio's total assets.
LENDING OF SECURITIES. Consistent with applicable regulatory requirements,
the 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). 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
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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 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 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 the
exposure of the Portfolio to the risks of high yield securities.
WORLD BANK OBLIGATIONS. The 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 Portfolio may purchase 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 with
respect to money market instruments 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 or
original issuers which present minimal credit risks. There is a credit risk
associated with the purchase of puts in that the broker, dealer or financial
institution or original issuer 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 or original issuer.
OPTIONS TRANSACTIONS. The 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 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 other liquid assets 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 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
B-6
<PAGE>
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 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 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 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.
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
B-7
<PAGE>
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 exempt from the definition of "commodity pool
operator," subject to compliance with certain conditions. The exemption is
conditioned upon the Portfolio's purchasing and selling futures contracts and
options thereon for bona fide hedging transactions, except that the Portfolio
may purchase and sell futures contracts and options thereon for any other
purpose to the extent that the aggregate initial margin and option premiums do
not exceed 5% of the liquidation value of the Portfolio's total assets. The
Portfolio will use futures contracts and options thereon in a manner
consistent with these requirements.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND OPTIONS THEREON. The
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 of 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, equity securities or other
liquid, unencumbered assets, marked-to-market daily, 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, equity securities or other
liquid, unencumbered assets, marked-to-market daily, 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.
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
B-8
<PAGE>
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 Portfolio may hold up to 15% of its net assets 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.
When the 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.
The staff of the SEC has taken the position that purchased over-the-counter
options and the assets used as "cover" for written over-the-counter options
are illiquid securities unless the Portfolio and the counterparty have
provided for the Portfolio, at the Portfolio's election, to unwind the over-
the-counter option. The exercise of such an option ordinarily would involve
the payment by the Portfolio of an amount designed to reflect the
counterparty's economic loss from an early termination, but does allow the
Portfolio to treat the assets used as "cover" as "liquid."
PORTFOLIO TURNOVER. The Income Portfolio's turnover rates in 1996 and 1995
were 170% and 160%, 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--Other
Investments and Policies" in the Prospectus.
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 the Portfolio. A "majority of
the outstanding voting securities" of the Portfolio, when used in this
Statement of Additional Information, means the lesser of (i) 67% of the voting
shares represented at a meeting at which more than 50% of the outstanding
voting shares are present in person or represented by proxy or (ii) more than
50% of the outstanding voting shares.
The Portfolio may not:
1. Purchase securities on margin (but the 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".
3. Issue senior securities, borrow money or pledge its assets, except that
the Portfolio may borrow up to 20% of the value of its total assets
(calculated when the loan is made) from banks for temporary, extraordinary or
emergency purposes or for the clearance of transactions and may pledge up to
20% of the value of its total assets to secure such borrowings. The purchase
or sale of securities on a "when-issued" or delayed delivery basis, and the
purchase and sale of financial futures contracts and collateral arrangements
with respect thereto and with respect to interest rate swap transactions,
covered dollar rolls and reverse repurchase agreements, are not deemed to be a
pledge of assets and such arrangements are not deemed to be the issuance of a
senior security. The Portfolio will not purchase portfolio securities if its
borrowings exceed 5% of its net assets.
B-9
<PAGE>
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 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.
6. Buy or sell real estate or interests in real estate, except that the
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 Portfolio may not
purchase interests in real estate limited partnerships which are not readily
marketable.
7. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter
under certain federal securities laws.
8. Make investments for the purpose of exercising control or management.
9. Invest in securities of other registered investment companies, except by
purchases in the open market involving only customary brokerage commissions
and as a result of which not more than 10% of its total assets (determined at
the time of investment) would be invested in such securities, or except as
part of a merger, consolidation or other acquisition.
10. Invest in interests in oil, gas or other mineral exploration or
development programs, except that the Portfolio may invest in the securities
of companies which invest in or sponsor such programs.
11. Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities (limited to 30% of the value of the Portfolio's total
assets).
12. Purchase common stock or other voting securities, preferred stock,
warrants or other equity securities, except as may be permitted by restriction
number 9.
13. Buy or sell commodities or commodity contracts, except that the
Portfolio may purchase and sell financial futures contracts and options
thereon.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the 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 the
Portfolio's asset coverage for borrowing falls below 300%, the Portfolio will
take prompt action to reduce its borrowings, as required by applicable law.
B-10
<PAGE>
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE THE FUND DURING PAST 5 YEARS
- --------------------- ------------- ---------------------
<S> <C> <C>
Edward D. Beach (72) Director President and Director of BMC Fund, Inc., a
c/o Prudential Mutual closed-end investment company; prior thereto,
Fund Management LLC Vice Chairman of Broyhill Furniture Industries,
Gateway Center Three Inc.; Certified Public Accountant; Secretary
Newark, NJ 07102 and Treasurer of Broyhill Family Foundation,
Inc.; Member of the Board of Trustees of Mars
Hill College; President, Director of The High
Yield Income Fund, Inc.
Eugene C. Dorsey (70) Director Retired President, Chief Executive Officer and
c/o Prudential Mutual Trustee of the Gannett Foundation (now Freedom
Fund Management LLC Forum); former Publisher of four Gannett
Gateway Center Three newspapers and Vice President of Gannett
Newark, NJ 07102 Company; former Chairman of Independent Sector,
Washington, D.C. (national coalition of
philanthropic organizations); former Chairman
of the American Council for the Arts; Director
of the Advisory Board of Chase Manhattan Bank
of Rochester and The High Yield Income Fund,
Inc.
Delayne Dedrick Director Marketing and Management Consultant; Director of
Gold (58) The High Yield Income Fund, Inc.
c/o Prudential Mutual
Fund Management LLC
Gateway Center Three
Newark, NJ 07102
*Robert F. Gunia (50) Director Comptroller (since May 1996), Prudential
Gateway Center Three Investments; Executive Vice President and
Newark, NJ 07102 Treasurer (since December 1996), Prudential
Mutual Fund Management LLC (PMF); Senior Vice
President (since March 1987) of Prudential
Securities Incorporated (Prudential
Securities); formerly Chief Administrative
Officer (July 1990-September 1996), Director
(January 1989-September 1996) and Executive
Vice President, Treasurer and Chief Financial
Officer (June 1987-September 1996) of
Prudential Mutual Fund Management, Inc.; Vice
President and Director of The Asia Pacific
Fund, Inc. (since May 1989); Director of The
High Yield Income Fund, Inc.
*Harry A. Jacobs, Director Senior Director (since January 1986) of
Jr. (75) Prudential Securities; formerly Interim
One Seaport Plaza Chairman and Chief Executive Officer of
New York, NY 10292 Prudential Mutual Fund Management, Inc. (June-
September 1993); Chairman of the Board of
Prudential Securities (1982-1985) and Chairman
of the Board and Chief Executive Officer of
Bache Group Inc. (1977-1982); Director of The
First Australia Fund, Inc., The First Australia
Prime Income Fund, Inc. and The High Yield
Income Fund, Inc.; Trustee of The Trudeau
Institute.
Donald D. Lennox (78) Director Chairman (since February 1990) and Director
c/o Prudential Mutual (since April 1989) of International Imaging
Fund Management LLC Materials, Inc.; Retired Chairman, Chief
Gateway Center Three Executive Officer and Director of Schlegel
Newark, NJ 07102 Corporation (industrial manufacturing) (March
1987-February 1989); Director of Gleason
Corporation, Personal Sound Technologies, Inc.
and The High Yield Income Fund, Inc.
</TABLE>
B-11
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE THE FUND DURING PAST 5 YEARS
- --------------------- ------------- ---------------------
<S> <C> <C>
*Mendel A. Melzer, CFA, Director Chief Investment Officer (since October 1996) of
ChFC, CLU (35) Prudential Mutual Funds; formerly Chief
751 Broad Street Financial Officer (November 1995-September
Newark, NJ 07102 1996) of the Money Management Group of The
Prudential Insurance Company of America
(Prudential), Senior Vice President and Chief
Financial Officer of Prudential Preferred
Financial Services (April 1993-November 1995),
Managing Director of Prudential Investment
Advisors (April 1991-April 1993), and Senior
Vice President of Prudential Capital
Corporation (July 1989-April 1991); Chairman
and Director of Prudential Series Fund, Inc.;
Director of The High Yield Income Fund, Inc.
Thomas T. Mooney (55) Director President of the Greater Rochester Metro Chamber
c/o Prudential Mutual of Commerce; former Rochester City Manager;
Fund Management LLC Trustee of Center for Governmental Research,
Gateway Center Three Inc.; Director of Blue Cross of Rochester,
Newark, NJ 07102 Monroe County Water Authority, Rochester Jobs,
Inc., Executive Service Corps of Rochester,
Monroe County Industrial Development
Corporation, Northeast Midwest Institute, The
Business Council of New York, First Financial
Fund, Inc., The High Yield Plus Fund, Inc. and
The High Yield Income Fund, Inc.
Thomas H. O'Brien (72) Director President of O'Brien Associates; formerly
c/o Prudential Mutual President of Jamaica Water Securities Corp.
Fund Management LLC (February 1989-August 1990), Chairman and Chief
Gateway Center Three Executive Officer (September 1987-February
Newark, NJ 07102 1989) and Director (September 1987-August 1990)
of Jamaica Water Supply Company, and Director
(1984-June 1989) of TransCanada Pipelines
U.S.A. Ltd.; Director of Ridgewood Savings Bank
and The High Yield Income Fund, Inc.; Trustee
of Hofstra University.
*Richard A. Redeker (53) President and Employee of Prudential Investments; formerly
751 Broad Street Director President, Chief Executive Officer and Director
Newark, NJ 07102 (October 1993-September 1996), Prudential
Mutual Fund Management, Inc., Director and
Member of Operating Committee (October 1993-
September 1996), Prudential Securities,
Director (October 1993-September 1996) of
Prudential Securities Group, Inc., Executive
Vice President, The Prudential Investment
Corporation (January 1994-September 1996),
Director (January 1994-September 1996),
Prudential Mutual Fund Distributors, Inc. and
Prudential Mutual Fund Services LLC, and Senior
Executive Vice President and Director of Kemper
Financial Services, Inc. (September 1978-
September 1993); President and Director of The
High Yield Income Fund, Inc.
Nancy H. Teeters (66) Director Economist; formerly Vice President and Chief
c/o Prudential Mutual Economist (March 1986-June 1990) of
Fund Management LLC International Business Machines Corporation;
Gateway Center Three Director of Inland Steel Corporation and The
Newark, NJ 07102 High Yield Income Fund, Inc.
</TABLE>
B-12
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE THE FUND DURING PAST 5 YEARS
- --------------------- ------------- ---------------------
<S> <C> <C>
Louis A. Weil, III (55) Director President and Chief Executive Officer (since
c/o Prudential Mutual January 1996) and Director (since September
Fund Management LLC 1991) of Central Newspapers, Inc.; Chairman of
Gateway Center Three the Board (since January 1996), Publisher and
Newark, NJ 07102 Chief Executive Officer (August 1991-December
1995) of Phoenix Newspapers, Inc.; formerly
Publisher of Time Magazine (May 1989-March
1991); formerly President, Publisher and Chief
Executive Officer of The Detroit News (February
1986-August 1989); formerly member of the
Advisory Board, Chase Manhattan Bank-
Westchester; Director of The High Yield Income
Fund, Inc.
Susan C. Cote (42) Vice President Executive Vice President (since February 1997)
Gateway Center Three and Chief Financial Officer (since May 1996) of
Newark, NJ 07102 PMF; formerly Managing Director of Prudential
Investments and Vice President, The Prudential
Investment Corporation (February 1995-May
1996), Senior Vice President (January 1989-
January 1995-February 1995) of Prudential
Mutual Fund Management, Inc., and Senior Vice
President (January 1992-January 1995) of
Prudential Securities.
Thomas A. Early (42) Vice President Executive Vice President, Secretary and General
Gateway Center Three Counsel of PMF (since December 1996); Vice
Newark, NJ 07102 President and General Counsel, Prudential
Retirement Services (since March 1994);
formerly Associate General Counsel and Chief
Financial Services Officer, Frank Russell
Company (1988-1994).
S. Jane Rose (51) Secretary Senior Vice President (since December 1996) of
Gateway Center Three PMF; Senior Vice President (January 1991-
Newark, NJ 07102 September 1996) and Senior Counsel (June 1987-
September 1996) of Prudential Mutual Fund
Management, Inc.; Senior Vice President and
Senior Counsel (since July 1992) of Prudential
Securities; formerly Vice President and
Associate General Counsel of Prudential
Securities.
Eugene S. Stark (39) Treasurer and First Vice President (since December 1996) of
Gateway Center Three Principal Financial PMF; formerly First Vice President (January
Newark, NJ 07102 and Accounting 1990-September 1996) of Prudential Mutual Fund
Officer Management, Inc.
Stephen M. Ungerman (44) Assistant Treasurer Tax Director of Prudential Investments and the
Gateway Center Three Private Asset Group of Prudential (since March
Newark, NJ 07102 1996); formerly First Vice President of
Prudential Mutual Fund Management, Inc.
(February 1993-September 1996); prior thereto,
Senior Tax Manager of Price Waterhouse (1981-
January 1993).
Deborah A. Docs (39) Assistant Secretary Vice President (since December 1996) of PMF;
Gateway Center Three Vice President and Associate General Counsel
Newark, NJ 07102 (June 1991-September 1996) of Prudential Mutual
Fund Management, Inc.; Vice President and
Associate General Counsel of Prudential
Securities.
</TABLE>
- ---------
* "Interested" Director, as defined in the Investment Company Act, by reason
of his affiliation with Prudential, 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.
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 Board of Directors has adopted a retirement policy which calls for the
retirement of Directors on December 31 of the year in which they reach the age
of 72, except that retirement is being phased in for Directors who were age 68
or older as of December 31, 1993. Under this phase-in provision, Messrs.
Beach, Jacobs, Lennox and O'Brien are scheduled to retire on December 31,
1999, 1998, 1997 and 1999, respectively.
B-13
<PAGE>
The Fund pays each of its Directors who is not an affiliated person of PMF
annual compensation of $3,000, in addition to certain out-of-pocket expenses.
The amount of annual compensation paid to each Director may change as a result
of the introduction of additional funds upon which the Director will be asked
to serve.
Directors may receive their Director's fee pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of such Director's fee which accrues 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, pursuant to an SEC exemptive order,
at the daily rate of return of the Fund (the Fund Rate). Payment of the
interest so accrued is also deferred and accruals become payable at the option
of the Director. The Fund's obligation to make payments of deferred Directors'
fees, together with interest thereon, is a general obligation of the Fund.
Pursuant to the terms of the Management Agreement with the Fund, the Manager
pays all compensation of officers and employees of the Fund as well as the
fees and expenses of all Directors of the Fund who are affiliated persons of
the Manager.
The following table sets forth the aggregate compensation paid by the Fund
to the Directors who are not affiliated with the Manager for the fiscal year
ended December 31, 1996 and the aggregate compensation paid to such Directors
for service on the Fund's Board and the Boards of any other investment
companies managed by Prudential Mutual Fund Management LLC (Fund Complex) for
the calendar year ended December 31, 1996. In October 1996, shareholders
elected a new Board of Directors. Below are listed all Directors who have
served the Fund during its most recent fiscal year, as well as the new
Directors who took office after the shareholder meeting in October.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM FUND
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL AND FUND
NAME AND COMPENSATION AS PART OF FUND BENEFITS UPON COMPLEX PAID
POSITION FROM FUND EXPENSES RETIREMENT TO DIRECTORS
- -------- ------------ ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Edward D.
Beach,
Director...... -- None N/A $166,000(21/39)*
Eugene C.
Dorsey,
Director**.... -- None N/A $ 98,583(12/36)*
Robert R.
Fortune,
Former
Director**.... $6,000 None N/A $ 15,000(2/2)*
Delayne Dedrick
Gold,
Director...... $6,000 None N/A $175,308(21/42)*
Robert F.
Gunia,
Director+..... -- None N/A --
Harry A.
Jacobs, Jr.,
Director+..... -- None N/A --
Donald D.
Lennox,
Director...... -- None N/A $ 90,000(10/22)*
Mendel A.
Melzer,
Director+..... -- None N/A --
Thomas T.
Mooney,
Director**.... -- None N/A $135,375(18/36)*
Thomas H.
O'Brien,
Director...... -- None N/A $ 32,250(5/20)*
Thomas A.
Owens, Jr.,
Former
Director...... $6,000 None N/A $ 86,333(9/11)*
Richard A.
Redeker,
Director+..... -- None N/A --
Nancy H.
Teeters,
Director...... -- None N/A $103,583(11/28)*
Louis A. Weil,
III, Director. -- None N/A $ 91,250(13/18)*
Merle T.
Welshans,
Former
Director...... $6,000 None N/A $ 15,000(2/2)*
</TABLE>
- -------
* Indicates number of funds/portfolios in Fund Complex (including the Fund)
to which aggregate compensation relates.
** Total compensation from all of the funds in the Fund Complex for the
calendar year ended December 31, 1996, includes amounts deferred at the
election of Directors under the Funds' deferred compensation plans.
Including accrued interest total compensation amounted to $111,535, $23,327
and $139,869 for Eugene C. Dorsey, Robert R. Fortune and Thomas T. Mooney,
respectively.
+ Robert F. Gunia, Harry A. Jacobs, Jr., Mendel A. Melzer and Richard A.
Redeker, who are interested Directors, do not receive compensation from the
Fund or any fund in the Fund Complex.
As of February 7, 1997, 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 Portfolio.
As of February 7, 1997, Prudential Securities was record holder for other
beneficial owners of 4,496,726 Class A shares (67% of the outstanding Class A
shares), 5,201,518 Class B shares (65% of the outstanding Class B shares),
62,548 Class C shares (or 51% of the outstanding Class C shares) and 0 Class Z
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-14
<PAGE>
As of February 7, 1997, the beneficial owners, directly or indirectly, of
more than 5% of the outstanding Class C Shares were: Sallie M. Reeves TTEE of
the Evelyn M. Anderson Trust UA DTD 1/23/95, 8 Thyme Place, Rancho Palace
Verdes, CA 90275, who owned 7,194 Class C shares ( % of the outstanding Class
C shares) and Suzanne T. Shepherd (TTEE for Suzanne T. Shepherd, 1815
Sheffield Drive, Kalamazoo, Michigan 49008-1750, who owned 13,714 Class C
shares (or % of the outstanding Class C shares.)
MANAGER
The manager of the Fund is Prudential Mutual Fund Management LLC (PMF or the
Manager), Gateway Center Three, Newark, New Jersey 07102. PMF serves as
manager to all of the other investment companies that, together with the Fund,
comprise the Prudential Mutual Funds. See "How the Fund is Managed--Manager"
in the Prospectus. As of January 31, 1997, PMF managed and/or administered
open-end and closed-end management investment companies with assets of
approximately $55.8 billion. According to the Investment Company Institute, as
of December 31, 1996, the Prudential Mutual Funds were the 15th largest family
of mutual funds in the United States.
PMF is a subsidiary of Prudential Securities and The Prudential Insurance
Company of America (Prudential). Prudential Mutual Fund Services LLC (PMFS or
the Transfer Agent), a wholly-owned subsidiary of PMF, serves as the transfer
agent for the Prudential Mutual Funds and, in addition, provides customer
service, recordkeeping and management and administration services to qualified
plans.
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 PMFS, 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 the
Portfolio. The fee is computed daily and payable monthly. The Management
Agreement also provides that, in the event the expenses of the 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 the 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 the Portfolio. No such reductions were required during the
fiscal year ended December 31, 1996. Currently, the Fund believes that there
are no such expense limitations.
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,
doing business as Prudential Investments (PI), pursuant to the subadvisory
agreement between PMF and PI (the Subadvisory Agreement).
Under the terms of the Management Agreement, the Portfolio 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 the Portfolio and of pricing the
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 the Portfolio in connection with its
securities transactions, (f) all taxes and corporate fees payable by the
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 Portfolio, (i) the cost of fidelity and liability
insurance, (j) the fees and expenses involved in registering and maintaining
registration of the Portfolio and of its shares with the SEC, registering the
Portfolio 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.
B-15
<PAGE>
The Management Agreement provides that PMF will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the matters
to which the Management Agreement relates, except a loss resulting from willful
misfeasance, bad faith, gross negligence or reckless disregard of duty. The
Management Agreement provides that it will terminate automatically if assigned,
and that it may be terminated without penalty by either party upon not more
than 60 days' nor less than 30 days' written notice. The Management Agreement
will continue in effect for a period of more than two years from the date of
execution only so long as such continuance is specifically approved at least
annually in conformity with the Investment Company Act. The Management
Agreement was last approved by the Board of Directors of the Fund, including a
majority 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 April
10, 1996 and by shareholders of the Portfolio on April 25, 1990.
For the fiscal years ended December 31, 1996, 1995 and 1994, PMF received
management fees of $756,955, $861,589 and $967,204, respectively, from the
Portfolio.
PMF has entered into the Subadvisory Agreement with PI (the Subadviser), a
wholly-owned subsidiary of Prudential. The Subadvisory Agreement provides that
PI will furnish investment advisory services in connection with the management
of the Fund. In connection therewith, PI is obligated to keep certain books and
records of the Portfolio. PMF continues to have responsibility for all
investment advisory services pursuant to the Management Agreement and
supervises PI's performance of such services. PI is reimbursed by PMF for the
reasonable costs and expenses incurred by PI in furnishing those services.
The Subadvisory Agreement was last approved by the Board of Directors,
including a majority 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 April 10, 1996 and by shareholders of the 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 the
Fund, PMF or PI 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.
DISTRIBUTOR
Prudential Securities Incorporated (Prudential Securities or PSI), One
Seaport Plaza, New York, New York 10292, acts as the distributor of the shares
of the Portfolio. Prior to January 2, 1996, Prudential Mutual Fund
Distributors, Inc. (PMFD), One Seaport Plaza, New York, New York 10292, acted
as the distributor of the Class A shares of the Portfolio.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the
Portfolio under Rule 12b-1 under the Investment Company Act and a distribution
agreement (the Distribution Agreement), Prudential Securities (the Distributor)
incurs the expenses of distributing the Portfolio's Class A, Class B and Class
C shares. Prudential Securities also incurs the expenses of distributing the
Portfolio's Class Z shares under the Distribution Agreement, none of which are
reimbursed by or paid for by the Fund. See "How the Fund is Managed--
Distributor" in the Prospectus.
On June 7, 1989 and September 13, 1989, the Board of Directors, including a
majority of the Directors who are not interested persons of the Fund and who
have no direct or indirect financial interest in the operation of the Class A
or Class B Plan or in any agreement related to either Plan (the Rule 12b-1
Directors), at meetings called for the purpose of voting on each Plan, approved
an amended and restated plan of distribution of the Class A shares of the Fund
(the Class A Plan) and a plan of distribution for the Class B shares of the
Fund (the Class B Plan). The Class A Plan was last approved by shareholders of
the Fund on April 25, 1990. On September 9, 1992, the Board of Directors
reauthorized the categorization of the shares of the Fund as Class A shares and
the implementation of the Class B Plan. The Board of Directors reapproved the
Class B Plan as restated on September 9, 1992 and the Class B Plan was approved
by the sole holder of Class B shares on September 30, 1992. On June 9, 1993,
the Board of Directors, including a majority of the Rule 12b-1 Directors, at a
meeting called for the purpose of voting on each Plan, approved the continuance
of the Plans and Distribution Agreements and approved modifications of the
Fund's Class A and Class B Plans and Distribution Agreements to conform them
with recent amendments to the National Association of Securities Dealers, Inc.
(NASD) maximum sales charge rule described below. As so modified, the Class 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 .75 of 1% (including the service fee of .25 of
1%) for the fiscal year ending December 31, 1997. 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 May 3, 1993, the Board of Directors, including a majority of the Rule 12b-
1 Directors, at a meeting called for the purpose of voting on each Plan,
adopted a plan of distribution for the Class C shares of the Portfolio and
approved further amendments to the plans of distribution for the Portfolio's
Class A and Class B shares, changing them from reimbursement type plans to
compensation type plans. In addition, on March 4, 1994, the Board of Directors
approved, subject to shareholder approval, amendments to the Class
B-16
<PAGE>
A Plan for the Portfolio to increase the distribution fee. As so amended, the
Class A Plan provides that (i) up to .25 of 1% of the average daily net assets
of the Class A shares may be used as a service fee and (ii) total distribution
fees (including the service fee of .25 of 1%) may not exceed .30 of 1%. The
Distributor has agreed to limit the distribution fee with respect to Class A
shares to .10 of 1% for the fiscal year ending December 31, 1997. The Plans
were last approved by the Directors, including a majority of the Rule 12b-1
Directors, on April 10, 1996. The Class A Plan, as amended, was approved by
Class A and Class B shareholders, and the Class B Plan, as amended, was
approved by Class B shareholders, on July 19, 1994. The Class C Plan was
approved by the sole shareholder of Class C shares on August 1, 1994.
CLASS A PLAN. For the fiscal year ended December 31, 1996, PSI received
payments of $81,745 under the Class A Plan. This amount was primarily expended
for payment of account servicing fees to financial advisers and other persons
who sell Class A shares. For the fiscal year ended December 31, 1996, PSI
received approximately $65,200 in initial sales charges.
CLASS B PLAN. For the fiscal year ended December 31, 1996, Prudential
Securities received $796,677 from the Portfolio under the Class B Plan and
spent approximately $326,600 in distributing the Class B shares of the
Portfolio. It is estimated that of the latter amount approximately 37.0%
($121,000) was spent on compensation to Pruco Securities Corporation (Prusec),
an affiliated broker-dealer, for commissions to its representatives and other
expenses, including an allocation on account of overhead and other branch
office distribution-related expenses, incurred by it for distribution of the
Portfolio's shares; approximately 1.7% ($5,500) on prospectus and other
printing costs; and 61.3% ($200,100) on the aggregate of (i) payments of
commissions and account servicing fees to financial advisers (37.8% or
$123,300) and (ii) an allocation on account of overhead and other branch
office distribution-related expenses (23.5% or $76,800). The term "overhead
and other branch office distribution-related expenses" represents (a) the
expenses of operating Prudential Securities' and Prusec's branch offices in
connection with the sale of shares of the Portfolio, including lease costs,
the salaries and employee benefits of operations and sales support personnel,
utility costs, communications costs and the costs of stationery and supplies,
(b) the costs of client sales seminars, (c) expenses of mutual fund sales
coordinators to promote the sale of shares of the Portfolio, and (d) other
incidental expenses relating to branch promotion of Fund sales.
Prudential Securities also receives the proceeds of contingent deferred
sales charges paid by investors upon certain redemptions of Class B shares.
See "Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales
Charges" in the Prospectus. For the fiscal year ended December 31, 1996,
Prudential Securities received approximately $187,000 in contingent deferred
sales charges attributable to Class B shares.
CLASS C PLAN. For the fiscal year ended December 31, 1996, Prudential
Securities received $9,527 under the Class C Plan and spent approximately
$9,400 in distributing Class C shares. It is estimated that of the latter
amount, approximately 5.3% ($500) was spent on printing and mailing of
prospectuses to other than current shareholders; 18.1% ($1,700) on
compensation to Prusec for commissions to its representatives and other
expenses, including an allocation of overhead and other branch office
distribution-related expenses incurred by it for distribution of Fund shares;
and 76.6% ($7,200) was spent on the aggregate of (i) payments of commissions
and account servicing fees to financial advisers (51.1% or $4,900) and (ii) an
allocation of overhead and other branch office distribution-related expenses
for payments of related expenses (24.5% or $2,300). For the fiscal year ended
December 31, 1996, Prudential Securities also received approximately $2,000 in
contingent deferred sales charges paid by investors upon certain redemptions
of Class C shares. See "Shareholder Guide--How to Sell Your Shares--Contingent
Deferred Sales Charges" in the Prospectus.
The Class A, Class B and Class C Plans continue in effect from year to year,
provided that each such continuance is approved at least annually by a vote of
the Board of Directors, including a majority vote of the Rule 12b-1 Directors,
cast in person at a meeting called for the purpose of voting on such
continuance. The Plans may be terminated at any time, without penalty, by the
vote of a majority of the Rule 12b-1 Directors or by the vote of the holders
of a majority of the outstanding shares of the applicable class ofthe
Portfolio on not more than 30 days' written notice to any other party to the
Plans. The Plans may not be amended to increase materially the amounts to be
spent for the services described therein without approval by the shareholders
of the applicable class (by both Class A and Class B shareholders, voting
separately, in the case of material amendments to the Class A Plan), and all
material amendments are required to be approved by the Board of Directors in
the manner described above. Each Plan will automatically terminate in the
event of assignment. The Fund will not be contractually obligated to pay
expenses incurred under any Plan if it isterminated or not continued.
Pursuant to each Plan, the Board of Directors will review at least quarterly
a written report of the distribution expenses incurred on behalf of each class
of shares of the Portfolios by the Distributor. The report includes an
itemization of the distribution expenses and the purposes of such
expenditures. In addition, as long as the Plans remain in effect, the
selection and nomination of Rule 12b-1 Directors shall be committed to the
Rule 12b-1 Directors.
Pursuant to the Distribution Agreement, the Fund has agreed to indemnify
Prudential Securities to the extent permitted by applicable law against
certain liabilities under the Securities Act of 1933, as amended. The restated
Distribution Agreement was last approved by the Board of Directors, including
a majority of the Rule 12b-1 Directors, on April 10, 1996.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators in 51 jurisdictions and the NASD to resolve
allegations that PSI sold interests in more than 700 limited partnerships (and
a limited number of other types of
B-17
<PAGE>
securities) from January 1, 1980 through December 31, 1990, in violation of
securities laws to persons for whom such securities were not suitable in light
of the individuals' financial condition or investment objectives. It was also
alleged that the safety, potential returns and liquidity of the investments
had been misrepresented. The limited partnerships principally involved real
estate, oil and gas producing properties and aircraft leasing ventures. The
SEC Order (i) included findings that PSI's conduct violated the federal
securities laws and that an order issued by the SEC in 1986 requiring PSI to
adopt, implement and maintain certain supervisory procedures had not been
complied with; (ii) directed PSI to cease and desist from violating the
federal securities laws and imposed a $10 million civil penalty; and (iii)
required PSI to adopt certain remedial measures including the establishment of
a Compliance Committee of its Board of Directors. Pursuant to the terms of the
SEC settlement, PSI established a settlement fund in the amount of
$330,000,000 and procedures, overseen by a court approved Claims
Administrator, to resolve legitimate claims for compensatory damages by
purchasers of the partnership interests. PSI has agreed to provide additional
funds, if necessary, for that purpose. PSI's settlement with the state
securities regulators included an agreement to pay a penalty of $500,000 per
jurisdiction. PSI consented to a censure and to the payment of a $5,000,000
fine in settling the NASD action. In settling the above referenced matters,
PSI neither admitted nor denied the allegations asserted against it.
On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a
Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and
other improper conduct resulting in pecuniary losses and other harm to
investors residing in Texas with respect to purchases and sales of limited
partnership interests during the period of January 1, 1980 through December 3,
1990. Without admitting or denying the allegations, PSI consented to a
reprimand, agreed to cease and desist from future violations, and to provide
voluntary donations to the State of Texas in the aggregate amount of
$1,500,000. The firm agreed to suspend the creation of new customer accounts,
the general solicitation of new accounts, and the offer for sale of securities
in or from PSI's North Dallas office to new customers during a period of
twenty consecutive business days, and agreed that its other Texas offices
would be subject to the same restrictions for a period of five consecutive
business days. PSI also agreed to institute training programs for its
securities salesmen in Texas.
On October 27, 1994, Prudential Securities Group, Inc. (PSG) and PSI entered
into agreements with the United States Attorney deferring prosecution
(provided PSI complies with the terms of the agreement for three years) for
any alleged criminal activity related to the sale of certain limited
partnership programs from 1983 to 1990. In connection with these agreements,
PSI agreed to add the sum of $330,000,000 to the fund established by the SEC
and executed a stipulation providing for a reversion of such funds to the
United States Postal Inspection Service. PSI further agreed to obtain a
mutually acceptable outside director to sit on the Board of Directors of PSG
and the Compliance Committee of PSI. The new director will also serve as an
independent "ombudsman" whom PSI employees can call anonymously with
complaints about ethics and compliance. Prudential Securities shall report any
allegations or instances of criminal conduct and material improprieties to the
new director.The new director will submit compliance reports which shall
identify all such allegations or instances of criminal conduct and material
improprieties every three months for a three-year period.
NASD MAXIMUM SALES CHARGE RULE. Pursuant to rules of the NASD, the
Distributor is required to limit aggregate initial sales charges, deferred
sales charges and asset-based sales charges to 6.25% of total gross sales of
each class of shares of the Portfolio. 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 shares of the Portfolio may not exceed .75
of 1% per class. The 6.25% limitation applies to each class of the Portfolio
rather than on a per shareholder basis. If aggregate sales charges were to
exceed 6.25% of total gross sales of any class of the 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 (or
any affiliate), 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. This limitation, in the opinion of the Fund, will
not significantly affect the Portfolio's ability to pursue its present
investment objective. However, in the future in other circumstances, the
Portfolio may be at a disadvantage because of this limitation in comparison to
other funds with similar objectives but not subject to such limitations.
In placing orders for portfolio securities of the Fund, the Manager is
required to give primary consideration to obtaining the most favorable price
and efficient execution. This means that the Manager will seek to execute each
transaction at a price and commission,
B-18
<PAGE>
if any, which provide the most favorable total cost or proceeds reasonably
attainable under the circumstances. While the Manager generally seeks
reasonably competitive spreads or commissions, the Fund will not necessarily
be paying the lowest spread or commission available. Within the framework of
this policy, the Manager may consider research and investment services
provided by brokers or dealers who effect or are parties to portfolio
transactions of the Fund, the Manager or the Manager's other clients. Such
research and investment services are those which brokerage houses customarily
provide to institutional investors and include statistical and economic data
and research reports on particular companies and industries. Such services are
used by the Manager in connection with all of its investment activities, and
some of such services obtained in connection with the execution of
transactions for the Fund may be used in managing other investment accounts.
Conversely, brokers furnishing such services may be selected for the execution
of transactions for such other accounts, whose aggregate assets are far larger
than the Fund's, and the services furnished by such brokers may be used by the
Manager in providing investment management for the Fund. While such services
are useful and important in supplementing its own research and facilities, the
Manager believes that the value of such services is not determinable and does
not significantly reduce expenses. The Fund does not reduce the advisory fee
it pays to the Manager by any amount that may be attributed to the value of
such services.
Subject to the above considerations, Prudential Securities may act as a
securities broker for the Fund. In order for Prudential Securities (or any
affiliate) to effect any portfolio transactions for the Fund, the commissions,
fees or other remuneration received by Prudential Securities (or any
affiliate) must be reasonable and fair compared to the commissions, fees or
other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold during a
comparable period of time. This standard would allow Prudential Securities (or
any affiliate) to receive no more than the remuneration which would be
expected to be received by an unaffiliated broker in a commensurate arm's-
length transaction. Furthermore, the Board of Directors of the Fund, including
a majority of the non-interested Directors, has adopted procedures which are
reasonably designed to provide that any commissions, fees or other
remuneration paid to Prudential Securities (or any affiliate) are consistent
with the foregoing standard. Brokerage transactions with Prudential Securities
are also subject to such fiduciary standards as may be imposed by applicable
law. For the fiscal years ended December 31, 1996, 1995 and 1994, the Fund
paid no brokerage commissions.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of the Portfolio may be purchased at a price equal to the next
determined net asset value per share plus a sales charge which, at the
election of the investor, may be imposed either (i) at the time of purchase
(Class A shares) or (ii) on a deferred basis (Class B or Class C shares).
Class Z shares of the Portfolio are offered to a limited group of investors at
net asset value without any sales charges. See "Shareholder Guide--How to Buy
Shares of the Fund" in the Prospectus.
Each class of shares represents an interest in the same portfolio of
investments of the Portfolio and has the same rights, except that (i) each
class is subject to different sales charges and distribution and/or service
fees (except for Class Z shares, which are not subject to any sales charges
and distribution and/or service fees), which may affect performance, (ii) each
class has exclusive voting rights with respect to any matter submitted to
shareholders that relates solely to its arrangement and has separate voting
rights on any matter submitted to shareholders in which the interests of one
class differ from the interests of any other class, (iii) each class has a
different exchange privilege, (iv) only Class B shares have a conversion
feature and (v) Class Z shares are offered exclusively for sale to a limited
group of investors. See "Distributor" and "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*, Class C* and Class Z shares of the Fund are sold at net
asset value. Using the Portfolio's net asset value at December 31, 1996, the
maximum offering price of the Portfolio's shares is as follows:
<TABLE>
<CAPTION>
Income
Portfolio
CLASS A ---------
<S> <C>
Net asset value and redemption price per Class A share......... $11.36
Maximum sales charge (3.25% of offering price)................. .38
------
Maximum offering price to public............................... $11.74
======
CLASS B
Net asset value, offering price and redemption price per Class
B share*...................................................... $11.36
======
CLASS C
Net asset value, offering price and redemption price per Class
C share*...................................................... $11.36
======
CLASS Z
Net asset value, offering price and redemption price per Class
Z share....................................................... $11.37
======
</TABLE>
---------
* Class B and Class C shares are subject to a contingent deferred sales
charge on certain redemptions.
See "Shareholder Guide--How to Sell Your Shares--Contingent Deferred
Sales Charges" in the Prospectus.
B-19
<PAGE>
REDUCTION AND WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Portfolio
concurrently with Class A shares of other Prudential Mutual Funds, the
purchases may be combined to take advantage of the reduced sales charges
applicable to larger purchases. See the table of breakpoints under
"Shareholder Guide--Alternative Purchase Plan" in the Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or group
that holds 25% or more of the outstanding voting securities of a
company will be deemed to control the company, and a partnership will
be deemed to be controlled by each of its general partners);
(e) a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse; and
(g) one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related investors in the Portfolio 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 any retirement or group plans.
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of
related investors, as described above under "Combined Purchase and Cumulative
Purchase Privilege," may aggregate the value of their existing holdings of the
shares of the Fund and shares of other Prudential Mutual Funds (excluding
money market funds other than those acquired pursuant to the exchange
privilege) to determine the reduced sales charge. However, the value of shares
held directly with the Transfer Agent and through Prudential Securities will
not be aggregated to determine the 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 any retirement or group plans.
LETTERS OF INTENT. Reduced sales charges are available to investors (or an
eligible group of related investors), including retirement and group plans,
who enter into a written Letter of Intent providing for the purchase, within a
thirteen-month period, of shares of the Fund and shares of other Prudential
Mutual Funds (Investment Letter of Intent). Retirement and group plans may
also qualify to purchase Class A shares at net asset value by entering into a
Letter of Intent whereby they agree to enroll, within a thirteen-month period,
a specified number of eligible employees or participants (Participant Letter
of Intent).
For purposes of the Investment Letter of Intent, all shares of the Fund and
shares of other Prudential Mutual Funds (excluding money market funds other
than those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent
and through Prudential Securities will not be aggregated to determine the
value of the reduced sales charge. All shares must be held either directly
with the Transfer Agent or through Prudential Securities.
A Letter of Intent permits a purchaser, in the case of an Investment Letter
of Intent, to establish a total investment goal to be achieved by any number
of investments over a thirteen-month period and, in the case of a Participant
Letter of Intent, to establish a minimum eligible employee or participant goal
over a thirteen-month period. Each investment made during the period, in the
case of an Investment Letter of Intent, will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. In the case of a Participant Letter of Intent, each investment
made during the period will be made at net asset value. Escrowed Class A
shares totaling 5% of the dollar amount of the Letter of Intent will be held
by the Transfer Agent in the name of the purchaser, except in the case of
retirement and group plans where the employer or plan sponsor will be
responsible for paying any applicable sales charge. The effective date of an
Investment Letter of Intent (except in the case of retirement and group plans)
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.
B-20
<PAGE>
The Investment Letter of Intent does not obligate the investor to purchase,
nor the Fund to sell, the indicated amount. Similarly, the Participant Letter
of Intent does not obligate the retirement or group plan to enroll the
indicated number of eligible employees or participants. In the event the
Letter of Intent goal is not achieved within the thirteen-month period, the
purchaser (or the employer or plan sponsor in the case of any retirement or
group plan) is required to pay the difference between the sales charge
otherwise applicable to the purchases made during this period and sales
charges actually paid. Such payment may be made directly to the Distributor
or, if not paid, the Distributor will liquidate sufficient escrowed shares to
obtain such difference. Investors electing to purchase Class A shares of the
Fund pursuant to a Letter of Intent should carefully read such Letter of
Intent.
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, in the
case of an Investment Letter of Intent, be granted subject to confirmation of
the investor's holdings or, in the case of a Participant Letter of Intent,
subject to confirmation of the number of eligible employees or participants in
the retirement or group plan. Letters of Intent are not available to
individual participants in any retirement or group plans.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
The contingent deferred sales charge is waived under circumstances described
in the Prospectus. See "Shareholder Guide--How to Sell Your Shares--Waiver of
the Contingent Deferred Sales Charges--Class B Shares" in the Prospectus. In
connection with these waivers, the Transfer Agent will require you to submit
the supporting documentation set forth below.
<TABLE>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
- ------------------ ----------------------
<S> <C>
Death A copy of the shareholder's death certificate or, in
the case of a trust, a copy of the grantor's death
certificate, plus a copy of the trust agreement
identifying the grantor.
Disability--An individual A copy of the Social Security Administration award
will be considered letter or a letter from a physician on the physician's
disabled if he or she is letterhead stating that the shareholder (or, in the
unable to engage in any case of a trust, the grantor) is permanently disabled.
substantial gainful The letter must also indicate the date of disability.
activity by reason of any
medically determinable
physical or mental
impairment which can be
expected to result in
death or to be of long-
continued and indefinite
duration.
Distribution from an IRA A copy of the distribution form from the custodial firm
or 403(b) Custodial indicating (i) the date of birth of the shareholder and
Account (ii) that the shareholder is over age 59 1/2 and is
taking a normal distribution--signed by the
shareholder.
Distribution from A letter signed by the plan administrator/trustee
Retirement Plan indicating the reason for the distribution.
Excess Contributions A letter from the shareholder (for an IRA) or the plan
administrator/trustee on company letterhead indicating
the amount of the excess and whether or not taxes have
been paid.
</TABLE>
The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.
QUANTITY DISCOUNT--CLASS B SHARES PURCHASED PRIOR TO AUGUST 1, 1994
While a quantity discount is not available for Class B shares of the
Portfolio, a quantity discount may apply with respect to Class B shares
exchanged from another Prudential Mutual Fund. The contingent deferred sales
charge may be reduced on redemptions of Class B shares of the Portfolio if the
investor qualified for a quantity discount upon the initial purchase of shares
exchanged into the Portfolio.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of shares of the Portfolio, a Shareholder
Investment Account is established for each investor under which shares are
held for the investor 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. The
Fund makes available to the shareholders the following privileges and plans.
B-21
<PAGE>
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Portfolio. An
investor may direct the Transfer Agent in writing not less than five full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. In the case of recently
purchased shares for which registration instructions have not been received on
the record date, cash payment will be made directly to the dealer. Any
shareholder who receives a cash payment representing a dividend or
distribution may reinvest such dividend or distribution at net asset value by
returning the check or the proceeds to the Transfer Agent within 30 days after
the payment date. Such investment will be made at the net asset value per
share next determined after receipt of the check or proceeds by the Transfer
Agent. Such shareholder will receive credit for any contingent deferred sales
charge paid in connection with the amount of proceeds being reinvested.
EXCHANGE PRIVILEGE
The Portfolio makes available to its shareholders the privilege of
exchanging their shares of the Portfolio for shares of certain other
Prudential Mutual Funds, including one or more specified money market funds,
subject in each case to the minimum investment requirements of such funds.
Shares of other Prudential Mutual Funds may also be exchanged for shares of
the Portfolio. 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 Portfolio may exchange their Class A shares for
Class A shares of certain other Prudential Mutual Funds, shares of Prudential
Government Securities Trust (Short-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, Inc.
Prudential Tax-Free Money Fund, Inc.
CLASS B AND CLASS C. Shareholders of the Portfolio may exchange their Class
B and Class C shares for Class B and Class C shares, respectively, of certain
other Prudential Mutual Funds and shares of Prudential Special Money Market
Fund, Inc. No contingent deferred sales charge will be payable upon such
exchange, but a CDSC may be payable upon the redemption of Class B and Class C
shares acquired as a result of the exchange. The applicable sales charge will
be that imposed by the fund in which shares were initially purchased and the
purchase date will be deemed to be the first day of the month after the
initial purchase, rather than the date of the exchange.
Class B and Class C shares of the Portfolio may also be exchanged for shares
of Prudential Special Money Market Fund, Inc. without imposition of any CDSC
at the time of exchange. Upon subsequent redemption from such money market
fund or after re-exchange into the Fund, such shares will be subject to the
CDSC calculated by excluding the time such shares were held in the money
market fund. In order to minimize the period of time in which shares are
subject to a CDSC, shares exchanged out of the money market fund will be
exchanged on the basis of their remaining holding periods, with the longest
remaining holding periods being transferred first. In measuring the time
period shares are held in a money market fund and "tolled" for purposes of
calculating the CDSC holding period, exchanges are deemed to have been made on
the last day of the month. Thus, if shares are exchanged into the Portfolio
from a money market fund during the month (and are held in the Portfolio at
the end of the month), the entire month will be included in the CDSC holding
period. Conversely, if shares are exchanged into a money market fund prior to
the last day of the month
B-22
<PAGE>
(and are held in the money market fund on the last day of the month), the
entire month will be excluded from the CDSC holding period. For purposes of
calculating the five year holding period applicable to the Class B conversion
feature, the time period during which Class B shares were held in a money
market fund will be excluded.
At any time after acquiring shares of other funds participating in the Class
B or Class C exchange privilege, a shareholder may again exchange those shares
(and any reinvested dividends and distributions) for Class B or Class C shares
of the Portfolio, respectively, without subjecting such shares to any CDSC.
Shares of any fund participating in the Class B or Class C exchange privilege
that were acquired through reinvestment of dividends or distributions may be
exchanged for Class B or Class C shares of other funds, respectively, without
being subject to any CDSC.
CLASS Z. Class Z shares may be exchanged for Class Z shares of other
Prudential Mutual Funds.
Additional details about the Exchange Privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on sixty days' notice, and any fund, including the
Fund, or the Distributor, has the right to reject any exchange application
relating to such fund's shares.
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more
shares when the price is low and fewer shares when the price is high. The
average cost per share is lower than it would be if a constant number of
shares were bought at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2011, the cost of four years at a private
college could reach $210,000 and over $90,000 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
MONTHLY INVESTMENTS $100,000 $150,000 $200,000 $250,000
------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
25 Years............................ $ 110 $ 165 $ 220 $ 275
20 Years............................ 176 264 352 440
15 Years............................ 296 444 592 740
10 Years............................ 555 833 1,110 1,388
5 Years............................ 1,371 2,057 2,742 3,428
</TABLE>
See "Automatic Savings Accumulation Plan."
- ---------
/1/Source information concerning the costs of education at public and
private universities is available from The College Board Annual Survey of
Colleges, 1993. Average costs for private institutions include tuition, fees,
room and board for the 1993-1994 academic year.
/2/The chart assumes an average rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not
intended to reflect the performance of an investment in shares of the
Portfolio. 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 the Portfolio monthly by authorizing his or her bank
account or Prudential Securities account (including a Command Account) to be
debited to invest specified dollar amounts in shares of the Fund. The
investor's bank must be a member of the Automatic Clearing House System. Stock
certificates are not issued to ASAP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available for shareholders through
Prudential Securities or the Transfer Agent. Such withdrawal plan provides for
monthly or quarterly checks in any amount, except as provided below, up to the
value of the shares in the
B-23
<PAGE>
shareholder's account. Withdrawals of Class B or Class C shares may be subject
to a CDSC. See "Shareholder Guide--How to Sell Your Shares--Contingent
Deferred Sales Charges" in the Prospectus.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and
(iii) the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at net asset
value on shares held under this plan. See "Shareholder Investment Account--
Automatic Reinvestment of Dividends and/or Distributions."
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may
be terminated at any time, and the Distributor reserves the right to initiate
a fee of up to $5 per withdrawal, upon 30 days' written notice to the
shareholder.
Withdrawal payments should not generally be considered as dividends, yield
or income. If periodic withdrawals continuously exceed reinvested dividends
and distributions, the shareholder's original investment will be
correspondingly reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must generally be recognized for federal income tax
purposes. In addition, withdrawals made concurrently with purchases of
additional shares are inadvisable because of the applicable sales charges to
(i) the purchase of Class A shares and (ii) the withdrawal of Class B and
Class C shares. Each shareholder should consult his or her own tax adviser
with regard to the tax consequences of the plan, particularly if used in
connection with a retirement plan.
TAX-DEFERRED RETIREMENT PLANS
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.
TAX-DEFERRED RETIREMENT ACCOUNTS
INDIVIDUAL RETIREMENT ACCOUNTS. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account
until the earnings are withdrawn. The following chart represents a comparison
of the earnings in a personal savings account with those in an IRA, assuming a
$2,000 annual contribution, an 8% rate of return and a 39.6% federal income
tax bracket and shows how much more retirement income can accumulate within an
IRA as opposed to a taxable individual savings account.
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 the Portfolio 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.
MUTUAL FUND PROGRAMS
From time to time, the Fund may be included in a mutual fund program with
other Prudential Mutual Funds. Under such a program, a group of portfolios
will be selected and thereafter marketed collectively. Typically, these
programs are created with an investment theme, e.g., to seek greater
diversification, protection from interest rate movements or access to
different management styles. In the event such a program is instituted, there
may be a minimum investment requirement for the program as a whole. The Fund
may waive or reduce the minimum initial investment requirements in connection
with such a program.
B-24
<PAGE>
The mutual funds in the program may be purchased individually or as part of
a program. Since the allocation of portfolios included in the program may not
be appropriate for all investors, individuals should consult their Prudential
Securities Financial Advisor or Prudential/Pruco Securities Representative
concerning the appropriate blend of portfolios for them. If investors elect to
purchase the individual mutual funds that constitute the program in an
investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
NET ASSET VALUE
The net asset value per share is the net worth of the Portfolio (assets,
including securities at value, minus liabilities) divided by the number of
shares outstanding. The net asset value is calculated separately for each
class of the Portfolio.
Under the Investment Company Act, the Board of Directors is responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Board of Directors, the value of
each U.S. Government and corporate security of the 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. Futures
contracts are valued daily at 4:15 P.M., New York time, at market quotations
provided by the Chicago Board of Trade. The Fund will compute its net asset
value at 4:15 P.M., New York time, on each day the New York Stock Exchange is
open for trading except on days on which no orders to purchase, sell or redeem
Fund shares have been received or days on which changes in the value of the
Fund's portfolio securities do not affect net asset value. In the event the
New York Stock Exchange closes early on any business day, the net asset value
of the Fund's shares shall be determined at the time between such closing and
4:15 P.M., New York time. 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.
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 by the Board of Directors.
As long as the Portfolio declares dividends daily, the net asset value of
the Class A, Class B, Class C and Class Z shares of the Portfolio will
generally be the same. It is expected, however, that the dividends, if any,
will differ by approximately the amount of the distribution and/or service fee
expense accrual differential among the classes.
DIVIDENDS AND DISTRIBUTIONS
The Portfolio declares dividends daily based on actual net investment income
determined in accordance with generally accepted accounting principles. Such
dividends will be payable monthly. The Portfolio's net capital gains, if any,
will be distributed at least annually. In determining the amount of capital
gains to be distributed, any capital loss carryforwards from prior years will
be offset against capital gains. Dividends and distributions will be paid in
additional Class A, Class B, Class C or Class Z shares of the Portfolio based
on net asset value on the payment date or such other date as the Board of
Directors may determine, unless the shareholder elects in writing not less
than five full business days prior to the payment date to receive such
distributions in cash. In the event that a shareholder's shares are redeemed
on a date other than the monthly dividend payment date, the proceeds of such
redemption will equal the net asset value of the shares redeemed plus the
amount of all dividends declared through the date of redemption.
The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A and Class Z shares as a result of the higher
distribution fee applicable to the Class B and Class C shares. The per share
distributions of net capital gains, if any, will be paid in the same amount
for Class A, Class B, Class C and Class Z shares. See "Net Asset Value."
TAXES
The Portfolio has elected to qualify and intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code.
This relieves the Portfolio (but not its shareholders) from paying federal
income tax on income which is distributed to shareholders 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 the 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
B-25
<PAGE>
capital gains of the 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 the 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 or options thereon,
or foreign currencies or other income (including but not limited to gains from
options, futures or forward contracts) derived with respect to its business of
investing in such securities or currencies; (b) the Portfolio derives less
than 30% of its gross income from gains (without reduction for losses) from
the sale or other disposition of securities, options thereon, futures
contracts, options thereon, forward contracts and foreign currencies held for
less than three months (except for foreign currencies directly related to the
Portfolio's business of investing in securities); (c) the Portfolio diversify
its holdings so that, at the end of each quarter of the taxable year, (i) at
least 50% of the value of the Portfolio's assets is represented by cash, U.S.
Government securities and other securities limited in respect of any one
issuer to an amount not greater than 5% of the value of the assets of the
Portfolio 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 securities) and (d)
the Portfolio distribute to its shareholders at least 90% of its net
investment income and net short-term gains (i.e., the excess of net short-term
capital gains over net long-term capital losses) in each year.
Gains or losses on sales of securities by the 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 otherwise holds an offsetting position with
respect to the securities. Other gains or losses on the sale of securities
will be short-term capital gains or losses. Debt securities acquired by the
Portfolio may be subject to original issue discount and market discount rules.
Special rules will apply to futures contracts and options thereon in which
the Portfolio invests. See "Investment Objective 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.
The Portfolio's hedging activities may be affected by the requirement under
the Internal Revenue Code that less 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.
The 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. The 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 will 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 the
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 the 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 the
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 the 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 Prospectus.
If any net capital gains 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
B-26
<PAGE>
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, the 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
the 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, 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 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 capital gains, whether
received in shares or cash, must be reported by each shareholder on his or her
federal income tax return.
Distributions to shareholders of the Portfolio of net investment income and
of net short-term gains 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, 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 the 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.
PERFORMANCE INFORMATION
AVERAGE ANNUAL TOTAL RETURN. The Portfolio may from time to time advertise
its average annual total return. Average annual total return is determined
separately for Class A, Class B, Class C and Class Z shares. See "How the Fund
Calculates Performance" in the Prospectus.
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 at the end of the 1, 5 or 10 year periods
(or fractional portion thereof) of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year periods.
Average annual 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 returns for Class A shares of the Portfolio for the
one year, five year and since inception (September 1, 1989) periods ended
December 31, 1996 were .93%, 5.23% and 7.09%, respectively. Without expense
subsidies and the management fee waiver, the average annual total returns for
these periods would have been .93%, 5.17% and 6.95%, respectively. The average
annual total returns with respect to the Class B shares of the Portfolio for
the one year and since inception (December 9, 1992) periods ended December 31,
1996 were .64% and 5.04%, respectively. The average annual total returns for
Class C shares for the one year and since inception (August 1, 1994) periods
ended December 31, 1996 were 2.65% and 6.22%, respectively.
AGGREGATE TOTAL RETURN. The Portfolio may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B,
Class C and Class Z shares. See "How the Fund Calculates Performance" in the
Prospectus.
Aggregate total return represents the cumulative change in the value of an
investment in the Portfolio and is computed by the following formula:
ERV - P
--------
P
Where: P = a hypothetical initial payment of $1,000.
ERV = Ending Redeemable Value at the end of the 1, 5, or 10 year
periods (or fractional portion thereof) of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10 year periods.
B-27
<PAGE>
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 returns for Class A shares of the Portfolio for the one
year, five year and since inception periods ended December 31, 1996 were
4.32%, 33.35% and 70.83%, respectively. The aggregate total returns for Class
B shares of the Portfolio for the one year and since inception periods ended
December 31, 1996 were 3.64% and 22.09%, respectively. The aggregate total
returns for Class C shares for the one year and since inception periods ended
December 31, 1996 were 3.64% and 15.70%, respectively. The aggregate total
return for Class Z shares of the Portfolio for the since inception (December
16, 1996) period ended December 31, 1996 was .59%.
YIELD. The Portfolio may from time to time advertise its yield as calculated
over a 30-day period. Yield is calculated separately for Class A, Class B,
Class C and Class Z shares. This yield will be computed by dividing the
Portfolio's net investment income per share earned during this 30-day period
by the maximum offering price per share on the last day of this period. Yield
is calculated according to the following formula:
a - b
YIELD = 2[( ------- +1) /6/-1 ]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
Yield fluctuates and an annualized yield quotation is not a representation
by the Fund as to what an investment in the Portfolio will actually yield for
any given period.
The yields for the 30-day period ended December 31, 1996 for the Portfolio's
Class A, Class B and Class C shares were 5.39%, 4.91% and 4.91%, respectively.
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/
(CHART)
<TABLE>
<CAPTION>
Performance Comparison of Different Types
of Investments Over the Long Term
(1/1926 - 12/1994)
<S> <C>
Common Stocks 10.2%
Long-Term Govt. Bonds 4.8%
Inflation 3.1%
</TABLE>
/1/Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation--1995
Yearbook" (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. 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. Investors cannot invest directly in an
index. Past performance is not a guarantee of future results.
B-28
<PAGE>
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities
and cash, and in that capacity maintains certain financial and accounting
books and records pursuant to an agreement with the Fund. See "How the Fund is
Managed--Custodian and Transfer and Dividend Disbursing Agent" in the
Prospectus.
Prudential Mutual Fund Services LLC (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, 1996, the Portfolio
incurred fees of approximately $277,000 for the services of PMFS.
Deloitte & Touche LLP, Two World Financial Center, New York, New York 10281,
served as the Fund's independent accountants for the fiscal year ended
December 31, 1996 and in that capacity audited the Fund's annual financial
statements. Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New
York 10036, currently serves as the Fund's independent public accountants and,
in that capacity, will audit the Fund's annual financial statements.
B-29
<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 INCOME PORTFOLIO
=====================================================================
Portfolio of Investments as of December 31, 1996
=====================================================================
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
- ---------------------------------------------------------------------
<S> <C> <C> <C>
5-6 YEARS--17.5%
Ba1 $ 6,400 Federated Department
Stores, Inc.,
(Retail)
8.125%, 10/15/02 $ 6,550,656
23,500 United States Treasury
Note,
6.375%, 8/15/02 23,654,160
-------------
30,204,816
- ---------------------------------------------------------------------
4-5 YEARS--16.0%
Baa1 4,800 Comdisco, Inc.,
(Leasing)
6.375%, 11/30/01 4,722,720
A1 5,000 Petroliam Nasional Berhad,
(Energy) (Malaysia)
6.625%, 10/18/01 4,996,350
A3 4,000 Rite Aid Corp.,
(Retail)
6.70%, 12/15/01 3,992,360
Ba1 7,250 Tele Communications, Inc.,
(Media)
7.35%, 8/27/01 7,311,843
United States Treasury
Notes,
1,000 5.625%, 2/28/01 980,160
5,500 6.25%, 10/31/01 5,505,170
100 5.875%, 11/30/01 98,547
-------------
27,607,150
- ---------------------------------------------------------------------
3-4 YEARS--15.6%
Baa3 2,000 Banco de Comercio,
(Banking) (Colombia)
8.625%, 6/2/00 2,070,000
Ba2 9,000 Paramount Communications,
Inc.,
(Media)
5.875%, 7/15/00 8,694,630
Ba1 8,000 Time Warner, Inc.,
(Media)
7.95%, 2/1/00 8,261,520
United States Treasury
Notes,
2,000 7.125%, 2/29/00 2,059,060
6,000 6.125%, 7/31/00 6,000,000
-------------
27,085,210
- ---------------------------------------------------------------------
2-3 YEARS--16.7%
Capital One Bank,
(Banking)
Baa3 3,000 6.90%, 4/15/99 3,020,070
Baa3 2,500 7.20%, 7/19/99 2,528,025
Baa2 3,000 Crane Co.,
(Industrial Services)
7.25%, 6/15/99 3,028,560
Baa2 1,000 Federal Express Corp.,
(Consumer Services)
10.05%, 6/15/99 1,078,160
Baa3 3,000 Republic of Colombia,
(Foreign Government)
8.75%, 10/6/99 3,135,000
B1 3,000 Rio De Janeiro
Municipality,
(Foreign Government)
10.375%, 7/12/99 3,082,500
Baa1 8,500 Salomon, Inc.,
(Financial Services)
7.00%, 5/15/99 8,567,150
4,500 United States Treasury
Notes,
5.875%, 11/15/99 4,482,405
-------------
28,921,870
- ---------------------------------------------------------------------
1-2 YEARS--16.4%
Ba2 2,000 Bancomer S.A.,
(Banking) (Mexico)
8.00%, 7/7/98 1,995,000
</TABLE>
- ---------------------------------------------------------------------
See Notes to Financial Statements.
B-30
<PAGE>
PRUDENTIAL STRUCTURED MATURITY FUND
INCOME PORTFOLIO
=====================================================================
Portfolio of Investments as of December 31, 1996
=====================================================================
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
- ---------------------------------------------------------------------
<S> <C> <C> <C>
1-2 YEARS (cont'd.)
Baa2 $ 6,500 Enterprise Rent-A-Car
Finance Co.,
(Financial Services)
7.875%, 3/15/98 $ 6,644,625
A3 6,000 Kansallis-Osake-Pankki
Bank,
(Banking) (Finland)
9.75%, 12/15/98 6,368,400
Baa1 7,000 Lehman Brothers Holdings,
Inc.,
(Financial Services)
6.84%, 9/25/98 7,052,990
Ba2 2,000 Nacional Financiera,
(Foreign Government)
8.125%, 4/9/98 2,017,500
Baa2 4,200 Transco Energy Co.,
(Utilities)
9.125%, 5/1/98 4,359,348
-------------
28,437,863
- ---------------------------------------------------------------------
WITHIN 1 YEAR--15.7%
Baa2 10,000 Advanta Corp.,
(Consumer Finance)
6.24%, 2/7/97 10,019,500
Baa3 3,000 Banco Ganadero S.A.,
(Banking) (Colombia)
9.75%, 8/26/99, Put
8/26/97 3,157,500
A2 2,000 Bank One Credit Card
Trust,
(Asset Backed)
(Average Life 1 year)
7.75%, 12/15/99 2,030,620
Baa3 2,500 Capital One Bank,
(Banking)
8.625%, 1/15/97 2,501,400
Baa1 1,500 Comdisco, Inc.,
(Leasing)
9.75%, 1/15/97 1,501,290
Baa2 2,100 Finova Financial Corp.,
(Industrial Finance)
9.67%, 7/1/97 2,138,640
A3 2,000 General Motors Acceptance
Corp.,
(Financial Services)
7.50%, 11/4/97 $ 2,027,180
A3 3,500 Potomac Capital Investment
Corp.,
(Financial Services)
6.19%, 4/28/97 3,502,380
235 Joint Repurchase Agreement
Account,
6.61%, 1/2/97 235,000
-------------
27,113,510
- ---------------------------------------------------------------------
Total Investments--97.9%
(cost $168,266,426) 169,370,419
Other assets in excess of
liabilities--2.1% 3,547,924
-------------
Net Assets--100% $ 172,918,343
=============
</TABLE>
The industry classification of portfolio holdings and other net
assets shown as a percentage of net assets as of December 31, 1996
were as follows:
<TABLE>
<S> <C>
U.S. Treasury Notes........................................... 24.7%
Financial Services............................................ 16.1
Media......................................................... 14.0
Banking....................................................... 12.5
Retail........................................................ 6.1
Consumer Finance.............................................. 5.8
Foreign Government............................................ 4.8
Leasing....................................................... 3.6
Energy........................................................ 2.9
Utilities..................................................... 2.5
Industrial Services........................................... 1.8
Asset Backed.................................................. 1.2
Industrial Finance............................................ 1.2
Consumer Services............................................. .6
Repurchase Agreement.......................................... .1
Other assets in excess of liabilities......................... 2.1
-----
100.0%
=====
</TABLE>
- ---------------------------------------------------------------------
See Notes to Financial Statements.
B-31
<PAGE>
PRUDENTIAL STRUCTURED MATURITY FUND INCOME PORTFOLIO
Statement of Assets and Liabilities
=====================================================================
<TABLE>
<CAPTION>
Assets December 31, 1996
-----------------
<S> <C>
Investments, at value (cost $168,266,426)............................................................... $169,370,419
Cash.................................................................................................... 12,694
Interest receivable..................................................................................... 4,126,854
Receivable for Fund shares sold......................................................................... 78,653
Deferred expenses and other assets...................................................................... 5,007
---------------
Total assets......................................................................................... 173,593,627
---------------
Liabilities
Payable for Fund shares reacquired...................................................................... 352,805
Accrued expenses........................................................................................ 165,215
Distribution fee payable................................................................................ 71,309
Management fee payable.................................................................................. 59,376
Dividends payable....................................................................................... 26,579
---------------
Total liabilities.................................................................................... 675,284
---------------
Net Assets.............................................................................................. $172,918,343
===============
Net assets were comprised of:
Common stock, at par................................................................................. $ 152,212
Paid-in capital in excess of par..................................................................... 182,007,256
---------------
182,159,468
Accumulated net realized loss on investments......................................................... (10,345,118)
Net unrealized appreciation on investments........................................................... 1,103,993
---------------
Net assets at December 31, 1996......................................................................... $172,918,343
===============
Class A:
Net asset value and redemption price per share
($77,031,337 / 6,779,239 shares of common stock issued and outstanding)........................... $11.36
Maximum sales charge (3.25% of offering price)....................................................... .38
------
Maximum offering price to public..................................................................... $11.74
======
Class B:
Net asset value, offering price and redemption price per share
($94,490,400 / 8,318,961 shares of common stock issued and outstanding)........................... $11.36
======
Class C:
Net asset value, offering price and redemption price per share
($1,396,407 / 122,940 shares of common stock issued and outstanding).............................. $11.36
======
Class Z:
Net asset value, offering price and redemption price per share
($199.35 / 17.537 shares of common stock issued and outstanding).................................. $11.37
======
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
B-32
<PAGE>
PRUDENTIAL STRUCTURED MATURITY FUND INCOME PORTFOLIO
Statement of Operations
=====================================================================
<TABLE>
<CAPTION>
Year Ended
Net Investment Income December 31, 1996
-----------------
<S> <C>
Income
Interest.............................. $ 13,695,218
-------------
Expenses
Distribution fee--Class A............. 81,745
Distribution fee--Class B............. 796,677
Distribution fee--Class C............. 9,527
Management fee........................ 756,955
Transfer agent's fees and expenses.... 277,000
Reports to shareholders............... 130,000
Registration fees..................... 90,000
Custodian's fees and expenses......... 77,000
Audit fee............................. 38,000
Directors' fees....................... 30,000
Legal fees............................ 15,000
Miscellaneous......................... 22,481
-------------
Total expenses..................... 2,324,385
-------------
Net investment income.................... 11,370,833
-------------
Realized and Unrealized Loss
on Investments
Net realized loss on investment
transactions.......................... (3,071,885)
Net change in unrealized appreciation of
investments........................... (1,511,234)
-------------
Net loss on investments.................. (4,583,119)
-------------
Net Increase in Net Assets
Resulting from Operations................ $ 6,787,714
=============
</TABLE>
PRUDENTIAL STRUCTURED MATURITY FUND INCOME PORTFOLIO
Statement of Changes in Net Assets
================================================================
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended December 31,
in Net Assets ----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Operations
Net investment income.......... $ 11,370,833 $ 13,324,650
Net realized gain (loss) on
investment transactions..... (3,071,885) 1,914,240
Net change in unrealized
appreciation on
investments................. (1,511,234) 10,735,269
------------ ------------
Net increase in net assets
resulting from operations... 6,787,714 25,974,159
------------ ------------
Dividends (Note 1)
Dividends from net investment
income
Class A..................... (5,213,753) (5,877,430)
Class B..................... (6,084,170) (7,407,642)
Class C..................... (72,909) (39,578)
Class Z..................... (1) --
------------ ------------
(11,370,833) (13,324,650)
------------ ------------
Dividends in excess of net
investment income
Class A..................... (136,132) --
Class B..................... (166,601) --
Class C..................... (2,408) --
Class Z..................... (1) --
------------ ------------
(305,142) --
------------ ------------
Fund share transactions
(Net of share conversions) (Note 6)
Net proceeds from shares
subscribed.................. 25,615,019 30,676,035
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions .......... 7,793,568 8,591,299
Cost of shares reacquired...... (65,822,535) (64,005,192)
------------ ------------
Net decrease in net assets from
Fund share transactions..... (32,413,948) (24,737,858)
------------ ------------
Total decrease.................... (37,302,209) (12,088,349)
Net Assets
Beginning of year................. 210,220,552 222,308,901
------------ ------------
End of year....................... $172,918,343 $210,220,552
============ ============
</TABLE>
- ----------------------------------------------------------------
See Notes to Financial Statements.
B-33
<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. 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 Policies
The following is a summary of significant accounting policies 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 or designated subcustodians as the case may be under triparty
repurchase agreements, 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 Portfolio may be delayed or limited.
Securities Transactions and Net 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. Expenses are recorded on the accrual basis which may require the
use of certain estimates by management.
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 from net investment income. Distributions from 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.
- --------------------------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual Fund Management LLC
("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.
The Fund had a distribution agreement with Prudential Securities Incorporated
("PSI"), which acts as the distributor of the Class A, Class B, Class C and
Class Z shares of the Fund. The Fund compensates PSI for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution, (the "Class A, B and C plans"), regardless of expenses actually
incurred by them. The distribution fees for Class A, B and C shares are accrued
daily and payable monthly. No distribution
- --------------------------------------------------------------------------------
B-34
<PAGE>
PRUDENTIAL STRUCTURED MATURITY FUND
Notes to Financial Statements INCOME PORTFOLIO
================================================================================
or service fees are paid to PSI as distributor of the Class Z shares of the
Fund."
Pursuant to the Class A, B and C Plans, the Fund compensates PSI for the year
ended December 31, 1996 for distribution-related activities at an annual rate of
up to .30 of 1%, 1% and 1%, of the average daily net assets of the Class A, B
and C shares, respectively. Such expenses under the Plans were .10 of 1%, .75 of
1% and .75 of 1% of the average daily net assets of the Class A, B and C shares,
respectively for the year ended December 31, 1996.
PSI has advised the Portfolio that it has received approximately $65,000 in
front-end sales charges resulting from sales of Class A shares during the year
ended December 31, 1996. From these fees, PSI paid such sales charges to Pruco
Securities Corporation, an affiliated broker-dealer, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI advised the Portfolio that for the year ended December 31, 1996, it received
approximately $187,000 and $2,000 in contingent deferred sales charges imposed
upon certain redemptions by Class B and Class C shareholders, respectively.
PSI, PMF and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America.
The Fund, along with other affiliated registered investment companies (the
"Funds"), entered into a credit agreement (the "Agreement") on December 31, 1996
with an unaffiliated lender. The maximum commitment under the Agreement is
$200,000,000. The Agreement expires on December 30, 1997. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Fund has not borrowed any amounts pursuant to the Agreement as of December 31,
1996. The Funds pay a commitment fee at an annual rate of .055 of 1% on the
unused portion of the credit facility. The commitment fee is accrued and paid
quarterly on a pro-rata basis by the Funds.
- --------------------------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ("PMFS"), a wholly-owned subsidiary of PMF,
serves as the Portfolio's transfer agent. During the year ended December 31,
1996, the Portfolio incurred fees of approximately $236,000 for the services of
PMFS. As of December 31, 1996, approximately $8,400 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 Securities
Purchases and sales of portfolio securities, excluding short-term investments,
for the year ended December 31, 1996 were $311,572,582 and $343,859,562,
respectively.
The federal income tax basis of the Portfolio's investments at December 31, 1996
was $168,283,105 and accordingly, net unrealized appreciation for federal income
tax purposes was $1,087,314 (gross unrealized appreciation--$1,698,070; gross
unrealized depreciation--$610,756).
For federal income tax purposes, the Portfolio had a capital loss carryforward
as of December 31, 1996 of approximately $10,329,900, of which $7,180,600
expires in 2002 and $3,149,300 expires in 2004. Accordingly, no capital gain
distributions are expected to be paid to shareholders until net gains have been
realized in excess of such carryforward.
- --------------------------------------------------------------------------------
Note 5. Joint Repurchase Agreement Account
The Portfolio, along with other affiliated registered investment companies,
transfers 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 or federal agency obligations. As of
December 31, 1996, the Portfolio had a 0.02% undivided interest in the
repurchase agreements in the joint account. The undivided interest for the
Portfolio represented $235,000 in principal amount. As of such date, each
repurchase agreement in the joint account and the collateral therefor was as
follows:
Bear, Stearns & Co., 6.75%, in the principal amount of $341,000,000, repurchase
price $341,127,875, due 1/2/97. The value of the collateral including accrued
interest was $349,151,276.
Goldman, Sachs & Co. Inc., 6.60%, in the principal amount of $341,000,000,
repurchase price $341,125,033, due 1/2/97. The value of the collateral including
accrued interest was $347,820,889.
J.P. Morgan Securities, 6.60%, in the principal amount of $341,000,000,
repurchase price $341,125,033, due 1/2/97. The value of the collateral including
accrued interest was $347,822,540.
Sanwa Securities USA, 6.00%, in the principal amount of $68,014,000, repurchase
price $68,036,671, due 1/2/97. The value of the collateral including accrued
interest was $69,375,117.
- --------------------------------------------------------------------------------
B-35
<PAGE>
PRUDENTIAL STRUCTURED MATURITY FUND
Notes to Financial Statements INCOME PORTFOLIO
================================================================================
Note 6. Capital
The Portfolio offers Class A, Class B, Class C and Class Z 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. Class C shares are sold
with a contingent deferred sale charge of 1% during the first year. Class B
shares automatically convert to Class A shares on a quarterly basis
approximately five years after purchase. A special exchange privilege is also
available for shareholders who qualified to purchase Class A shares at net asset
value. Effective December 16, 1996, the Fund commenced offering Class Z shares.
Class Z shares are not subject to any sales or redemption charge and are offered
exclusively for sale to a limited group of investors.
There are 250 million authorized shares of $.01 par value common stock, divided
into four classes, designated Class A, Class B, Class C and Class Z common
stock, each of which consists of 62,500,000 authorized shares. Transactions in
shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------- ---------- ------------
<S> <C> <C>
Year ended December 31, 1996:
Shares sold...................................... 1,150,292 $ 13,199,197
Shares issued in reinvestment of dividends....... 311,003 3,533,398
Shares reacquired................................ (2,636,204) (30,074,596)
---------- ------------
Net decrease in shares outstanding before
conversion..................................... (1,174,909) (13,342,001)
Shares issued upon conversion from Class B....... 305,819 3,462,886
---------- ------------
Net decrease in shares outstanding............... (869,090) $ (9,879,115)
========== ============
Year ended December 31, 1995:
Shares sold...................................... 812,745 $ 9,281,283
Shares issued in reinvestment of dividends....... 325,730 3,698,766
Shares reacquired................................ (2,387,143) (26,982,383)
---------- ------------
Net decrease in shares outstanding before
conversion..................................... (1,248,668) (14,002,334)
Shares issued upon conversion from Class B....... 540,088 6,039,105
---------- ------------
Net decrease in shares outstanding............... (708,580) $ (7,963,229)
========== ============
Class B
- -------
Year ended December 31, 1996:
Shares sold...................................... 1,010,371 $ 11,499,424
Shares issued in reinvestment of dividends....... 369,545 4,198,055
Shares reacquired................................ (3,089,496) (35,143,225)
---------- ------------
Net decrease in shares outstanding before
conversion..................................... (1,709,580) (19,445,746)
Shares reacquired upon conversion into
Class A........................................ (305,885) (3,462,886)
---------- ------------
Net decrease in shares outstanding............... (2,015,465) $(22,908,632)
========== ============
Year ended December 31, 1995:
Shares sold...................................... 1,817,442 $ 20,499,580
Shares issued in reinvestment of dividends....... 428,576 4,863,912
Shares reacquired................................ (3,249,167) (36,739,116)
---------- ------------
Net decrease in shares outstanding before
conversion..................................... (1,003,149) (11,375,624)
Shares reacquired upon conversion into
Class A........................................ (540,088) (6,039,105)
---------- ------------
Net decrease in shares outstanding............... (1,543,237) $(17,414,729)
========== ============
Class C
- -------
Year ended December 31, 1996:
Shares sold...................................... 80,524 $ 916,198
Shares issued in reinvestment of dividends....... 5,471 62,115
Shares reacquired................................ (53,376) (604,714)
---------- ------------
Net increase in shares outstanding............... 32,619 $ 373,599
========== ============
Year ended December 31, 1995:
Shares sold...................................... 78,793 $ 895,172
Shares issued in reinvestment of dividends....... 2,515 28,621
Shares reacquired................................ (24,796) (283,693)
---------- ------------
Net increase in shares outstanding............... 56,512 $ 640,100
========== ============
Class Z
- -------
Year ended December 31, 1996:
Shares sold...................................... 18 $ 200
========== ============
- --------------------------------------------------------------------------------
</TABLE>
B-36
<PAGE>
PRUDENTIAL STRUCTURED MATURITY FUND
Financial Highlights INCOME PORTFOLIO
================================================================================
<TABLE>
<CAPTION>
Class A
------------------------------------------------------------------------------
Year ended December 31,
------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of year.... $ 11.63 $ 10.97 $ 11.78 $ 11.79 $ 12.13
------- ------- -------- -------- --------
Income from investment
operations:
Net investment income................. .73 .73 .65 .71 .86(b)
Net realized and unrealized gain
(loss) on investment transactions.. (.25) .66 (.80) .12 (.08)
------- ------- -------- -------- --------
Total from investment operations... .48 1.39 (.15) .83 .78
------- ------- -------- -------- --------
Less distributions:
Dividends from net investment
income............................. (.73) (.73) (.65) (.71) (.86)
Dividends in excess of net
investment income.................. (.02) -- (.01) -- --
Distributions from net realized gains. -- -- -- (.13) (.26)
------- ------- -------- -------- --------
Total distributions................ (.75) (.73) (.66) (.84) (1.12)
------- ------- -------- -------- --------
Net asset value, end of year.......... $ 11.36 $ 11.63 $ 10.97 $ 11.78 $ 11.79
======= ======= ======== ======== ========
TOTAL RETURN(a):...................... 4.32% 13.12% (1.16)% 7.19% 6.67%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)......... $77,031 $88,982 $ 91,680 $119,449 $109,828
Average net assets (000).............. $81,745 $89,500 $106,737 $114,728 $107,937
Ratios to average net assets:
Expenses, including distribution
fees............................ .86% .82% .94% .80% .70(b)
Expenses, excluding distribution
fees............................ .76% .72% .84% .70% .60(b)
Net investment income.............. 6.38% 6.57% 5.88% 5.92% 7.15(b)
For Class A, B, C and Z shares:
Portfolio turnover................. 170% 160% 123% 137% 91%
</TABLE>
- ---------------
(a) 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 year reported and includes reinvestment of dividends and
distributions.
(b) Net of expense subsidy and/or fee waiver.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-37
<PAGE>
PRUDENTIAL STRUCTURED MATURITY FUND
Financial Highlights INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
----------------------------------------------------------------
December 9,
1992(c)
Year ended December 31, Through
----------------------------------------------- December 31,
1996 1995 1994 1993 1992
-------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........ $ 11.63 $ 10.97 $ 11.78 $ 11.79 $ 11.79
-------- -------- -------- -------- --------
Income from investment
operations:
Net investment income....................... .65 .66 .58 .62 .04
Net realized and unrealized gain
(loss) on investment transactions........ (.25) .66 (.80) .12 --
-------- -------- -------- -------- --------
Total from investment operations......... .40 1.32 (.22) .74 .04
-------- -------- -------- -------- --------
Less distributions:
Dividends from net investment
income................................... (.65) (.66) (.58) (.62) (.04)
Dividends in excess of net
investment income........................ (.02) -- (.01) -- --
Distributions from net realized gains....... -- -- -- (.13) --
-------- -------- -------- -------- --------
Total distributions...................... (.67) (.66) (.59) (.75) (.04)
-------- -------- -------- -------- --------
Net asset value, end of period.............. $ 11.36 $ 11.63 $ 10.97 $ 11.78 $ 11.79
======== ======== ======== ======== ========
TOTAL RETURN(a):............................ 3.64% 12.40% (1.83)% 6.38% .32%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............. $94,490 $120,188 $130,258 $123,306 $11,981
Average net assets (000).................... $106,224 $125,230 $134,985 $69,314 $5,474
Ratios to average net assets:
Expenses, including distribution fees.... 1.51% 1.47% 1.66% 1.55% 1.67%(b)
Expenses, excluding distribution fees.... .76% .72% .84% .70% .82%(b)
Net investment income.................... 5.73% 5.92% 5.17% 5.08% 6.31%(b)
<CAPTION>
Class C Class Z
--------------------------------------- ------------
August 1, December 16,
1994(d) 1996(e)
Year ended December 31, Through Through
----------------------- December 31, December 31,
1996 1995 1994 1996
------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........ $ 11.63 $ 10.97 $ 11.30 $ 11.41
------- -------- -------- --------
Income from investment
operations:
Net investment income....................... .65 .66 .23 .09
Net realized and unrealized gain
(loss) on investment transactions........ (.25) .66 (.32) (.02)
------- -------- -------- --------
Total from investment operations.......... .40 1.32 (.09) .07
------- -------- -------- --------
Less distributions:
Dividends from net investment
income.................................... (.65) (.66) (.23) (.09)
Dividends in excess of net
investment income......................... (.02) -- (.01) (.02)
Distributions from net realized gains........ -- -- -- --
------- -------- -------- --------
Total distributions....................... (.67) (.66) (.24) (.11)
------- -------- ======== ========
Net asset value, end of period............... $ 11.36 $ 11.63 $ 10.97 $ 11.37
======= ======== ======== ========
TOTAL RETURN(a):............................. 3.64% 12.40% (0.68)% .59%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............. $1,396 $1,050 $371 $200(f)
Average net assets (000)..................... $1,270 $667 $192 $200(f)
Ratios to average net assets:
Expenses, including distribution fees..... 1.51% 1.47% 1.90%(b) .76%(b)
Expenses, excluding distribution fees..... .76% .72% 1.15%(b) .76%(b)
Net investment income..................... 5.73% 5.92% 5.30%(b) 6.48%(b)
</TABLE>
- ---------------
(a) 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 full year are not
annualized.
(b) Annualized.
(c) Commencement of offering of Class B shares.
(d) Commencement of offering of Class C shares.
(e) Commencement of offering of Class Z shares.
(f) Figures are actual and are not rounded to the nearest thousand.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-38
<PAGE>
PRUDENTIAL STRUCTURED MATURITY FUND
Independent Auditors' Report INCOME PORTFOLIO
================================================================================
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, 1996, the related statements of operations for the
year then ended and of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential
Structured Maturity Fund, Income Portfolio, as of December 31, 1996, the results
of its operations, the changes in its net assets and its financial highlights
for the respective stated periods in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
February 14, 1997
B-39
<PAGE>
PRUDENTIAL STRUCTURED MATURITY FUND
Supplemental Proxy Information INCOME PORTFOLIO
================================================================================
The Annual Meeting of Shareholders of the Prudential Structured Maturity Fund
(the "Fund") was held on Wednesday, October 30, 1996 at the offices of
Prudential Securities Incorporated, One Seaport Plaza, New York, New York. The
meeting was held for the following purposes:
(1) To elect Directors as follows: Edward D. Beach, Eugene C. Dorsey, Delayne
Dedrick Gold, Robert F. Gunia, Harry A. Jacobs, Jr., Donald D. Lennox,
Mendel A. Melzer, Thomas T. Mooney, Thomas H. O'Brien, Richard A. Redeker,
Nancy H. Teeters and Louis A. Weil, III.
(2) To ratify the selection of Deloitte & Touche LLP as independent public
accountants for the fiscal year ending December 31, 1996.
The results of the proxy solicitation on the above matters were as follows:
<TABLE>
<CAPTION>
Director/Matter Votes for Votes against Abstentions
- --------------- ---------------- ------------- -----------
<S> <C> <C> <C>
(1) Edward D. Beach 15,342,743 -- 215,999
Eugene C. Dorsey 15,350,417 -- 208,325
Delayne Dedrick Gold 15,349,707 -- 209,035
Robert F. Gunia 15,361,867 -- 196,875
Harry A. Jacobs, Jr. 15,350,430 -- 208,312
Donald D. Lennox 15,345,622 -- 213,120
Mendel A. Melzer 15,357,309 -- 201,403
Thomas T. Mooney 15,361,453 -- 197,289
Thomas H. O'Brien 15,349,265 -- 209,477
Richard A. Redeker 15,361,676 -- 197,066
Nancy H. Teeters 15,350,029 -- 208,713
Louis A. Weil, III 15,356,025 -- 202,717
(2) Deloitte & Touche LLP 15,267,744 95,560 195,438
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
APPENDIX I--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk, providing balance. Asset
allocation among different types of securities within an overall investment
portfolio helps to reduce risk and to potentially provide stable returns,
while enabling investors to work toward their financial goal(s). Asset
allocation is also a strategy to gain exposure to better performing asset
classes while maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable
returns. Owning a portfolio of securities mitigates the individual risks (and
returns) of any one security. Additionally, diversification among types of
securities reduces the risks (and general returns) of any one type of
security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to
changes in interest rates. When interest rates fall, bond prices generally
rise. Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, i.e., principal and interest
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of
interest rate changes on the bond's (or the bond portfolio's) price. Duration
differs from effective maturity in that duration takes into account call
provisions, coupon rates and other factors. Duration measures interest rate
risk only and not other risks, such as credit risk and, in the case of non-
U.S. dollar denominated securities, currency risk. Effective maturity measures
the final maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will
fluctuate. However, owning a security for a long period of time may help
investors offset short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth
of assets. The long-term investment results of compounding may be greater than
that of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
I-1
<PAGE>
APPENDIX II--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
The following chart shows the long term performance of various asset classes
and the rate of inflation.
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY
Value of $1.00 invested 1/1/26 through 12/31/96
Small Stocks $4,495.99
Common Stocks $1,370.95
Long-Term Bonds $ 33.73
Treasury Bills $ 13.54
Inflation $ 8.87
(CHART)
Source: Stocks, Bonds, Bills, and Inflation 1995 Yearbook, Ibbotson
Associates, Chicago (annually updates work by Roger G. Ibbotson and Rex A.
Sinquefeld). Used with permission. All rights reserved. This chart is for
illustrative purposes only and is not indicative of the past, present, or
future performance of any asset class or any Prudential Mutual Fund.
Generally, stock returns are attributable to capital appreciation and the
reinvestment of distributions. Bond returns are attributable mainly to the
reinvestment of distributions. Also, stock prices are usually more volatile
than bond prices over the long-term.
Small stock returns for 1926-1989 are those of stocks comprising the 5th
quintile of the New York Stock Exchange. Thereafter, returns are those of the
Dimensional Fund Advisors (DFA) Small Company Fund. Common stock returns are
based on the S&P Composite Index, a market-weighted, unmanaged index of 500
stocks (currently) in a variety of industries. It is often used as a broad
measure of stock market performance.
Long-term government bond returns are represented by a portfolio that contains
only one bond with a maturity of roughly 20 years. At the beginning of each
year a new bond with a then-current coupon replaces the old bond. Treasury
bill returns are for a one-month bill. Treasuries are guaranteed by the
government as to the timely payment of principal and interest; equities are
not. Inflation is measured by the consumer price index (CPI).
Impact of Inflation. The "real" rate of investment return is that which
exceeds the rate of inflation, the percentage change in the value of consumer
goods and the general cost of living. A common goal of long-term investors is
to outpace the erosive impact of inflation on investment returns.
II-1
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate
bonds, U.S. high yield bonds and world government bonds on an annual basis
from 1987 through 1995. The total returns of the indices include accrued
interest, plus the price changes (gains or losses) of the underlying
securities during the period mentioned. The data is provided to illustrate the
varying historical total returns and investors should not consider this
performance data as an indication of the future performance of the Fund or of
any sector in which the Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information
has not been verified. The figures do not reflect the operating expenses and
fees of a mutual fund. See "Fund Expenses" in the Prospectus. The net effect
of the deduction of the operating expenses of a mutual fund on these
historical total returns, including the compounded effect over time, could be
substantial.
Historical Total Returns of Different Bond Market Sectors
<TABLE>
<CAPTION>
'87 '88 '89 '90 '91 '92 '93 '94 '95
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY
BONDS/1/ 2.0% 7.0% 14.4 % 8.5 % 15.3% 7.2% 10.7% (3.4)% 18.4%
--------------------------------------------------------------------------------
U.S. GOVERNMENT
MORTGAGE
SECURITIES/2/ 4.3% 8.7% 15.4 % 10.7 % 15.7% 7.0% 6.8% (1.6)% 16.8%
--------------------------------------------------------------------------------
U.S. INVESTMENT GRADE
CORPORATE
BONDS/3/ 2.6% 9.2% 14.1 % 7.1 % 18.5% 8.7% 12.2% (3.9)% 22.3%
--------------------------------------------------------------------------------
U.S.
HIGH YIELD
CORPORATE
BONDS/4/ 5.0% 12.5% 0.8 % (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2%
--------------------------------------------------------------------------------
WORLD
GOVERNMENT
BONDS/5/ 35.2% 2.3% (3.4)% 15.3 % 16.2% 4.8% 15.1% 6.0 % 19.6%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
DIFFERENCE BETWEEN
HIGHEST
AND LOWEST RETURN IN
PERCENT 33.2 10.2 18.8 24.9 30.9 11.0 10.3 9.9 5.5
</TABLE>
/1/ LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over
150 public issues of the U.S. Treasury having maturities of at least one year.
/2/ LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index
that includes over 600 15- and 30-year fixed-rate mortgage-backed securities
of the Government National Mortgage Association (GNMA), Federal National
Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation
(FHLMC).
/3/ LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-
rate, nonconvertible investment-grade bonds. All bonds are U.S. dollar-
denominated issues and include debt issued or guaranteed by foreign sovereign
governments, municipalities, governmental agencies or international agencies.
All bonds in the index have maturities of at least one year.
/4/ LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising
over 750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower
by Moody's Investors Service (or rated BB+ or lower by S&P or Fitch Investors
Service). All bonds in this index have maturities of at least one year.
/5/ SALOMON BROTHERS WORLD GOVERNMENT INDEX (NON U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the
U.S., but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
II-2
<PAGE>
This chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.
(CHART)
- -------
Source: Stocks, Bonds, Bills, and Inflation 1995 Yearbook, Ibbotson
Associates, Chicago (annually updates work by Roger G. Ibbotson and Rex A.
Sinquefeld). Used with permission. All rights reserved. The chart illustrates
the historical yield of the long-term U.S. Treasury Bond from 1926-1994.
Yields represent that of an annually renewed one-bond portfolio with a
remaining maturity of approximately 20 years. This chart is for illustrative
purposes and should not be construed to represent the yields of any Prudential
Mutual Fund.
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APPENDIX III--INFORMATION RELATING TO THE PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating
to the Prudential Mutual Funds. See "Management of the Fund--Manager" in the
Prospectus. The data will be used in sales materials relating to the
Prudential Mutual Funds. Unless otherwise indicated, the information is as of
December 31, 1995 and is subject to change thereafter. All information relies
on data provided by The Prudential Investment Corporation (PIC) or from other
sources believed by the Manager to be reliable. Such information has not been
verified by the Fund.
INFORMATION ABOUT PRUDENTIAL
The Manager and PIC/1/ are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December
31, 1995. Its primary business is to offer a full range of products and
services in three areas: insurance, investments and home ownership for
individuals and families; health-care management and other benefit programs
for employees of companies and members of groups; and asset management for
institutional clients and their associates. Prudential (together with its
subsidiaries) employs more than 92,000 persons worldwide, and maintains a
sales force of approximately 13,000 agents and 5,600 financial advisors.
Prudential is a major issuer of annuities, including variable annuities.
Prudential seeks to develop innovative products and services to meet consumer
needs in each of its business areas. Prudential uses the rock of Gibraltar as
its symbol. The Prudential rock is a recognized brand name throughout the
world.
Insurance. Prudential has been engaged in the insurance business since 1875.
It insures or provides financial services to more than 50 million people
worldwide--one of every five people in the United States. Long one of the
largest issuers of individual life insurance, the Prudential has 19 million
life insurance policies in force today with a face value of $1 trillion.
Prudential has the largest capital base ($11.4 billion) of any life insurance
company in the United States. The Prudential provides auto insurance for more
than 1.7 million cars and insures more than 1.4 million homes.
Money Management. The Prudential is one of the largest pension fund managers
in the country, providing pension services to 1 in 3 Fortune 500 firms. It
manages $36 billion of individual retirement plan assets, such as 401(k)
plans. In July 1995, 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, 1994. As of December 31,
1995, Prudential had more than $314 billion in assets under management.
Prudential Investments, a business group of Prudential (of which Prudential
Mutual Funds is a key part) manages over $190 billion in assets of
institutions and individuals.
Real Estate. The Prudential Real Estate Affiliates, the fourth largest real
estate brokerage network in the United States, has more than 34,000 brokers
and agents and more than 1,100 offices in the United States./2/
Healthcare. Over two decades ago, the Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, almost 5 million
Americans receive healthcare from a Prudential managed care membership.
Financial Services. The Prudential Bank, a wholly-owned subsidiary of the
Prudential, has nearly $3 billion in assets and serves nearly 1.5 million
customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
Prudential Mutual Fund Management is one of the sixteen largest mutual fund
companies in the country, with over 2.5 million shareholders invested in more
than 50 mutual fund portfolios and variable annuities with more than 3.7
million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser
in national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in
surveys conducted by national and regional publications and media
organizations such as The Wall Street Journal, The New York Times, Barron's
and USA Today.
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/1/ Prudential Investments, a business group of PIC, serves as the Subadviser to
substantially all of the Prudential Mutual Funds. Wellington Management
Company serves as the subadviser to Global Utility Fund, Inc., Nicholas-
Applegate Capital Management as subadviser to Nicholas-Applegate Fund, Inc.,
Jennison Associates Capital Corp. as the subadviser to Prudential Jennison
Series Fund, Inc. and Prudential Active Balanced Fund, a portfolio of
Prudential Dryden Fund, Mercator Asset Management LP as the Subadviser to
International Stock Series, a portfolio of Prudential World Fund, Inc. and
BlackRock Financial Management, Inc. as subadviser to The BlackRock
Government Income Trust. There are multiple subadvisers for The Target
Portfolio Trust.
/2/ As of December 31, 1994.
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Equity Funds. Forbes magazine listed Prudential Equity Fund among twenty
mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995.
Honorees are chosen annually among mutual funds (excluding sector funds) which
are open to new investors and have had the same management for at least five
years. Forbes considers, among other criteria, the total return of a mutual
fund in both bull and bear markets as well as a fund's risk profile.
Prudential Equity Fund is managed with a "value" investment style by PIC. In
1995, Prudential Securities introduced Prudential Jennison Fund, a growth-
style equity fund managed by Jennison Associates Capital Corp., a premier
institutional equity manager and a subsidiary of Prudential.
High Yield Funds. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor the 167
issues held in the Prudential High Yield Fund (currently the largest fund of
its kind in the country) along with 100 or so other high yield bonds, which
may be considered for purchase./3/ Non-investment grade bonds, also known as
junk bonds or high yield bonds, are subject to a greater risk of loss of
principal and interest including default risk than higher-rated bonds.
Prudential high yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from Pulp and Paper Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential
mutual fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions
in foreign countries to the viability of index-linked securities in the United
States.
Prudential Mutual Funds' portfolio managers and analysts met with over 1,200
companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
Prudential Mutual Fund global equity managers conducted many of their visits
overseas, often holding private meetings with a company in a foreign language
(our global equity managers speak 7 different languages, including Mandarin
Chinese).
Trading Data./4/ On an average day, Prudential Mutual Funds' U.S. and
foreign equity trading desks traded $77 million in securities representing
over 3.8 million shares with nearly 200 different firms. Prudential Mutual
Funds' bond trading desks traded $157 million in government and corporate
bonds on an average day. That represents more in daily trading than most bond
funds tracked by Lipper even have in assets./5/ Prudential Mutual Funds' money
market desk traded $3.2 billion in money market securities on an average day,
or over $800 billion a year. They made a trade every 3 minutes of every
trading day. In 1994, the Prudential Mutual Funds effected more than 40,000
trades in money market securities and held on average $20 billion of money
market securities./6/
Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services LLC, the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On
an annual basis, that represents approximately 1.8 million telephone calls
answered.
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/3/ As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.
/4/ Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios
of the Prudential Series Fund and institutional and non-US accounts managed
by Prudential Mutual Fund Investment Management, a division of PIC, for the
year ended December 31, 1995.
/5/ Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate
U.S. Government, Short Investment Grade Debt, Intermediate Investment Grade
Debt, General U.S. Treasury, General U.S. Government and Mortgage Funds.
/6/ As of December 31, 1994.
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INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 5,600 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1995, assets held by Prudential Securities for
its clients approximated $168 billion. During 1994, over 28,000 new customer
accounts were opened each month at PSI./7/
Prudential Securities has a two-year Financial Advisor training program plus
advanced education programs, including Prudential Securities "university,"
which provides advanced education in a wide array of investment areas.
Prudential Securities is the only Wall Street firm to have its own in-house
Certified Financial Planner (CFP) program. In the December 1995 issue of
Registered Rep, an industry publication, Prudential Securities' Financial
Advisor training programs received a grade of A- (compared to an industry
average of B+).
In 1995, Prudential Securities' equity research team ranked 8th in
Institutional Investor magazine's 1995 "All America Research Team" survey.
Five Prudential Securities analysts were ranked as first-team finishers./8/
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architects SM, a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis
system that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
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/7/ As of December 31, 1994.
/8/ On an annual basis, Institutional Investor magazine surveys more than 700
institutional money managers, chief investment officers and research
directors, asking them to evaluate analysts in 76 industry sectors. Scores
are produced by taking the number of votes awarded to an individual analyst
and weighting them based on the size of the voting institution. In total,
the magazine sends its survey to approximately 2,000 institutions and a
group of European and Asian institutions.
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