<PAGE>
As filed with the Securities and Exchange Commission on March 3, 1997
Securities Act Registration No. 33-22363
Investment Company Act Registration No. 811-5594
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]
PRE-EFFECTIVE AMENDMENT NO. [_]
[X]
POST-EFFECTIVE AMENDMENT NO. 15
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [_]
[X]
AMENDMENT NO. 17
(Check appropriate box or boxes)
-----------
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
(Exact name of registrant as specified in charter)
GATEWAY CENTER THREE
NEWARK, NEW JERSEY 07102-4077
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201) 367-7530
S. JANE ROSE, ESQ.
GATEWAY CENTER THREE
NEWARK, NEW JERSEY 07102-4077
(NAME AND ADDRESS OF AGENT FOR SERVICE)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE
DATE OF THE REGISTRATION STATEMENT.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX):
[_] immediately upon filing pursuant to paragraph (b)
[X] on March 3, 1997 pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of rule
485.If appropriate, check the following box:
[_] this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant
has previously registered an indefinite number of shares of its Common
Stock, par value $.01 per share. The Registrant filed a notice for its
fiscal year ended December 31, 1996 on February 27, 1997.
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
<TABLE>
- ----------------------------------------------------------------------------------------------
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
TITLE OF SECURITIES BEING OFFERING PRICE AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED PER SHARE* OFFERING PRICE* REGISTRATION FEE
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Common Stock
par value $0.01, per
share................. 2,811,973 $11.74 N/A N/A
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
* The calculation of the maximum aggregate offering price was made pursuant to
Rule 24e-2. The total number of shares redeemed during the fiscal year ended
December 31, 1996 amounted to 5,790,417 shares. Of this number, no shares
have been used for reduction pursuant to paragraph (a) of Rule 24e-2 in all
previous filings of post-effective amendments during the current year and
2,978,444 shares have been used for reduction pursuant to paragraph (c) of
Rule 24f-2 in all previous filings during the current year. 2,811,973
($31,891,260) of the redeemed shares for the fiscal year ended December 31,
1996 are being used for the reductions in the post-effective amendment being
filed herein.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- ------------- --------
<S> <C>
PART A
Item 1. Cover Page.................... Cover Page
Item 2. Synopsis...................... Fund Expenses; Fund Highlights
Item 3. Condensed Financial
Information.................. Fund Expenses; Financial Highlights;
How the Fund Calculates Performance
Item 4. General Description of
Registrant................... Cover Page; Fund Highlights; How the
Fund Invests; General Information
Item 5. Management of the Fund........ Financial Highlights; How the Fund is
Managed
Item 5A. Management's Discussion of
Fund Performance............. Financial Highlights
Item 6. Capital Stock and Other
Securities................... Taxes, Dividends and Distributions;
General Information; Shareholder Guide
Item 7. Purchase of Securities Being
Offered...................... Shareholder Guide; How the Fund Values
its Shares; How the Fund is Managed
Item 8. Redemption or Repurchase...... Shareholder Guide; How the Fund Values
its Shares
Item 9. Pending Legal Proceedings..... Not Applicable
PART B
Item 10. Cover Page.................... Cover Page
Item 11. Table of Contents............. Table of Contents
Item 12. General Information and
History...................... General Information
Item 13. Investment Objectives and
Policies..................... Investment Objective and Policies;
Investment Restrictions
Item 14. Management of the Fund........ Directors and Officers; Manager;
Distributor
Item 15. Control Persons and Principal
Holders of Securities........ Not Applicable
Item 16. Investment Advisory and Other
Services..................... Manager; Distributor; Custodian,
Transfer and Dividend Disbursing Agent
and Independent Accountants
Item 17. Brokerage Allocation and Other
Practices.................... Portfolio Transactions
Item 18. Capital Stock and Other
Securities................... Not Applicable
Item 19. Purchase, Redemption and
Pricing of Securities Being
Offered...................... Purchase and Redemption of Fund
Shares; Shareholder Investment
Account; Net Asset Value
Item 20. Tax Status.................... Taxes
Item 21. Underwriters.................. Distributor
Item 22. Calculation of Performance
Data......................... Performance Information
Item 23. Financial Statements.......... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Post-Effective Amendment
to the Registration Statement.
<PAGE>
PRUDENTIAL STRUCTURED MATURITY FUND, INC. (INCOME PORTFOLIO)
- -------------------------------------------------------------------------------
PROSPECTUS DATED MARCH 3, 1997
- -------------------------------------------------------------------------------
Prudential Structured Maturity Fund, Inc. (the Fund), Income Portfolio (the
Portfolio), is one of two separate portfolios of an open-end, management
investment company, or mutual fund. The Portfolio's investment objective is
high current income consistent with the preservation of principal. The
Portfolio seeks to achieve its objective primarily through structuring its
portfolio by utilizing a "laddered" maturity strategy. The Portfolio invests
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. 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.
The Portfolio may also engage in various hedging and return enhancement
strategies, including derivative transactions. There can be no assurance that
the Portfolio's investment objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies." The Fund's address is Gateway
Center Three, Newark, New Jersey 07102, and its telephone number is (800) 225-
1852.
This Prospectus sets forth concisely the information about the Fund and the
Income Portfolio that a prospective investor should know before investing.
Additional information about the Fund and the Portfolio has been filed with
the Securities and Exchange Commission in a Statement of Additional
Information, dated March 3, 1997, which information is incorporated herein by
reference (is legally considered a part of this Prospectus) and is available
without charge upon request to the Fund, at the address or telephone number
noted above.
- -------------------------------------------------------------------------------
Investors are advised to read this Prospectus and retain it for future
reference.
- -------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information
contained in this Prospectus and is qualified in its entirety by the more
detailed information appearing elsewhere herein.
WHAT IS PRUDENTIAL STRUCTURED MATURITY FUND, INC.?
Prudential Structured Maturity Fund, Inc. is a mutual fund whose shares are
divided into two portfolios, each of which operates as a separate fund. A
mutual fund pools the resources of investors by selling its shares to the
public and investing the proceeds of such sale in a portfolio of securities
designed to achieve its investment objective. Technically, the Fund is an open-
end, management investment company. Only shares of the Income Portfolio are
offered through this Prospectus.
WHAT IS THE PORTFOLIO'S INVESTMENT OBJECTIVE?
The Portfolio's investment objective is high current income consistent with
the preservation of principal. It seeks to achieve this objective primarily
through structuring its portfolio by utilizing a "laddered" maturity strategy.
The Portfolio is diversified and it 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. These
securities are allocated by maturity among six annual maturity categories
ranging from one year or less to between five and six years with each category
representing approximately one-sixth of the Fund's assets ("laddered"
maturities). There can be no assurance that the Portfolio's objective will be
achieved. See "How the Fund Invests--Investment Objective and Policies" at page
8.
WHAT ARE THE FUND'S RISK FACTORS AND SPECIAL CHARACTERISTICS?
The Portfolio may invest in debt securities of U.S. issuers that have
securities outstanding that are rated at the time of purchase at least BBB by
Standard & Poor's Ratings Group (S&P) or Baa by Moody's Investors Service
(Moody's) or a similar nationally recognized statistical rating organization
(NRSRO) or, if not rated, of comparable quality in the opinion of the
investment adviser. In addition, the Portfolio may invest up to 10% of its
total assets in securities rated below BBB by S&P or Baa by Moody's or a
similar NRSRO or, if not rated, of comparable quality in the opinion of the
investment adviser. These securities are commonly referred to as "junk bonds."
The Portfolio may invest up to 25% of its net assets in asset-backed securities
and up to 30% of its net assets in collateralized mortgage obligations and real
estate mortgage investment conduits. These investments may be sensitive to
prepayments and interest rates. See "How the Fund Invests--Investment Objective
and Policies--Corporate and Other Debt Obligations" at page 10. The Portfolio
may also engage in various hedging and return enhancement strategies, including
utilizing derivatives. See "How the Fund Invests--Hedging and Return
Enhancement Strategies--Risks of Hedging and Return Enhancement Strategies" at
page 14. As with an investment in any mutual fund, an investment in this Fund
can decrease in value and you can lose money.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management LLC (PMF or the Manager) is the Manager of
the Fund and is compensated for its services at an annual rate of .40 of 1% of
the Portfolio's average daily net assets. As of January 31, 1997, PMF served as
manager or administrator to 62 investment companies, including 40 mutual funds,
with aggregate assets of approximately $55.8 billion. The Prudential Investment
Corporation, doing business as Prudential Investments (PI, the Subadviser or
the investment adviser), furnishes investment advisory services in connection
with the management of the Fund under a Subadvisory Agreement with PMF. See
"How the Fund is Managed--Manager" at page 17.
WHO DISTRIBUTES THE PORTFOLIO'S SHARES?
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Portfolio's Class A, Class B, Class C and Class Z shares and
is paid an
2
<PAGE>
annual distribution and service fee which is currently being charged at the
rate of .10 of 1% of the average daily net assets of the Class A shares and .75
of 1% of the average daily net assets of each of the Class B and Class C
shares. Prudential Securities incurs the expense of distributing the Fund's
Class Z shares under a Distribution Agreement with the Fund, none of which is
reimbursed or paid for by the Fund. See "How the Fund is Managed--Distributor"
at page 17.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
for Class A, Class B and Class C shares. Class Z shares are not subject to any
minimum investment requirements. There is no minimum investment requirement for
certain retirement and employee savings plans or custodial accounts for the
benefit of minors. For purchases made through the Automatic Savings
Accumulation Plan, the minimum initial and subsequent investment is $50. See
"Shareholder Guide--How to Buy Shares of the Fund" at page 23 and "Shareholder
Guide--Shareholder Services" at page 33.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Portfolio through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund, through its transfer
agent, Prudential Mutual Fund Services LLC (PMFS or the Transfer Agent) at the
net asset value per share (NAV) next determined after receipt of your purchase
order by the Transfer Agent or Prudential Securities plus a sales charge which
may be imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class B or Class C shares). Class Z shares are offered to a
limited group of investors at net asset value without any sales charge. See
"How the Fund Values its Shares" at page 20 and "Shareholder Guide--How to Buy
Shares of the Fund" at page 23.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Portfolio offers four classes of shares:
.Class A Shares: Sold with an initial sales charge of up to 3.25% of the
offering price.
.Class B Shares: Sold without an initial sales charge but are subject to a
contingent deferred sales charge or CDSC (declining from 3%
to zero of the lower of the amount invested or the
redemption proceeds) which will be imposed on certain
redemptions made within four years of purchase. Although
Class B shares are subject to higher ongoing distribution-
related expenses than Class A shares, Class B shares will
automatically convert to Class A shares (which are subject
to lower ongoing distribution-related expenses)
approximately five years after purchase.
.Class C Shares: Sold without an initial sales charge and, for one year
after purchase, are subject to a 1% CDSC on redemptions.
Like Class B shares, Class C shares are subject to higher
ongoing distribution-related expenses than Class A shares
but do not convert to another class.
.Class Z Shares: Sold without either an initial or contingent deferred sales
charge to a limited group of investors. Class Z shares are
not subject to any ongoing service or distribution
expenses.
See "Shareholder Guide--Alternative Purchase Plan" at page 24.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. See "Shareholder Guide--How to Sell Your Shares" at page 28.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Portfolio expects to declare daily and pay monthly dividends of net
investment income, if any, and make distributions of any net capital gains at
least annually. Dividends and distributions will be automatically reinvested in
additional shares of the Fund at NAV without a sales charge unless you request
that they be paid to you in cash. See "Taxes, Dividends and Distributions" at
page 21.
3
<PAGE>
FUND EXPENSES
(INCOME PORTFOLIO)
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES+
Maximum Sales Load Im-
posed on Purchases (as
a percentage of offer-
ing price)............ 3.25% None None None
Maximum Sales Load
Imposed on Reinvested
Dividends............. None None None None
Maximum Deferred Sales
Load (as a percentage
of original purchase
price or redemption None 3% during the first year, 1% on redemptions None
proceeds, whichever is decreasing by 1% annually to made within
lower)................ 1% in the third year and one year of
1% in the fourth year and purchase
0% the fifth year*
Redemption Fees........ None None None None
Exchange Fee........... None None None None
<CAPTION>
ANNUAL FUND OPERATING EX-
PENSES
(as a percentage of av- CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES***
erage net assets) -------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C>
Management Fees........ .40% .40% .40% 40%
12b-1 Fees (After Re-
duction).............. .10** .75++ .75++ None
Other Expenses......... .36 .36 .36 .36
--- --- --- ---
Total Fund Operating
Expenses (After
Reduction)............ .86% 1.51% 1.51% .76%
=== ==== ==== ===
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
EXAMPLE ------ ------- ------- -------- ---
<S> <C> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual
return and (2) redemption at the end of
each time period:
Class A................................... $41 $59 $79 $135
Class B................................... $45 $58 $82 $154
Class C................................... $25 $48 $82 $180
Class Z***................................ $ 8 $24 $42 $ 94
You would pay the following expenses on the
same investment assuming no redemption:
Class A................................... $41 $59 $79 $135
Class B................................... $15 $48 $82 $154
Class C................................... $15 $48 $82 $180
Class Z***................................ $ 8 $24 $42 $ 94
</TABLE>
The above example is based on data for the Fund's fiscal year ended December
31, 1996. The example should not be considered a representation of past or
future expenses. Actual expenses may be greater or less than those shown.
The purpose of this table is to assist investors in understanding the various
costs and expenses that an investor in the Portfolio will bear, whether
directly or indirectly. For more complete descriptions of the various costs and
expenses, see "How the Fund is Managed." "Other Expenses" includes operating
expenses of the Portfolio, such as Directors' and professional fees,
registration fees, reports to shareholders and transfer agency and custodian
fees.
- ------------
* Class B shares will automatically convert to Class A shares approximately
five years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."
** Although the Class A Distribution and Service Plan provides that the
Portfolio may pay a distribution fee of up to .30 of 1% per annum of the
average daily net assets of the Class A shares, the Distributor has agreed
to limit its distribution fees with respect to the Class A shares of the
Portfolio to no more than .10 of 1% for the fiscal year ending December 31,
1997. Total Fund Operating Expenses of the Class A shares without such
limitation would be 1.06%.
*** Estimated based on expenses expected to have been incurred if Class Z
shares had been in existence throughout the fiscal year ended December 31,
1996.
+ Pursuant to the rules of the National Association of Securities Dealers,
Inc., the aggregate initial sales charges, deferred sales charges and
asset-based sales charges on shares of the Portfolio may not exceed 6.25%
of total gross sales, subject to certain exclusions. This 6.25% limitation
is imposed on each class of the Portfolio rather than on a per shareholder
basis. Therefore, long-term shareholders of the Portfolio may pay more in
total sales charges than the economic equivalent of 6.25% of such
shareholders' investments in such shares. See "How the Fund is Managed--
Distributor."
++ Although the Class B and Class C Distribution and Service Plans provide
that the Portfolio may pay a distribution fee of up to 1% per annum of the
average daily net assets of the Class B and Class C shares, the Distributor
has agreed to limit its distribution fees with respect to Class B and Class
C shares of the Portfolio to no more than .75 of 1% of the average daily
net assets of each of the Class B and Class C shares for the fiscal year
ending December 31, 1997. Total Fund Operating Expenses of the Class B and
Class C shares without such limitations would be 1.76% and 1.76%,
respectively. See "How the Fund is Managed--Distributor."
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS A SHARES)
The following financial highlights have been audited by Deloitte & Touche
LLP, independent auditors, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a share of Class A
common stock outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------------------
SEPTEMBER 1,
1989(A)
YEARS ENDED DECEMBER 31, THROUGH
------------------------------------------------------------------------- DECEMBER 31,
PER SHARE OPERATING 1996 1995 1994 1993 1992 1991 1990 1989
PERFORMANCE: ------- ------- -------- -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period..... $ 11.63 $ 10.97 $ 11.78 $ 11.79 $ 12.13 $ 11.67 $ 11.63 $ 11.61
------- ------- -------- -------- -------- -------- -------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income.... .73 .73 .65 .71 .86(c) .93(c) 1.00(c) .35(c)
Net realized and
unrealized gain (loss)
on investment
transactions............ (.25) .66 (.80) .12 (.08) .56 .04 .03
------- ------- -------- -------- -------- -------- -------- -------
Total from investment
operations............. .48 1.39 (.15) .83 .78 1.49 1.04 .38
------- ------- -------- -------- -------- -------- -------- -------
LESS DISTRIBUTIONS
Dividends from net
investment income....... (73) (.73) (.65) (.71) (.86) (.93) (1.00) (.35)
Distributions in excess
of net investment
income.................. (.02) -- (.01) -- -- -- -- --
Distributions from net
realized gains.......... -- -- -- (.13) (.26) (.10) -- (.01)
------- ------- -------- -------- -------- -------- -------- -------
Total distributions..... (.75) (.73) (.66) (.84) (1.12) (1.03) (1.00) (.36)
------- ------- -------- -------- -------- -------- -------- -------
Net asset value, end of
period.................. $ 11.36 $ 11.63 $ 10.97 $ 11.78 $ 11.79 $ 12.13 $ 11.67 $ 11.63
======= ======= ======== ======== ======== ======== ======== =======
TOTAL RETURN(D):......... 4.32% 13.12% (1.16)% 7.19% 6.67% 13.35% 9.40% 3.30%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $77,031 $88,982 $91,680 $119,449 $109,828 $109,997 $113,125 $98,414
Average net assets (000). $81,745 $89,500 $106,737 $114,728 $107,937 $113,010 $107,276 $89,176
Ratios to average net
assets:
Expenses, including
distribution fees...... .86% .82% .94% .80% .70%(c) .37%(c) .13%(c) 0%(b)/(c)
Expenses, excluding
distribution fees...... .76% .72% .84% .70% .60%(c) .27%(c) .10%(c) 0%(b)/(c)
Net investment income... 6.38% 6.57% 5.88% 5.92% 7.15%(c) 7.89%(c) 8.67%(c) 8.41%(b)/(c)
Portfolio turnover rate.. 170% 160% 123% 137% 91% 117% 46% 69%
</TABLE>
- ------------
(a) Commencement of offering of Class A shares.
(b) Annualized.
(c) Net of expense subsidy and/or fee waiver.
(d) 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.
5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS B SHARES)
The following financial highlights have been audited by Deloitte & Touche
LLP, independent auditors, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a share of Class B
common stock outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS B
-----------------------------------------------------
DECEMBER 9,
1992(A)
YEARS ENDED DECEMBER 31, THROUGH
--------------------------------------- DECEMBER 31,
1996 1995 1994 1993 1992
-------- -------- -------- -------- ------------
PER SHARE OPERATING
PERFORMANCE:
<S> <C> <C> <C> <C> <C>
Net asset value, begin-
ning 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 transac-
tions.................. (.25) .66 (.80) .12 --
-------- -------- -------- -------- -------
Total from investment
operations............ .40 1.32 (.22) .74 .04
-------- -------- -------- -------- -------
LESS DISTRIBUTIONS
Dividends from net in-
vestment income........ (.65) (.66) (.58) (.62) (.04)
Distributions in excess
of net investment in-
come................... (.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(C):........ 3.64% 12.40% (1.83)% 6.38% .32%
RATIOS/SUPPLEMENTAL DA-
TA:
Net assets, end of pe-
riod (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)
Portfolio turnover rate. 170% 160% 123% 137% 91%
</TABLE>
- ------------
(a) Commencement of offering of Class B shares.
(b) Annualized.
(c) 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.
6
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS C AND CLASS Z SHARES)
The following financial highlights have been audited by Deloitte & Touche
LLP, independent auditors, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a share of Class C and
Class Z common stock outstanding, total return, ratios to average net assets
and other supplemental data for the periods indicated. The information is based
on data contained in the financial statements. Further performance information
is contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS C CLASS Z
-------------------------------------- ------------
AUGUST 1, DECEMBER 16,
1994(A) 1996(B)
YEAR ENDED YEAR ENDED THROUGH THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994 1996
------------ ------------ ------------ ------------
PER SHARE OPERATING
PERFORMANCE:
<S> <C> <C> <C> <C>
Net asset value, begin-
ning 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 in-
vestment income......... (.65) (.66) (.23) (.09)
Distributions in excess
of net investment in-
come.................... (.02) -- (.01) (.02)
------ ------- ------- ------
Total distributions..... (.67) (.66) (.24) (.11)
------ ------- ------- ------
Net asset value, end of
period.................. $11.36 $ 11.63 $ 10.97 $11.37
====== ======= ======= ======
TOTAL RETURN(D):......... 3.64% 12.40% (0.68)% .59%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $1,396 $ 1,050 $ 371 $ 200(e)
Average net assets (000). $1,270 $ 667 $ 192 $ 200(e)
Ratios to average net as-
sets:
Expenses, including dis-
tribution fees......... 1.51% 1.47% 1.90%(c) .76%(c)
Expenses, excluding dis-
tribution fees......... .76% .72% 1.15%(c) .76%(c)
Net investment income... 5.73% 5.92% 5.30%(c) 6.48%(c)
Portfolio turnover rate.. 170% 160% 123% 170%
</TABLE>
- ------------
(a) Commencement of offering of Class C shares.
(b) Commencement of offering of Class Z shares.
(c) Annualized.
(d) 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.
(e) Figures are actual and are not rounded to the nearest thousand.
7
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL STRUCTURED MATURITY FUND, INC. IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY, OR MUTUAL FUND, CONSISTING OF TWO PORTFOLIOS. EACH
PORTFOLIO IS MANAGED INDEPENDENTLY. THE INCOME PORTFOLIO'S INVESTMENT OBJECTIVE
IS HIGH CURRENT INCOME CONSISTENT WITH THE PRESERVATION OF PRINCIPAL. THE
PORTFOLIO SEEKS TO ACHIEVE THIS OBJECTIVE PRIMARILY THROUGH STRUCTURING ITS
PORTFOLIO BY UTILIZING A "LADDERED" MATURITY STRATEGY. THE PORTFOLIO IS
DIVERSIFIED AND IT 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. 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 ("LADDERED" MATURITIES). AS
THE SECURITIES IN EACH ANNUAL CATEGORY MATURE OR AS NEW INVESTMENTS ARE MADE IN
THE PORTFOLIO, THE PROCEEDS WILL BE INVESTED TO MAINTAIN THE BALANCE OF
INVESTMENTS AMONG THE SIX ANNUAL MATURITY CATEGORIES. THERE CAN BE NO ASSURANCE
THAT SUCH OBJECTIVE WILL BE ACHIEVED. See "Investment Objective and Policies"
in the Statement of Additional Information.
AS WITH AN INVESTMENT IN ANY MUTUAL FUND, AN INVESTMENT IN THE FUND CAN
DECREASE IN VALUE AND YOU CAN LOSE MONEY.
THE PORTFOLIO'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE,
MAY NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE
PORTFOLIO'S OUTSTANDING VOTING SECURITIES, AS DEFINED IN THE INVESTMENT COMPANY
ACT OF 1940, AS AMENDED (THE INVESTMENT COMPANY ACT). POLICIES OF THE PORTFOLIO
THAT ARE NOT FUNDAMENTAL MAY BE MODIFIED BY THE BOARD OF DIRECTORS.
THE PORTFOLIO SEEKS TO PROVIDE INVESTORS WITH MORE STABILITY OF PRINCIPAL
THAN LONG-TERM BONDS HAVE HISTORICALLY PROVIDED THROUGH THE STRUCTURED
PORTFOLIO MANAGEMENT STRATEGY OF INVESTING IN SHORT- TO INTERMEDIATE-TERM DEBT
SECURITIES. LADDERING INVESTMENTS AMONG DEBT INSTRUMENTS WITH A RANGE OF
MATURITIES OF FROM ONE YEAR OR LESS TO SIX YEARS PROVIDES AN ADDED DEGREE OF
PORTFOLIO VARIATION, WHICH TENDS TO REDUCE VOLATILITY TO A LEVEL LOWER THAN
THAT EXPERIENCED BY A LONG-TERM BOND FUND. In general, the longer the maturity
of a debt security, the higher the yield and the greater the potential for
price fluctuation. Conversely, shorter maturities generally provide lower
yields but greater principal stability. The prices of fixed-income securities
are likely to vary inversely with interest rates. The Portfolio has the
potential for high current yields although they may not be as high as those of
a long-term bond fund. The investment adviser has had experience structuring
portfolios with laddered maturities for institutional clients since 1977.
Under normal market circumstances, the Portfolio will invest its assets in
U.S. Government securities and investment grade corporate debt obligations
having "laddered" maturities ranging from one year or less to six years. The
Portfolio's investment adviser will allocate assets among the various
categories by maturity and not by type of investment and will continuously
monitor each annual category. The investment adviser will buy and sell
portfolio securities to take advantage of investment opportunities based on its
analysis of market conditions, interest rates and general economic factors,
thereby increasing the Portfolio's annual portfolio turnover rate. From time to
time, the Portfolio may also sell portfolio securities to meet redemption
requests.
During times of portfolio structuring as well as when the investment adviser
deems it necessary for defensive purposes or to provide liquidity, assets of
the Portfolio may be invested temporarily in high quality money market
instruments and repurchase agreements.
The Portfolio's effective dollar-weighted average maturity is expected to be
between 2 1/2 and 3 1/2 years. See "U.S. Government Securities--Mortgage-
Related Securities Issued by U.S. Government Agencies and Instrumentalities"
below.
8
<PAGE>
U.S. GOVERNMENT SECURITIES
U.S. TREASURY SECURITIES. THE PORTFOLIO WILL INVEST IN U.S. TREASURY
SECURITIES, INCLUDING BILLS, NOTES AND BONDS. These instruments are direct
obligations of the U.S. Government and, as such, are backed by the "full faith
and credit" of the United States. They differ primarily in their interest
rates and the lengths of their maturities.
SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. THE PORTFOLIO WILL INVEST IN OBLIGATIONS ISSUED OR
GUARANTEED BY AGENCIES OF THE U.S. GOVERNMENT OR INSTRUMENTALITIES ESTABLISHED
OR SPONSORED BY THE U.S. GOVERNMENT. THESE OBLIGATIONS, INCLUDING THOSE WHICH
ARE GUARANTEED BY FEDERAL AGENCIES OR INSTRUMENTALITIES, MAY OR MAY NOT BE
BACKED BY THE "FULL FAITH AND CREDIT" OF THE UNITED STATES. Obligations of the
Government National Mortgage Association (GNMA), the Farmers Home
Administration and the Export-Import Bank are backed by the "full faith and
credit" of the United States. In the case of securities not backed by the full
faith and credit of the United States, the Portfolio must look principally to
the agency issuing or guaranteeing the obligation for ultimate repayment and
may not be able to assert a claim against the United States if the agency or
instrumentality does not meet its commitments. Securities of this type in
which the Portfolio may invest that are not backed by the full faith and
credit of the United States include obligations which generally may be
satisfied only by the individual credit of the issuing agency, such as
obligations of the Federal National Mortgage Association (FNMA), the Federal
Home Loan Mortgage Corporation (FHLMC) and the Resolution Funding Corporation.
GNMA, FNMA and FHLMC investments may include collateralized mortgage
obligations. See "Corporate and Other Debt Obligations" below.
Obligations issued or guaranteed as to principal and interest by the U.S.
Government may be acquired by the Portfolio in the form of custodial receipts
that evidence ownership of future interest payments, principal payments or
both on certain United States Treasury notes or bonds. Such notes and bonds
are held in custody by a bank on behalf of the owners. These custodial
receipts are commonly referred to as Treasury strips. See "Investment
Objective and Policies--U.S. Government Securities" in the Statement of
Additional Information.
MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. THE PORTFOLIO MAY INVEST IN MORTGAGE-BACKED SECURITIES THAT
ARE ISSUED BY FNMA OR FHLMC OR GUARANTEED BY GNMA AND WHICH REPRESENT
UNDIVIDED OWNERSHIP INTERESTS IN POOLS OF MORTGAGES. The U.S. Government or
the issuing agency or instrumentality guarantees the payment of interest on
and principal of these securities; however, the guarantees do not extend to
the yield or value of the securities nor do the guarantees extend to the yield
or value of the Portfolio's shares. These securities are in most cases "pass-
through" instruments, through which the holders receive a share of all
interest and principal payments from the mortgages underlying the securities,
net of certain fees. As a result of the pass-through of prepayments of
principal on the underlying securities, mortgage-backed securities are often
subject to more rapid prepayment of principal than their stated maturity would
indicate. The remaining expected average life of a pool of mortgage loans
underlying a mortgage-backed security is a prediction of when the mortgage
loans will be repaid and is based upon a variety of factors, such as the
demographic and geographic characteristics of the borrowers and the mortgaged
properties, the length of time that each of the mortgage loans has been
outstanding, the interest rates payable on the mortgage loans and the current
interest rate environment. The remaining maturity of a mortgage-backed
security will be deemed to be equal to the average maturity of the mortgages
underlying such security determined by the investment adviser on the basis of
assumed prepayment rates with respect to such mortgages. See "Investment
Objective and Policies" in the Statement of Additional Information.
THE PORTFOLIO WILL INVEST IN BOTH ADJUSTABLE RATE MORTGAGE SECURITIES
(ARMS), WHICH ARE PASS-THROUGH MORTGAGE SECURITIES COLLATERALIZED BY
ADJUSTABLE RATE MORTGAGES, AND FIXED RATE MORTGAGE SECURITIES (FRMS), WHICH
ARE SECURITIES COLLATERALIZED BY FIXED RATE MORTGAGES. See "Investment
Objective and Policies--U.S. Government Securities" in the Statement of
Additional Information.
THE PORTFOLIO MAY ALSO INVEST IN BALLOON PAYMENT MORTGAGE-BACKED SECURITIES.
A balloon payment mortgage-backed security is an amortizing mortgage security
with installments of principal and interest, the last installment of which is
predominantly principal.
9
<PAGE>
THE PORTFOLIO MAY ALSO INVEST IN MORTGAGE PASS-THROUGH SECURITIES WHERE ALL
INTEREST PAYMENTS GO TO ONE CLASS OF HOLDERS (INTEREST ONLY SECURITIES OR IOS)
AND ALL PRINCIPAL PAYMENTS GO TO A SECOND CLASS OF HOLDERS (PRINCIPAL ONLY
SECURITIES OR POS). THESE SECURITIES ARE COMMONLY REFERRED TO AS MORTGAGE-
BACKED SECURITIES STRIPS OR MBS STRIPS. The yields to maturity on IOs are very
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on yield to maturity. If the underlying
mortgage assets experience greater than anticipated prepayments of principal,
the Portfolio may not fully recoup its initial investment in these securities.
Conversely, if the underlying mortgage assets experience less than anticipated
prepayments of principal, the yield on POs could be materially adversely
affected.
CORPORATE AND OTHER DEBT OBLIGATIONS
THE PORTFOLIO MAY INVEST IN DEBT SECURITIES OF U.S. ISSUERS THAT HAVE
SECURITIES OUTSTANDING THAT ARE RATED AT THE TIME OF PURCHASE AT LEAST BBB BY
STANDARD & 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 (NRSRO) OR, IF NOT RATED, OF COMPARABLE QUALITY IN THE
OPINION OF THE INVESTMENT ADVISER. THE FUND MAY ALSO INVEST UP TO 10% OF TOTAL
ASSETS IN SECURITIES RATED BELOW BBB OR BAA BY S&P OR MOODY'S, RESPECTIVELY
(OR COMPARABLY RATED BY A SIMILAR NRSRO), OR, IF NOT RATED, OF COMPARABLE
QUALITY IN THE OPINION OF THE INVESTMENT ADVISER. Securities rated Baa by
Moody's are considered to be investment grade, although they have speculative
characteristics. Changes in economic or other circumstances are more likely to
lead to a weakened capacity of issuers whose securities are rated BBB or Baa
to pay interest or repay principal than is the case for issuers of higher
rated securities. Securities rated below Baa by Moody's and below BBB by S&P
are considered speculative. See "Description of Security Ratings" in the
Appendix to this Prospectus. Such securities are commonly referred to as "junk
bonds." Such securities generally offer a higher yield than those in the
higher rated categories but also involve greater risk of loss of principal and
income and may also be subject to greater price volatility due to the market's
perceptions of the creditworthiness of the issuer.
THE PORTFOLIO MAY INVEST IN WHOLE LOAN MORTGAGE-BACKED SECURITIES ISSUED
OTHER THAN BY U.S. GOVERNMENT AGENCIES AND RATED AT LEAST AA BY S&P OR AA BY
MOODY'S. See "Investment Objective and Policies--Mortgage-Backed Securities"
in the Statement of Additional Information.
THE CORPORATE OBLIGATIONS IN WHICH THE PORTFOLIO MAY INVEST INCLUDE ASSET-
BACKED SECURITIES, COLLATERALIZED MORTGAGE OBLIGATIONS AND REAL ESTATE
MORTGAGE INVESTMENT CONDUITS. THE PORTFOLIO MAY INVEST UP TO 25% OF ITS NET
ASSETS IN ASSET-BACKED SECURITIES AND UP TO 30% OF ITS NET ASSETS IN
COLLATERALIZED MORTGAGE OBLIGATIONS AND REAL ESTATE MORTGAGE INVESTMENT
CONDUITS.
LOWER RATED OR UNRATED DEBT OBLIGATIONS OF COMPARABLE QUALITY 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 rated 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.
During the year ended December 31, 1996, the monthly dollar weighted average
ratings of the debt obligations held by the Portfolio, expressed as a
percentage of the Portfolio's total investments, were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
RATINGS INVESTMENTS
------- -------------------
<S> <C>
AAA/Aaa 23.7%
AA/Aa 0.5
A/A 17.0
BBB/Baa 52.3
BB/Ba 5.5
B/B 1.0
Unrated 0
</TABLE>
10
<PAGE>
RISKS OF 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 AND THE MARKET PERCEPTION OF THE CREDITWORTHINESS OF THE ISSUER
(MARKET RISK). Lower rated or unrated (i.e., high yield) securities are more
likely to react to developments affecting market and credit risk than are more
highly rated securities, which react primarily to movements in the general
level of interest rates. The investment adviser considers both credit risk and
market risk in making investment decisions for the Fund. See "Investment
Objective and Policies--Other Investments--Risk Factors Relating to Investing
in High Yield Securities" in the Statement of Additional Information.
ASSET-BACKED SECURITIES. THROUGH THE USE OF TRUSTS AND SPECIAL PURPOSE
CORPORATIONS, VARIOUS TYPES OF ASSETS, PRIMARILY HOME EQUITY LOANS AND
AUTOMOBILE AND CREDIT CARD RECEIVABLES, ARE BEING SECURITIZED IN PASS-THROUGH
STRUCTURES SIMILAR TO THE MORTGAGE PASS-THROUGH STRUCTURES DESCRIBED ABOVE OR
IN A PAY-THROUGH STRUCTURE SIMILAR TO THE COLLATERALIZED MORTGAGE STRUCTURE.
THE PORTFOLIO MAY INVEST IN THESE AND OTHER TYPES OF ASSET-BACKED SECURITIES
WHICH MAY BE DEVELOPED IN THE FUTURE. Asset-backed securities present certain
risks that are not presented by mortgage-backed securities. Primarily, these
securities do not have the benefit of the same security interest in the
related collateral. Credit card receivables are generally unsecured and
debtors are entitled to the protection of a number of state and federal
consumer credit laws, some of which may reduce the ability to obtain full
payment. In the case of automobile receivables, the security interests in the
underlying automobiles are often not transferred when the pool is created,
with the resulting possibility that the collateral could be resold. The
remaining maturity of an asset-backed security will be deemed to be equal to
the average maturity of the assets underlying such security determined by the
investment adviser on the basis of assumed prepayment rates and other factors
with respect to such assets. In general, these types of loans are of shorter
duration than mortgage loans and are less likely to have substantial
prepayments.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS) AND REAL ESTATE MORTGAGE
INVESTMENT CONDUITS (REMICS). A CMO IS A DEBT SECURITY THAT IS BACKED BY A
PORTFOLIO OF MORTGAGES OR MORTGAGE-BACKED SECURITIES. THE ISSUER'S OBLIGATION
TO MAKE INTEREST AND PRINCIPAL PAYMENTS IS SECURED BY THE UNDERLYING PORTFOLIO
OF MORTGAGES OR MORTGAGE-BACKED SECURITIES. Typically, CMOs are collateralized
by GNMA, FNMA or FHLMC certificates, but also may be collateralized by whole
loans or private mortgage pass-through securities (such collateral is
collectively referred to as Mortgage Assets). Multi-class pass-through
securities are equity interests in a trust composed of Mortgage Assets.
Payments of principal and interest on the Mortgage Assets, and any
reinvestment income thereon, provide the funds to pay debt service on the CMOs
or make scheduled distributions on the multi-class pass-through securities.
CMOs may be issued by agencies or instrumentalities of the U.S. Government, or
by private originators of, or investors in, mortgage loans, including
depository institutions, mortgage banks, investment banks and special purpose
subsidiaries of the foregoing. The issuer of a series of CMOs may elect to be
treated as a REMIC. All future references to CMOs include REMICs.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on all classes of the CMOs on
a monthly, quarterly or semi-annual basis. The principal and interest on the
Mortgage Assets may be allocated among the several classes of a CMO series in
a number of different ways. Generally, the purpose of the allocation of the
cash flow of a CMO to the various classes is to obtain a more predictable cash
flow to the individual tranches than exists with the underlying collateral of
the CMO. As a general rule, the more predictable the cash flow is on a CMO
tranche, the lower the anticipated yield will be on that tranche at the time
of issuance relative to prevailing market yields on mortgage-backed
securities.
In reliance on rules and interpretations of the Securities and Exchange
Commission (SEC), the Fund's investments in certain qualifying CMOs and REMICs
are not subject to the Investment Company Act's limitation on acquiring
interests in other investment companies. See "Investment Objective and
Policies--Mortgage-Backed Securities--Collateralized Mortgage
11
<PAGE>
Obligations" in the Statement of Additional Information. CMOs and REMICs
issued by an agency or instrumentality of the U.S. Government are considered
U.S. Government securities for purposes of this Prospectus.
RISK FACTORS RELATING TO INVESTING IN MORTGAGE-BACKED AND ASSET-BACKED
SECURITIES. THE YIELD CHARACTERISTICS OF MORTGAGE-BACKED AND ASSET-BACKED
SECURITIES DIFFER FROM TRADITIONAL DEBT SECURITIES. Among the major
differences are that interest and principal payments are made more frequently,
usually monthly, and principal may be prepaid at any time because the
underlying mortgage loans or other assets generally may be prepaid at any
time. As a result, if the Portfolio purchases such a security at a premium, a
prepayment rate that is faster than expected will reduce yield to maturity,
while a prepayment rate that is slower than expected will have the opposite
effect of increasing yield to maturity. Alternatively, if the Portfolio
purchases these securities at a discount, faster than expected prepayments
will increase, while slower than expected prepayments will reduce, yield to
maturity. The Portfolio may invest a portion of its assets in derivative
mortgage-backed securities such as MBS strips which are highly sensitive to
changes in prepayment and interest rates. The investment adviser will seek to
manage these risks (and potential benefits) by diversifying its investments in
such securities and through hedging techniques.
IN ADDITION, MORTGAGE-BACKED SECURITIES WHICH ARE SECURED BY MANUFACTURED
(MOBILE) HOMES AND MULTI-FAMILY RESIDENTIAL PROPERTIES, SUCH AS GNMA AND FNMA
CERTIFICATES, ARE SUBJECT TO A HIGHER RISK OF DEFAULT THAN ARE OTHER TYPES OF
MORTGAGE-BACKED SECURITIES. See "Investment Objective and Policies" in the
Statement of Additional Information. The investment adviser will seek to
minimize this risk by investing in mortgage-backed securities rated at least A
by Moody's and S&P. See "Asset-Backed Securities" above.
Although the extent of prepayments on a pool of mortgage loans depends on
various economic and other factors, as a general rule prepayments on fixed
rate mortgage loans will increase during a period of falling interest rates
and decrease during a period of rising interest rates. Accordingly, amounts
available for reinvestment by the Portfolio are likely to be greater during a
period of declining interest rates and, as a result, likely to be reinvested
at lower interest rates than during a period of rising interest rates. Asset-
backed securities, although less likely to experience the same prepayment rate
as mortgage-backed securities, may respond to certain of the same factors
influencing prepayments, while at other times different factors may
predominate. Mortgage-backed securities and asset-backed securities may
decrease in value as a result of increases in interest rates and may benefit
less than other fixed-income securities from declining interest rates because
of the risk of prepayment. During periods of rising interest rates, the rate
of prepayment of mortgages underlying mortgage-backed securities can be
expected to decline, extending the projected average maturity of the mortgage-
backed securities. The maturity extension risk may effectively change a
security which was considered short- or intermediate-term at the time of
purchase into a long-term security. Long-term securities generally fluctuate
more widely in response to changes in interest rates than short- or
intermediate-term securities.
ASSET-BACKED SECURITIES INVOLVE CERTAIN RISKS THAT ARE NOT POSED BY
MORTGAGE-BACKED SECURITIES, RESULTING MAINLY FROM THE FACT THAT ASSET-BACKED
SECURITIES DO NOT USUALLY CONTAIN THE COMPLETE BENEFIT OF A SECURITY INTEREST
IN THE RELATED COLLATERAL. For example, credit card receivables generally are
unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, some of which may reduce the ability to
obtain full payment. In the case of automobile receivables, due to various
legal and economic factors, proceeds from repossessed collateral may not
always be sufficient to support payments on these securities.
STRIPPED MORTGAGE-BACK SECURITIES. In addition to MBS strips issued by
agencies or instrumentalities of the U.S. Government, the Portfolio may
purchase MBS strips issued by private originators of, or investors in,
mortgage loans, including depository institutions, mortgage banks, investment
banks and special purpose subsidiaries of the foregoing.
YANKEE OBLIGATIONS. THE PORTFOLIO MAY INVEST IN U.S. DOLLAR-DENOMINATED DEBT
SECURITIES OF FOREIGN CORPORATIONS ISSUED IN THE UNITED STATES AND U.S.
DOLLAR-DENOMINATED DEBT SECURITIES ISSUED OR GUARANTEED AS TO PAYMENT OF
PRINCIPAL AND INTEREST BY GOVERNMENTS, QUASI-GOVERNMENTAL ENTITIES, GOVERNMENT
AGENCIES, SUPRANATIONAL ENTITIES AND OTHER GOVERNMENTAL ENTITIES OF FOREIGN
COUNTRIES, WHICH SECURITIES ARE ISSUED IN THE UNITED STATES (YANKEE
12
<PAGE>
OBLIGATIONS). A supranational entity is an entity constituted by the national
governments of several countries to promote economic development, such as the
World Bank (International Bank for Reconstruction and Development), the
European Investment Bank and the Asian Development Bank. Debt securities of
quasi-governmental entities are issued by entities owned by either a national,
state or equivalent government or are obligations of a political unit that is
not backed by the national government's full faith and credit and general
taxing powers. These include, among others, the Province of Ontario and the
City of Tokyo.
INVESTMENTS IN OBLIGATIONS OF FOREIGN ISSUERS MAY BE SUBJECT TO CERTAIN
RISKS, INCLUDING FUTURE POLITICAL AND ECONOMIC DEVELOPMENTS, THE POSSIBLE
IMPOSITION OF WITHHOLDING TAXES ON INTEREST INCOME, THE SEIZURE OR
NATIONALIZATION OF FOREIGN DEPOSITS AND FOREIGN EXCHANGE CONTROLS OR OTHER
RESTRICTIONS. IN ADDITION, THERE MAY BE LESS PUBLICLY AVAILABLE INFORMATION
ABOUT A FOREIGN ISSUER THAN ABOUT A DOMESTIC ISSUER AND SUCH ENTITIES MAY NOT
BE SUBJECT TO THE SAME ACCOUNTING, AUDITING AND FINANCIAL RECORDKEEPING
STANDARDS AND REQUIREMENTS AS DOMESTIC ISSUERS.
HEDGING AND RETURN ENHANCEMENT STRATEGIES
THE PORTFOLIO MAY ALSO ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING
UTILIZING DERIVATIVES, TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS AND TO
ATTEMPT TO ENHANCE RETURN, BUT NOT FOR SPECULATION. THE FUND, AND THUS THE
INVESTOR, MAY LOSE MONEY THROUGH ANY UNSUCCESSFUL USE OF THESE STRATEGIES.
These strategies include the use of interest rate swap transactions and
Eurodollar futures contracts and options thereon. The Portfolio's ability to
use these strategies may be limited by market conditions, regulatory limits
and tax considerations and there can be no assurance that any of these
strategies will succeed.
INTEREST RATE SWAP TRANSACTIONS
THE PORTFOLIO MAY ENTER INTO INTEREST RATE SWAPS. INTEREST RATE SWAPS
INVOLVE THE EXCHANGE BY THE PORTFOLIO WITH ANOTHER PARTY OF THEIR RESPECTIVE
COMMITMENTS TO PAY OR RECEIVE INTEREST, E.G., AN EXCHANGE OF FLOATING RATE
PAYMENTS FOR FIXED RATE PAYMENTS. The Portfolio expects to enter into these
transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio or to protect against any increase in
the price of securities the Portfolio anticipates purchasing at a later date.
The Portfolio intends to use these transactions as a hedge and not as a
speculative investment. See "Investment Objective and Policies--Other
Investments" in the Statement of Additional Information.
The risk of loss with respect to interest rate swaps is limited to the net
amount of interest payments that the Portfolio is contractually obligated to
make and will not exceed 5% of the Portfolio's net assets. The use of interest
rate swaps may involve investment techniques and risks different from those
associated with ordinary portfolio transactions. If the investment adviser is
incorrect in its forecast of market values, interest rates and other
applicable factors, the investment performance of the Portfolio would diminish
compared to what it would have been if the investment technique was never
used.
FUTURES CONTRACTS AND OPTIONS THEREON
THE PORTFOLIO MAY PURCHASE AND SELL EURODOLLAR FUTURES CONTRACTS AND OPTIONS
THEREON WHICH ARE TRADED ON THE CHICAGO MERCANTILE EXCHANGE OR OTHER
COMMODITIES EXCHANGES OR BOARDS OF TRADE, FOR CERTAIN HEDGING AND RISK
MANAGEMENT PURPOSES AND TO ATTEMPT TO ENHANCE RETURN IN ACCORDANCE WITH
REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION. THE FUND, AND THUS
THE INVESTOR, MAY LOSE MONEY THROUGH ANY UNSUCCESSFUL USE OF THESE STRATEGIES.
A FINANCIAL FUTURES CONTRACT IS AN AGREEMENT TO PURCHASE OR SELL AN AGREED
AMOUNT OF SECURITIES AT A SET PRICE FOR DELIVERY IN THE FUTURE. Eurodollar
futures contracts and options thereon are denominated in U.S. dollars and are
linked to the London Interbank Offered Rate (LIBOR). These futures contracts
and options thereon enable purchasers to obtain a fixed rate for the lending
of funds and sellers to obtain a fixed rate for borrowings. The Portfolio
intends to use Eurodollar futures contracts and options thereon to hedge
against changes in LIBOR, to which many interest rate swaps are linked.
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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 ON THE PORTFOLIO 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.
RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES
PARTICIPATION IN THE FUTURES MARKETS INVOLVES INVESTMENT RISKS AND
TRANSACTION COSTS TO WHICH THE PORTFOLIO WOULD NOT BE SUBJECT ABSENT THE USE
OF THIS STRATEGY. THE FUND, AND THUS THE INVESTOR, MAY LOSE MONEY THROUGH ANY
UNSUCCESSFUL USE OF THIS STRATEGY. If the investment adviser's predictions of
movements in the direction of the securities and interest rate markets are
inaccurate, the adverse consequences to the Portfolio may leave the Portfolio
in a worse position than if such strategies were not used. Risks inherent in
the use of futures contracts and options on futures contracts include (1)
dependence on the investment adviser's ability to predict correctly movements
in the direction of interest rates and securities prices; (2) imperfect
correlation between the price of futures contracts and options thereon and
movements in the prices of the securities being hedged; (3) the fact that
skills needed to use these strategies are different from those needed to
select portfolio securities; (4) the possible absence of a liquid secondary
market for any particular instrument at any time; (5) the possible need to
defer closing out certain hedged positions to avoid adverse tax consequences;
and (6) the possible inability of the Portfolio to purchase or sell a
portfolio security at a time that otherwise would be favorable for it to do
so, or the possible need for the Portfolio to sell a portfolio security at a
disadvantageous time, due to the need for the Portfolio to maintain "cover" or
to segregate securities in connection with hedging transactions. See
"Investment Objective and Policies--Other Investments--Interest Rate Futures
Contracts" and "Taxes" in the Statement of Additional Information.
OTHER INVESTMENTS AND POLICIES
Under normal market conditions, the assets of the Portfolio, other than
monies from recent investments in the Portfolio pending investment in
securities having laddered maturities, will be invested in U.S. Government
securities or corporate and other debt obligations, as described above. When
the investment adviser deems it necessary for defensive purposes, to provide
liquidity or pending investment in securities having laddered maturities, the
assets of the Portfolio may be committed temporarily to high quality money
market instruments or repurchase agreements, as described below.
During periods when the investment adviser deems it necessary for temporary
defensive purposes, the Portfolio may invest without limit in money market
instruments. The Portfolio will apply the proceeds of new investments in the
Portfolio to purchase money market instruments and repurchase agreements until
these amounts can be used to purchase corporate and other debt obligations and
U.S. Government securities with laddered maturities of from one year or less
to six years. The yield on money market instruments and repurchase agreements
is generally lower than the yield on corporate and other debt obligations and
U.S. Government securities. Accordingly, the Portfolio's yield and total
return will generally be lower during these periods.
MONEY MARKET INSTRUMENTS
The Portfolio may invest in high quality money market instruments,
including, among others, commercial paper of a U.S. or foreign company or
foreign government; certificates of deposit, bankers' acceptances and time
deposits of domestic and foreign banks; and obligations issued or guaranteed
by the U.S. Government, its agencies and instrumentalities. These obligations
will be U.S. dollar-denominated. Commercial paper will be rated, at the time
of purchase, at least A-2 by S&P or Prime-2 by Moody's, or, if not rated,
issued by an entity having an outstanding unsecured debt issue rated at least
A or A-2 by S&P or A or Prime-2 by Moody's.
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REPURCHASE AGREEMENTS
The Portfolio may on occasion enter into repurchase agreements whereby the
seller of a security agrees to repurchase that security from the Portfolio at
a mutually agreed-upon time and price. The period of maturity is usually quite
short, possibly overnight or a few days, although it may extend over a number
of months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Portfolio's
money is invested in the repurchase agreement. The Portfolio's repurchase
agreements will at all times be fully collateralized in an amount at least
equal to the resale price. The instruments held as collateral are valued
daily, and if the value of instruments declines, the Portfolio will require
additional collateral. If the seller defaults and the value of the collateral
securing the repurchase agreement declines, the Portfolio may incur a loss.
The Fund participates in a joint repurchase account with other investment
companies managed by Prudential Mutual Fund Management LLC pursuant to an
order of the SEC. See "Investment Objective and Policies--Other Investments--
Repurchase Agreements" in the Statement of Additional Information.
COVERED DOLLAR ROLLS
The Portfolio may enter into covered dollar rolls. In a dollar roll, the
Portfolio sells securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar (same type and
coupon) securities on a specified future date from the same party. During the
roll period, the Portfolio foregoes principal and interest paid on the
securities. The Portfolio is compensated by the difference between the current
sale price and the forward price for the future purchase (often referred to as
the "drop") as well as by the interest earned on the cash proceeds of the
initial sale. A "covered roll" is a specific type of dollar roll for which
there is an offsetting cash position or a cash equivalent security position
which matures on or before the forward settlement date of the dollar roll
transaction.
The Portfolio will establish a segregated account with its Custodian in
which it will maintain cash, U.S. Government securities, equity securities or
other liquid, unencumbered assets, marked-to-market daily, having a value
equal to its obligations in respect of covered dollar rolls. Covered dollar
rolls involve the risk that the market value of the securities retained by the
Portfolio may decline below the price of the securities the Portfolio has sold
but is obligated to repurchase under the agreement. In the event the buyer of
securities under a covered dollar roll files for bankruptcy or becomes
insolvent, the Portfolio's use of the proceeds of the agreement may be
restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Portfolio's obligation to repurchase the
securities.
The Portfolio may invest up to 5% of its assets in covered dollar rolls.
INSTRUMENTS WITH PUTS
The Portfolio may acquire longer-term debt securities with put features.
Puts give the Portfolio the right to sell the securities at a specified
exercise price on a specified date. Puts may be acquired to reduce the
volatility of the market value of the securities subject to the puts, but the
acquisition of the puts may involve an additional cost to the Portfolio. In
purchasing debt securities with a put feature to effectively shorten the
maturity of the instrument, the Subadviser will examine the credit of the
issuer and the third party put provider, if applicable, and will invest only
in those instruments meeting its current credit requirements.
SECURITIES LENDING
The Portfolio may lend its portfolio securities to brokers or dealers, banks
or other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or equivalent collateral or secures a
letter of credit in favor of the Portfolio in an amount equal to at least 100%
of the market value of the securities loaned. During the time portfolio
securities are on loan, the borrower will pay the Portfolio an amount
equivalent to any dividend or interest paid on such securities and the
Portfolio may invest the cash collateral and earn additional income, or it may
receive an agreed-upon amount of interest income from the borrower. As a
matter of fundamental policy, the Portfolio cannot lend more than 30% of the
value of its total assets.
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WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Portfolio may purchase or sell securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when
securities are purchased or sold by the Portfolio with payment and delivery
taking place a month or more in the future in order to secure what is
considered to be an advantageous price and yield to the Portfolio at the time
of entering into the transaction. The Fund's Custodian will maintain, in a
segregated account of the Portfolio, cash, U.S. Government securities, equity
securities or other liquid, unencumbered assets, marked-to-market daily,
having a value equal to or greater than the Portfolio's purchase commitments.
The securities so purchased are subject to market fluctuation and no interest
accrues to the purchaser during the period between purchase and settlement. At
the time of delivery of the securities the value may be more or less than the
purchase price and an increase in the percentage of the Portfolio's assets
committed to the purchase of securities on a when-issued or delayed delivery
basis may increase the volatility of the Portfolio's net asset value.
BORROWING
The Portfolio may borrow an amount equal to no more than 20% of the value of
its total assets (calculated when the loan is made) from banks for temporary,
extraordinary or emergency purposes. The Portfolio may pledge up to 20% of its
total assets to secure these borrowings. The Portfolio will not purchase
portfolio securities if its borrowings exceed 5% of its net assets.
PORTFOLIO TURNOVER
The Portfolio does not expect to trade in securities for short-term gain. It
is anticipated that the annual portfolio turnover rate will not exceed 200%.
High portfolio turnover may involve correspondingly greater transaction costs,
which will be borne by the Fund. The portfolio turnover rate is calculated by
dividing the lesser of sales or purchases of portfolio securities by the
average monthly value of the portfolio securities, excluding securities having
a maturity at the date of purchase of one year or less.
ILLIQUID SECURITIES
The Portfolio may hold up to 15% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven
days, securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act
of 1933, as amended (the Securities Act), and privately placed commercial
paper that have a readily available market are not considered illiquid for
purposes of this limitation. The investment adviser will monitor the liquidity
of such restricted securities under the supervision of the Board of Directors.
The Portfolio's investment in Rule 144A securities could have the effect of
increasing illiquidity to the extent that qualified institutional buyers
become, for a limited time, uninterested in purchasing Rule 144A securities.
Repurchase agreements subject to demand are deemed to have a maturity equal to
the applicable notice period.
INVESTMENT RESTRICTIONS
The Portfolio is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Portfolio's outstanding voting securities, as defined in the Investment
Company Act. See "Investment Restrictions" in the Statement of Additional
Information.
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HOW THE FUND IS MANAGED
THE FUND HAS A BOARD OF DIRECTORS WHICH, IN ADDITION TO OVERSEEING THE
ACTIONS OF THE FUND'S MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW,
DECIDES UPON MATTERS OF GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND
SUPERVISES THE DAILY BUSINESS OPERATIONS OF THE FUND. THE FUND'S SUBADVISER
FURNISHES DAILY INVESTMENT ADVISORY SERVICES.
For the fiscal year ended December 31, 1996, the total expenses of Class A,
Class B, Class C and Class Z shares as a percentage of average net assets were
.86%, 1.51%, 1.51% and .76% (annualized), respectively. See "Financial
Highlights."
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT LLC (PMF OR THE MANAGER), GATEWAY CENTER
THREE, NEWARK, NEW JERSEY 07102, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .40 OF 1% OF THE AVERAGE DAILY NET
ASSETS OF THE PORTFOLIO. PMF is organized in New York as a limited liability
company. It is the successor to Prudential Mutual Fund Management, Inc., which
transferred its assets to PMF in September 1996. For the fiscal year ended
December 31, 1996, the Portfolio paid management fees to PMF of .40% of the
Portfolio's average net assets. See "Manager" in the Statement of Additional
Information.
As of January 31, 1997, PMF served as the manager to 40 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $55.8 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF EACH PORTFOLIO AND ALSO ADMINISTERS THE FUND'S CORPORATE
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE
SUBADVISER OR THE INVESTMENT ADVISER), PI FURNISHES INVESTMENT ADVISORY
SERVICES IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY
PMF FOR ITS REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES.
PMF continues to have responsibility for all investment advisory services
pursuant to the Management Agreement and supervises PI's performance of such
services.
The current portfolio manager of the Portfolio is Anthony Rodriguez, a Vice
President of Prudential Investments, Mr. Rodriguez has responsibility for the
day-to-day management of the Portfolio's investments. Mr. Rodriguez has
managed the Portfolio since January 1995 and has been employed by PI as a
portfolio manager since 1988. Mr. Rodriguez also serves as the portfolio
manager of the bond portions of the Prudential Series Fund--Conservatively
Managed and Aggressively Managed Portfolios.
PMF and PIC are wholly-owned subsidiaries of Prudential, a major diversified
insurance and financial services company.
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE
SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE
LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE SHARES OF
THE PORTFOLIO. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND 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
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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 is reimbursed by or paid for by the
Portfolio. These expenses include commissions and account servicing fees paid
to, or on account of, financial advisers of Prudential Securities and
representatives of Pruco Securities Corporation (Prusec), an affiliated
broker-dealer, commissions and account servicing fees paid to, or on account
of, other broker-dealers or financial institutions (other than national banks)
which have entered into agreements with the Distributor, advertising expenses,
the cost of printing and mailing prospectuses to potential investors and
indirect and overhead costs of Prudential Securities and Prusec associated
with the sale of Portfolio shares, including lease, utility, communications
and sales promotion expenses.
Under the Plans, the Portfolio is obligated to pay distribution and/or
service fees to the Distributor as compensation for its distribution and
service activities, not as reimbursement for specific expenses incurred. If
the Distributor's expenses exceed its distribution and service fees, the
Portfolio will not be obligated to pay any additional expenses. If the
Distributor's expenses are less than such distribution and service fees, it
will retain its full fees and realize a profit.
UNDER THE CLASS A PLAN, THE PORTFOLIO MAY PAY PRUDENTIAL SECURITIES FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL
RATE OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES.
The Class A Plan provides that (i) up to .25 of 1% of the average daily net
assets of the Class A shares may be used to pay for personal service and/or
the maintenance of shareholder accounts (service fee) and (ii) total
distribution fees (including the service fee up to .25 of 1%) may not exceed
.30 of 1% of the average daily net assets of the Class A shares. Prudential
Securities has agreed to limit its distribution-related fees payable under the
Class A Plan to .10 of 1% of the average daily net assets of the Class A
shares for the fiscal year ending December 31, 1997.
UNDER THE CLASS B AND CLASS C PLANS, THE PORTFOLIO MAY PAY PRUDENTIAL
SECURITIES FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND
CLASS C SHARES AT AN ANNUAL RATE OF UP TO 1% OF THE AVERAGE DAILY NET ASSETS
OF EACH OF THE CLASS B AND CLASS C SHARES. The Class B and Class C Plans
provide for the payment to Prudential Securities of (i) an asset-based sales
charge of .75 of 1% of the average daily net assets of each of the Class B and
Class C shares and (ii) a service fee of .25 of 1% of the average daily net
assets of each of the Class B and Class C shares. The service fee is used to
pay for personal service and/or the maintenance of shareholder accounts.
Prudential Securities has agreed to limit its distribution-related fees
payable under the Class B and Class C Plans to no more than .75 of 1% of the
average daily net assets of each of the Class B and Class C shares for the
fiscal year ending December 31, 1997. Prudential Securities also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales
Charges."
For the fiscal year ended December 31, 1996, the Portfolio paid distribution
expenses of .10%, .75% and .75% of the average daily net assets of the Class
A, Class B and Class C shares, respectively. The Portfolio records all
payments made under the Plans as expenses in the calculation of net investment
income. See "Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of Class A, Class B and Class
C shares of the Portfolio will be allocated to each such class based upon the
ratio of sales of each such class to the sales of Class A, Class B and Class C
shares of the Portfolio other than expenses allocable to a particular class.
The distribution fee and sales charge of one class will not be used to
subsidize the sale of another class.
Each Plan provides that it shall continue in effect from year to year
provided that a majority of the Board of Directors of the Fund, including a
majority of the Directors who are not "interested persons" of the Fund (as
defined in the Investment Company Act) and who have no direct or indirect
financial interest in the operation of the Plan or any agreement related to
the Plan (the Rule 12b-1 Directors), vote annually to continue the Plan. Each
Plan may be terminated at any time by vote of
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<PAGE>
a majority of the Rule 12b-1 Directors or of a majority of the outstanding
shares of the applicable class of the Portfolio. The Portfolio will not be
obligated to pay distribution and service fees incurred under any Plan if it
is terminated or not continued.
In addition to distribution and service fees paid by the Portfolio under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers (including Prudential
Securities) and other persons who distribute shares of the Portfolio
(including Class Z shares). Such payments may be calculated by reference to
the net asset value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the
allegations asserted against it, PSI consented to the entry of an SEC
Administrative Order which stated that PSI's conduct violated the federal
securities laws, directed PSI to cease and desist from violating the federal
securities laws, pay civil penalties, and adopt certain remedial measures to
address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of
a $10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purposes of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the
signing of the agreement, provided that PSI complies with the terms of the
agreement. If, upon completion of the three year period, PSI has complied with
the terms of the agreement, no prosecution will be instituted by the United
States for the offenses charged in the complaint. If on the other hand, during
the course of the three year period, PSI violates the terms of the agreement,
the U.S. Attorney can then elect to pursue these charges. Under the terms of
the agreement, PSI agreed, among other things, to pay an additional
$330,000,000 into the fund established by the SEC to pay restitution to
investors who purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may
be obtained at no cost by calling 1-800-225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
FEE WAIVERS AND SUBSIDY
PMF may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. Fee waivers
and expense subsidies will increase the Fund's total return. See "Performance
Information" in the Statement of Additional Information and "Fund Expenses."
PORTFOLIO TRANSACTIONS
Prudential Securities may also act as a broker or futures commission
merchant for the Portfolio, provided that the commissions, fees or other
remuneration it receives are fair and reasonable. See "Portfolio Transactions"
in the Statement of Additional Information.
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CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Portfolio's securities and
cash and, in that capacity, maintains certain financial and accounting books
and records pursuant to an agreement with the Fund. Its mailing address is
P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent, and in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE PORTFOLIO'S NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY
SUBTRACTING ITS LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE
REMAINDER BY THE NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY
FOR EACH CLASS. THE BOARD OF DIRECTORS HAS FIXED THE SPECIFIC TIME OF DAY FOR
THE COMPUTATION OF THE PORTFOLIO'S NAV TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not
readily available, at fair value as determined in good faith under procedures
established by the Fund's Board of Directors. See "Net Asset Value" in the
Statement of Additional Information.
The Portfolio will compute its NAV once daily on days that the New York
Stock Exchange is open for trading except on days on which no orders to
purchase, sell or redeem shares have been received by the Fund or days on
which changes in the value of the Fund's portfolio securities do not
materially affect the NAV. The New York Stock Exchange is closed on the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger distribution-
related fee to which Class B and Class C shares are subject. The NAV of Class
Z shares will generally be higher than the NAV of the other three classes
because Class Z shares are not subject to any distribution and/or service
fees. It is expected, however, that the NAV of the four classes will tend to
converge immediately after the recording of dividends, if any, which will
differ by approximately the amount of the distribution and/or service fee
expense accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE PORTFOLIO MAY ADVERTISE ITS "TOTAL RETURN" (INCLUDING
"AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE" TOTAL RETURN) AND "YIELD" IN
ADVERTISEMENTS OR SALES LITERATURE. TOTAL RETURN AND YIELD ARE CALCULATED
SEPARATELY FOR CLASS A, CLASS B, CLASS C AND CLASS Z SHARES. These figures are
based on historical earnings and are not intended to indicate future
performance. The "total return" shows how much an investment in the Portfolio
would have increased (decreased) over a specified period of time (i.e., one,
five or ten years or since inception of the Portfolio) assuming that all
distributions and dividends by the Portfolio were reinvested on the
reinvestment dates during the period and less all recurring fees. The
"aggregate" total return reflects actual performance over a stated period of
time. "Average annual" total return is a hypothetical rate of return that, if
achieved annually, would have produced the same aggregate total return if
performance had been constant over the entire period. "Average annual" total
return smooths out variations in performance and takes into account any
applicable initial or contingent deferred sales charges. Neither "average
annual" total return nor
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"aggregate" total return takes into account any federal or state income taxes
that may be payable upon redemption. The "yield" refers to the income generated
by an investment in the Portfolio over a one-month or 30-day period. This
income is then "annualized;" that is, the amount of income generated by the
investment during that 30-day period is assumed to be generated each 30-day
period for twelve periods and is shown as a percentage of the investment. The
income earned on the investment is also assumed to be reinvested at the end of
the sixth 30-day period. The Fund also may include comparative performance
information in advertising or marketing the shares of the Portfolio. Such
performance information may include data from Lipper Analytical Services, Inc.,
Morningstar Publications, Inc., other industry publications, business
periodicals and market indices. See "Performance Information" in the Statement
of Additional Information. Further performance information is contained in the
Fund's annual and semi-annual reports to shareholders, which may be obtained
without charge. See "Shareholder Guide--Shareholder Services--Reports to
Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE PORTFOLIO HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED (THE INTERNAL REVENUE CODE). ACCORDINGLY, THE PORTFOLIO WILL NOT BE
SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME AND CAPITAL GAINS,
IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. To the extent not distributed
by the Portfolio, net investment income and capital gains and losses are
taxable to the Portfolio. See "Taxes" in the Statement of Additional
Information.
TAXATION OF SHAREHOLDERS
Any dividends out of net investment income, together with distributions of
net short-term gains (i.e., the excess of net short-term capital gains over net
long-term capital losses) distributed to shareholders, will be taxable as
ordinary income to the shareholder whether or not reinvested. Any net capital
gains (i.e., the excess of net long-term capital gains over net short-term
capital losses) distributed to shareholders will be taxable as long-term
capital gains to the shareholders, whether or not reinvested and regardless of
the length of time a shareholder has owned his or her shares. The maximum long-
term capital gains rate for individuals is 28%. The maximum long-term capital
gains rate for corporate shareholders is currently the same as the maximum tax
rate for ordinary income.
Any gain or loss realized upon a sale or redemption of Portfolio shares by a
shareholder who is not a dealer in securities generally will be treated as
long-term capital gain or loss if the shares have been held for more than one
year and otherwise as short-term capital gain or loss. Any such loss, however,
with respect to shares that are held for six months or less will be treated as
long-term capital loss to the extent of any capital gain distributions received
by the shareholder.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of any
class of the Portfolio's shares for any other class of its shares constitutes a
taxable event for federal income tax purposes. However, such opinions are not
binding on the Internal Revenue Service.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Taxes" in the Statement of
Additional Information.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Portfolio is required to withhold and
remit to the U.S. Treasury 31% of dividends, capital gain income and redemption
proceeds on the accounts of those shareholders who fail to furnish their tax
identification numbers on IRS Form W-9 (or IRS Form W-8 in the case of certain
foreign shareholders) with the required certifications
21
<PAGE>
regarding the shareholder's status under the federal income tax law.
Withholding at this rate is also required from dividends and capital gains
distributions (but not redemption proceeds) payable to shareholders who are
otherwise subject to backup withholding. Dividends of net investment income and
short-term capital gains paid to a foreign shareholder will generally be
subject to U.S. withholding tax at the rate of 30% (or lower treaty rate).
DIVIDENDS AND DISTRIBUTIONS
THE PORTFOLIO EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF NET CAPITAL
GAINS, IF ANY. For federal income tax purposes, the Portfolio had a capital
loss carryforward as of December 31, 1996, of approximately $10,329,900, of
which approximately $7,180,600 expires in 2002 and approximately $3,149,300
expires in 2004. Accordingly, no capital gains distributions are expected to be
paid to shareholders until net gains have been realized in excess of such
carryforward. Dividends paid by the Portfolio with respect to each class of
shares, to the extent any dividends are paid, will be calculated in the same
manner, at the same time, on the same day and will be in the same amount except
that each class (other than Class Z) will bear its own distribution charges,
generally resulting in lower dividends for Class B and Class C shares in
relation to Class A shares and lower dividends for Class A shares in relation
to Class Z shares. Distributions of net capital gains, if any, will be paid in
the same amount for each class of shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL PORTFOLIO SHARES, AT
THE NAV ON THE PAYMENT DATE UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT LESS
THAN FIVE BUSINESS DAYS PRIOR TO THE PAYMENT DATE TO RECEIVE SUCH DIVIDENDS AND
DISTRIBUTIONS IN CASH. The Board of Directors reserves the right to change the
reinvestment date from the payment date to the record date for certain capital
gains distributions. Such election should be submitted to Prudential Mutual
Fund Services LLC, Attention: Account Maintenance, P.O. Box 15015, New
Brunswick, New Jersey 08906-5015. If you hold shares through Prudential
Securities you should contact your financial adviser to elect to receive
dividends and distributions in cash. The Fund will notify each shareholder
after the close of the Fund's taxable year both of the dollar amount and the
taxable status of that year's dividends and distributions on a per share basis.
WHEN THE PORTFOLIO GOES "EX-DIVIDEND," ITS NAV IS REDUCED BY THE AMOUNT OF
THE DIVIDEND OR DISTRIBUTION. IF YOU BUY SHARES JUST PRIOR TO THE EX-DIVIDEND
DATE FOR A CAPITAL GAIN DISTRIBUTION, THE PRICE YOU PAY WILL INCLUDE THE
DISTRIBUTION AND A PORTION OF YOUR INVESTMENT WILL BE RETURNED TO YOU AS A
TAXABLE DISTRIBUTION. YOU SHOULD, THEREFORE, CONSIDER THE TIMING OF CAPITAL
GAIN DISTRIBUTIONS WHEN MAKING YOUR PURCHASES.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
THE FUND WAS INCORPORATED IN MARYLAND ON JUNE 8, 1988. THE FUND IS AUTHORIZED
TO ISSUE 500 MILLION SHARES OF COMMON STOCK, $.01 PAR VALUE PER SHARE, DIVIDED
INTO FOUR CLASSES FOR EACH PORTFOLIO, DESIGNATED CLASS A, CLASS B, CLASS C AND
CLASS Z COMMON STOCK, EACH OF WHICH CONSISTS OF 62,500,000 AUTHORIZED SHARES.
Each class represents an interest in the same assets of the Portfolio and is
identical in all respects 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 on 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 "How the Fund is
Managed--Distributor." In accordance with the Fund's Articles of Incorporation,
the Board of Directors may authorize the creation of additional series of
common stock and classes within such series, with such preferences, privileges,
limitations and voting and dividend rights as the Board of Directors may
determine.
22
<PAGE>
The Board of Directors may increase or decrease the number of authorized
shares without approval by the shareholders. Shares of the Fund, when issued,
are fully paid, nonassessable, fully transferable and redeemable at the option
of the holder. Shares are also redeemable at the option of the Fund under
certain circumstances as described under "Shareholder Guide--How to Sell Your
Shares." Each share of each class of common stock of the Portfolio is equal as
to earnings, assets and voting privileges, except as noted above, and each
class (with the exception of Class Z shares, which are not subject to any
distribution or service fees) bears the expenses related to the distribution of
its shares. Except for the conversion feature applicable to the Class B shares,
there are no conversion, preemptive or other subscription rights. In the event
of liquidation, each share of common stock of each Portfolio is entitled to its
portion of all of the Portfolio's assets after all debt and expenses of the
Portfolio have been paid. Since Class B and Class C shares generally bear
higher distribution expenses than Class A shares, the liquidation proceeds to
shareholders of those classes are likely to be lower than to Class A
shareholders and to Class Z shareholders, whose shares are not subject to any
distribution and/or service fees. The Fund's shares do not have cumulative
voting rights for the election of Directors.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF DIRECTORS IS REQUIRED TO BE
ACTED ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE DIRECTORS OR TO TRANSACT ANY OTHER BUSINESS.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE PORTFOLIO THROUGH PRUDENTIAL SECURITIES,
PRUSEC OR DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL
FUND SERVICES LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. Participants in programs
sponsored by Prudential Retirement Services should contact their client
representative for more information about Class Z shares. The purchase price is
the NAV next determined following receipt of an order by the Transfer Agent or
Prudential Securities plus a sales charge which, at your option, may be imposed
either (i) at the time of purchase (Class A shares) or (ii) on a deferred basis
(Class B or Class C shares). Class Z shares are offered to a limited group of
investors at net asset value without any sales charge. See "Alternative
Purchase Plan" below. See also "How the Fund Values its Shares" above.
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. There is no minimum investment requirement
for Class Z shares. The minimum subsequent investment is $100 for all classes,
except for Class Z shares, for which there is no minimum. All minimum
investment requirements are waived for certain retirement and employee savings
plans or custodial accounts for the benefit of minors. For purchases made
through the Automatic Savings Accumulation Plan, the minimum initial and
subsequent investment is $50. See "Shareholder Services" below.
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a stock certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who
hold their shares through Prudential Securities will not receive stock
certificates.
23
<PAGE>
The Fund reserves the right to reject any purchase order (including an
exchange into the Portfolio) or to suspend or modify the continuous offering
of its shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the investment.
Transactions in Fund shares may be subject to postage and handling charges
imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Portfolio by
wire, you must first telephone PMFS at (800) 225-1852 (toll-free) to receive
an account number. The following information will be requested: your name,
address, tax identification number, class election, dividend distribution
election, amount being wired and wiring bank. Instructions should then be
given by you to your bank to transfer funds by wire to State Street Bank and
Trust Company (State Street), Boston, Massachusetts, Custody and Shareholder
Services Division, Attention: Prudential Structured Maturity Fund, Inc.
(Income Portfolio), specifying on the wire the account number assigned by PMFS
and your name and identifying the class in which you are eligible to invest
(Class A, Class B, Class C or Class Z shares).
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Portfolio as of that day. See "Net Asset Value" in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Structured
Maturity Fund, Inc. (Income Portfolio), Class A, Class B, Class C or Class Z
shares and your name and individual account number. It is not necessary to
call PMFS to make subsequent purchase orders utilizing Federal Funds. The
minimum amount which may be invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
THE PORTFOLIO OFFERS FOUR CLASSES OF SHARES (CLASS A, CLASS B, CLASS C AND
CLASS Z SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE
STRUCTURE FOR YOUR INDIVIDUAL CIRCUMSTANCES, GIVEN THE AMOUNT OF THE PURCHASE,
THE LENGTH OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT
CIRCUMSTANCES (ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
------------------------ ------------------------ -----------------------------
<C> <S> <C> <C>
Class A Maximum initial sales .30 of 1% Initial sales charge waived
charge of 3.25% of the (Currently being or reduced for certain
public offering price charged at a rate purchases
of .10 of 1%)
Class B Maximum contingent 1% (Currently being Shares convert to Class A
deferred sales charge or charged at a rate shares approximately five
CDSC of 3% of the lesser of .75 of 1%) years after purchase
of the amount invested
or the redemption
proceeds; declines to
zero after four years
Class C Maximum CDSC of 1% of 1% (Currently being Shares do not convert to
the lesser of the amount charged at a rate another class
invested or the of .75 of 1%)
redemption proceeds on
redemptions made within
one year of purchase
Class Z None None Sold to a limited group of
investors
</TABLE>
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<PAGE>
The four classes of shares represent an interest in the same portfolio of
investments of the Portfolio and have the same rights, except that (i) each
class (with the exception of Class Z shares, which are not subject to any
distribution or service fees), bears the separate expenses of its Rule 12b-1
distribution and service plan, (ii) each class has exclusive voting rights on
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,
and (iii) only Class B shares have a conversion feature. The four classes also
have separate exchange privileges. See "How to Exchange Your Shares" below.
The income attributable to each class and the dividends payable on the shares
of each class will be reduced by the amount of the distribution fee (if any)
of each class. Class B and Class C shares bear the expenses of a higher
distribution fee which will generally cause them to have higher expense ratios
and to pay lower dividends than the Class A and Class Z shares.
Financial advisers and other sales agents who sell shares of the Portfolio
will receive different compensation for selling Class A, Class B, Class C and
Class Z shares and will generally receive more compensation initially for
selling Class A and Class B shares than for selling Class C or Class Z shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER
THINGS, (1) the length of time you expect to hold your investment, (2) the
amount of any applicable sales charge (whether imposed at the time of purchase
or redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) the fact that Class B shares
automatically convert to Class A shares approximately five years after
purchase (see "Conversion Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Portfolio:
If you intend to hold your investment in the Portfolio for less than 5 years
and do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 3.25% and Class B
shares are subject to a CDSC of 3% which declines to zero over a 4 year
period, you should consider purchasing Class C shares over either Class A or
Class B shares.
If you intend to hold your investment for 5 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 5 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money
invested initially because the sales charge on Class A shares is deducted at
the time of purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 4 years in the case of Class B shares and Class C shares for the
higher cumulative annual distribution-related fee on those shares to exceed
the initial sales charge plus cumulative annual distribution-related fees on
Class A shares. This does not take into account the time value of money, which
further reduces the impact of the higher Class B or Class C distribution-
related fee on the investment, fluctuations in net asset value, the effect of
the return on the investment over this period of time or redemptions when the
CDSC is applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT
OR UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A
SHARES UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. SEE
"REDUCTION AND WAIVER OF INITIAL SALES CHARGES" AND "CLASS Z SHARES" BELOW.
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<PAGE>
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial
sales charge alternative is the next determined NAV plus a sales charge
(expressed as a percentage of the offering price and of the amount invested),
as shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
------------------ --------------- --------------- -----------------
<S> <C> <C> <C>
Less than $99,999 3.25% 3.36% 3.00%
$100,000 to $249,999 2.75 2.83 2.50
$250,000 to $499,999 2.25 2.30 2.00
$500,000 to $999,999 1.75 1.78 1.55
$1,000,000 and above None None None
</TABLE>
The Distributor may reallow the entire initial sales charge to dealers.
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act.
In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay dealers, financial advisers and other persons which distribute shares
a finders' fee based on a percentage of the net asset value of shares sold by
such persons.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be
aggregated to determine the applicable reduction. See "Purchase and Redemption
of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares"
in the Statement of Additional Information.
Benefit Plans. CLASS A SHARES MAY BE PURCHASED AT NAV, WITHOUT PAYMENT OF AN
INITIAL SALES CHARGE, BY PENSION, PROFIT-SHARING OR OTHER EMPLOYEE BENEFIT
PLANS QUALIFIED UNDER SECTION 401 OF THE INTERNAL REVENUE CODE AND DEFERRED
COMPENSATION AND ANNUITY PLANS UNDER SECTIONS 457 AND 403(B)(7) OF THE
INTERNAL REVENUE CODE (COLLECTIVELY, BENEFIT PLANS), PROVIDED THAT THE BENEFIT
PLAN HAS EXISTING ASSETS OF AT LEAST $1 MILLION INVESTED IN SHARES OF
PRUDENTIAL MUTUAL FUNDS (EXCLUDING MONEY MARKET FUNDS OTHER THAN THOSE
acquired pursuant to the exchange privilege) or 250 eligible employees or
participants. In the case of Benefit Plans whose accounts are held directly
with the Transfer Agent or Prudential Securities and for which the Transfer
Agent or Prudential Securities does individual account recordkeeping (Direct
Account Benefit Plans) and Benefit Plans sponsored by PSI or its subsidiaries
(PSI or Subsidiary Prototype Benefit Plans), Class A shares may be purchased
at NAV by participants who are repaying loans made from such plans to the
participant.
PruArray and SmartPath Plans. Class A shares may be purchased at NAV by
certain savings, retirement and deferred compensation plans, qualified or non-
qualified under the Internal Revenue Code, including pension, profit-sharing,
stock-bonus or other employee benefit plans under Section 401 of the Internal
Revenue Code and deferred compensation and annuity plans under Sections 457
and 403(b)(7) of the Internal Revenue Code that participate in the Transfer
Agent's PruArray or SmartPath Programs (benefit plan recordkeeping services)
(hereafter referred to as a PruArray or SmartPath Plan); provided that the
plan has at least $1 million in existing assets or 250 eligible employees or
participants. The term "existing assets" for this purpose includes stock
issued by a PruArray or SmartPath Plan sponsor, shares of non-money market
Prudential Mutual Funds and shares of certain unaffiliated non-money market
mutual funds that participate in the PruArray or SmartPath Program
(Participating Funds). "Existing assets" also include shares of money market
funds acquired by exchange from a Participating Fund, monies invested in The
Guaranteed Interest Account (GIA), a group annuity product issued by
Prudential, and units of The Stable Value Fund (SVF), an unaffiliated bank
collective fund. Class A shares also may be purchased at NAV by plans that
have monies invested in GIA and SVF, provided (i) the purchase is made with
the proceeds of a redemption from either GIA or SVF and (ii) Class A shares
are an investment option of the plan.
26
<PAGE>
PruArray Association Benefit Plans. Class A shares are also offered at net
asset value to Benefit Plans or non-qualified plans sponsored by employers
which are members of a common trade, professional or membership association
(Association) that participate in the PruArray Program provided that the
Association enters into a written agreement with Prudential. Such Benefit
Plans or non-qualified plans may purchase Class A shares at net asset value
without regard to the assets or number of participants in the individual
employer's qualified Plan(s) or non-qualified plans so long as the employers
in the Association (i) have retirement plan assets in the aggregate of at
least $1 million or 250 participants in the aggregate and (ii) maintain their
accounts with the Fund's transfer agent.
PruArray Savings Program. Class A shares are also offered at net asset value
to employees or companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under this
Program, a limited number of Prudential Mutual Funds are available for
purchase at net asset value by Individual Retirement Accounts and Savings
Accumulation Plans of the company's employees. The Program is available only
to (i) employees who open an IRA or Savings Accumulation Plan account with the
Fund's transfer agent and (ii) spouses of employees who open an IRA account
with the Fund's transfer agent. The program is offered to companies that have
at least 250 eligible employees.
Special Rules Applicable to Retirement Plans. After a Benefit Plan or
PruArray or SmartPath Plan qualifies to purchase Class A shares at NAV, all
subsequent purchases will be made at NAV.
Other Waivers. In addition, Class A shares may be purchased at NAV, through
Prudential Securities or the Transfer Agent, by the following persons: (a)
officers and current and former Directors/Trustees of the Prudential Mutual
Funds (including the Fund), (b) employees of Prudential Securities and PMF and
their subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent, (c)
employees of subadvisers of the Prudential Mutual Funds provided that
purchases at NAV are permitted by such person's employer, (d) Prudential,
employees and special agents of Prudential and its subsidiaries and all
persons who have retired directly from active service with Prudential or one
of its subsidiaries, (e) registered representatives and employees of dealers
who have entered into a selected dealer agreement with Prudential Securities
provided that purchases at NAV are permitted by such person's employer and (f)
investors who have a business relationship with a financial adviser who joined
Prudential Securities from another investment firm, provided that (i) the
purchase is made within 180 days of the commencement of the financial
adviser's employment at Prudential Securities or within one year in the case
of Benefit Plans, (ii) the purchase is made with proceeds of a redemption of
shares of any open-end, non-money market fund sponsored by the financial
adviser's previous employer (other than a fund which imposes a distribution or
service fee of .25 of 1% or less) and (iii) the financial adviser served as
the client's broker on the previous purchase.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation
of your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions. See "Purchase
and Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--
Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one
of the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class
B and Class C shares may be subject to a CDSC. See "How to Sell Your Shares--
Contingent Deferred Sales Charges." The Distributor will pay sales commissions
of up to 4% of the purchase price of Class B shares to dealers, financial
advisers and other persons who sell Class B shares at the time of sale from
its own resources. This facilitates the ability of the Fund to sell the Class
B shares without an initial sales charge being deducted at the time of
purchase. The Distributor anticipates that it will recoup its advancement of
sales commissions from the combination of the CDSC and the distribution fee.
See "How the Fund is Managed--Distributor." In connection
27
<PAGE>
with the sale of Class C shares, the Distributor will pay dealers, financial
advisers and other persons which distribute Class C shares a sales commission
of up to 1% of the purchase price at the time of the sale.
CLASS Z SHARES
Class Z shares of the Fund are available for purchase by the following
categories of investors:
(i) pension, profit-sharing or other employee benefit plans qualified under
Section 401 of the Internal Revenue Code, deferred compensation and annuity
plans under Sections 457 and 403(b)(7) of the Internal Revenue Code and non-
qualified plans for which the Fund is an available option (collectively,
Benefit Plans), provided such Benefit Plans (in combination with other plans
sponsored by the same employer or group of related employers) have at least
$50 million in defined contribution assets; (ii) participants in any fee-based
program sponsored by Prudential Securities or its affiliates which includes
mutual funds as investment options and for which the Fund is an available
option; and (iii) investors who are, or have executed a letter of intent to
become, shareholders of any series of Prudential Dryden Fund (formerly The
Prudential Institutional Fund (Dryden Fund)) on or before one or more series
of Dryden Fund reorganized or who on that date had investments in certain
products for which Dryden Fund provided exchangeability. After a Benefit Plan
qualifies to purchase Class Z shares, all subsequent purchases will be for
Class Z shares.
In connection with the sale of Class Z shares, the Manager, the Distributor
or one of their affiliates may pay dealers, financial advisers and other
persons which distribute shares a finders' fee based on a percentage of the
net asset value of shares sold by such persons.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES AT ANY TIME FOR CASH AT THE NAV NEXT DETERMINED
AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE TRANSFER AGENT
OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES." In certain
cases, however, redemption proceeds will be reduced by the amount of any
applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE PORTFOLIO THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM YOUR SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION
SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD
CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE
CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE
REDEMPTION REQUEST TO BE PROCESSED. IF REDEMPTION IS REQUESTED BY A
CORPORATION, PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY
ACCEPTABLE TO THE TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH REQUEST WILL BE
ACCEPTED. All correspondence and documents concerning redemptions should be
sent to the Fund in care of its Transfer Agent, Prudential Mutual Fund
Services LLC, Attention: Redemption Services, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the
redemption request and on the certificates, if any, or stock power must be
guaranteed by an "eligible guarantor institution." An "eligible guarantor
institution" includes any bank, broker, dealer or credit union. The Transfer
Agent reserves the right to request additional information from, and make
reasonable inquires of, any eligible guarantor institution. For clients of
Prusec, a signature guarantee may be obtained from the agency or office
manager of most Prudential Insurance and Financial Services or Preferred
Services offices. In the case of redemptions from a PruArray or SmartPath
Plan, if the proceeds of the redemption are invested in another investment
option of the plan, in the name of the record holder and at the same address
reflected in the Transfer Agent's records, a signature guarantee is not
required.
28
<PAGE>
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR
WRITTEN REQUEST, EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH
PRUDENTIAL SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE
CREDITED TO YOUR PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE.
Such payment may be postponed or the right of redemption suspended at times
(a) when the New York Stock Exchange is closed for other than customary
weekends and holidays, (b) when trading on such Exchange is restricted, (c)
when an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or
(d) during any other period when the SEC, by order, so permits; provided that
applicable rules and regulations of the SEC shall govern as to whether the
conditions prescribed in (b), (c) or (d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL
THE FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS
BEEN HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE
CHECK BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY
WIRE OR BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payments wholly or partly in cash, the Fund may pay the redemption price
in whole or in part by a distribution in kind of securities from the
investment portfolio of the Fund, in lieu of cash, in conformity with
applicable rules of the SEC. Securities will be readily marketable and will be
valued in the same manner as in a regular redemption. See "How the Fund Values
its Shares." If your shares are redeemed in kind, you would incur transaction
costs in converting the assets into cash. The Fund, however, has elected to be
governed by Rule 18f-1 under the Investment Company Act, under which the Fund
is obligated to redeem shares solely in cash up to the lesser of $250,000 or
1% of the net asset value of the Fund during any 90-day period for any one
shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Board
of Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose
account has a net asset value of less than $500 due to a redemption. The Fund
will give such shareholders 60 days' prior written notice in which to purchase
sufficient additional shares to avoid such redemption. No contingent deferred
sales charge will be imposed on any such involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Portfolio at the NAV
next determined after the order is received, which must be within 90 days
after the date of the redemption. Any CDSC paid in connection with such
redemption will be credited (in shares) to your account. (If less than a full
repurchase is made, the credit will be on a pro rata basis.) You must notify
the Fund's Transfer Agent, either directly or through Prudential Securities,
at the time the repurchase privilege is exercised to adjust your account for
the CDSC you previously paid. Thereafter, any redemptions will be subject to
the CDSC applicable at the time of redemption. See "Contingent Deferred Sales
Charges" below. Exercise of the repurchase privilege may affect federal income
tax treatment of any gain realized upon redemption. See "Taxes" in the
Statement of Additional Information.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 3% to zero over a four-year period. Class C
shares redeemed within one year of purchase will be subject to a 1% CDSC. The
CDSC will be deducted from the redemption proceeds and reduce the amount paid
to you. The CDSC will be imposed on any redemption by you which reduces the
current value of your Class B or Class C shares to an amount which is lower
than the amount of all payments by you for shares during the preceding four
years, in the case of Class B shares, and one year, in the case of Class C
shares. A CDSC will be applied on the lesser of the original purchase price or
the current value of the shares being redeemed. Increases in the value of your
shares or shares acquired through reinvestment of dividends or
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<PAGE>
distributions are not subject to a CDSC. The amount of any CDSC will be paid
to and retained by the Distributor. See "How the Fund is Managed--Distributor"
and "Waiver of the Contingent Deferred Sales Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchase of shares, all payments
during a month will be aggregated and deemed to have been made on the last day
of the month.The CDSC will be calculated from the first day of the month after
the initial purchase, excluding the time shares were held in a money market
fund. See "How to Exchange Your Shares."
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------- -------------------------
<S> <C>
First......................................... 3.0%
Second........................................ 2.0%
Third......................................... 1.0%
Fourth........................................ 1.0%
Fifth......................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Portfolio shares made during the preceding four
years; then of amounts representing the cost of shares held beyond the
applicable CDSC period; and finally, of amounts representing the cost of
shares held for the longest period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided
to redeem $500 of your investment. Assuming at the time of the redemption the
net asset value had appreciated to $12 per share, the value of your Class B
shares would be $1,260 (105 shares at $12 per share). The CDSC would not be
applied to the value of the reinvested dividend shares and the amount which
represents appreciation ($260). Therefore, $240 of the $500 redemption
proceeds ($500 minus $260) would be charged at a rate of 2% (the applicable
rate in the second year after purchase) for a total CDSC of $4.80.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC
will be waived in the case of a redemption following the death or disability
of a shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint
tenancy (with rights of survivorship), at the time of death or initial
determination of disability, provided that the shares were purchased prior to
death or disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i) in the case of a tax-
deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59 1/2; and (iii) a tax-free return of
an excess contribution or plan distributions following the death or disability
of the shareholder, provided that the shares were purchase prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service (i.e.,
following voluntary or
30
<PAGE>
involuntary termination of employment or following retirement). Under no
circumstances will the CDSC be waived on redemptions resulting from the
termination of a tax-deferred retirement plan, unless such redemptions
otherwise qualify for a waiver as described above. In the case of Direct
Account and PSI or Subsidiary Prototype Benefit Plans, the CDSC will be waived
on redemptions which represent borrowings from such plans. Shares purchased
with amounts used to repay a loan from such plans on which a CDSC was not
previously deducted will thereafter be subject to a CDSC without regard to the
time such amounts were previously invested. In the case of a 401(k) plan, the
CDSC will also be waived upon the redemption of shares purchased with amounts
used to repay loans made from the account to the participant and from which a
CDSC was previously deducted.
Systematic Withdrawal Plan. The contingent deferred sales charge (CDSC) will
be waived (or reduced) on certain redemptions from a Systematic Withdrawal
Plan. On an annual basis, up to 12% of the total dollar amount subject to the
CDSC may be redeemed without charge.
In addition, the CDSC will be waived on redemptions of shares held by
Directors of the Fund.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec, at the time of redemption, that you are entitled to
waiver of the CDSC and provide the Transfer Agent with such supporting
documentation as it may deem appropriate. The waiver will be granted subject
to confirmation of your entitlement. See "Purchase and Redemption of Fund
Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in the
Statement of Additional Information.
A quantity discount may apply to redemptions of Class B shares purchased
prior to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement
of Additional Information.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS C SHARES
PruArray or SmartPath Plans. The CDSC will be waived on redemptions from
certain qualified and non-qualified retirement and deferred compensation plans
that participate in the Transfer Agent's PruArray and SmartPath Programs,
provided that the investment options of the Plan include shares of Prudential
Mutual Funds and shares of non-affiliated mutual funds.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately five years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales
charge. The first conversion of Class B shares occurred in February 1995, when
the conversion feature was first implemented.
Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will
be determined on each conversion date in accordance with the following
formula: (i) the ratio of (a) the amounts paid for Class B shares purchased at
least five years prior to the conversion date to (b) the total amount paid for
all Class B shares purchased and then held in your account (ii) multiplied by
the total number of Class B shares purchased and then held in your account.
Each time any Eligible Shares in your account convert to Class A shares, all
shares or amounts representing Class B shares then in your account that were
acquired through the automatic reinvestment of dividends and other
distributions will convert to Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible
Shares calculated as described above will generally be either more or less
than the number of shares actually purchased approximately five years before
such conversion date. For example, if 100 shares were initially purchased at
$10 per share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
31
<PAGE>
convert approximately five years from the initial purchase (i.e., $1,000
divided by $2,100 (47.62%), multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to
shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share net asset value of the Class A shares may be
higher than that of the Class B shares at the time of conversion. Thus,
although the aggregate dollar value will be the same, you may receive fewer
Class A shares than Class B shares converted. See "How the Fund Values its
Shares."
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been
made on the last day of the month, or for Class B shares acquired through
exchange, or a series of exchanges, on the last day of the month in which the
original payment for purchases of such Class B shares was made. For Class B
shares previously exchanged for shares of a money market fund, the time period
during which such shares were held in the money market fund will be excluded.
For example, Class B shares held in a money market fund for one year will not
convert to Class A shares until approximately six years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase
of such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B, Class C and Class
Z shares will not constitute "preferential dividends" under the Internal
Revenue Code and (ii) that the conversion of shares does not constitute a
taxable event. The conversion of Class B shares into Class A shares may be
suspended if such opinions or rulings are no longer available. If conversions
are suspended, Class B shares of the Portfolio will continue to be subject,
possibly indefinitely, to their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE PORTFOLIO, YOU HAVE AN EXCHANGE PRIVILEGE WITH
CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE PRIVILEGE), INCLUDING ONE
OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE MINIMUM INVESTMENT
REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B, CLASS C AND CLASS Z SHARES MAY
BE EXCHANGED FOR CLASS A, CLASS B, CLASS C AND CLASS Z SHARES, RESPECTIVELY,
OF ANOTHER FUND ON THE BASIS OF THE RELATIVE NAV. No sales charge will be
imposed at the time of the exchange. Any applicable CDSC payable upon the
redemption of shares exchanged will be calculated from the first day of the
month after the date of the initial purchase, excluding the time shares were
held in a money market fund. Class B and Class C shares may not be exchanged
into money market funds other than Prudential Special Money Market Fund, Inc.
For purposes of calculating the holding period applicable to the Class B
conversion feature, the time period during which Class B shares were held in a
money market fund will be excluded. See "Conversion Feature--Class B Shares"
above. An exchange will be treated as a redemption and purchase for tax
purposes. See "Shareholder Investment Account--Exchange Privilege" in the
Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE
TRANSFER AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may
call the Fund at (800) 225-1852 to execute a telephone exchange of shares, on
weekdays, except holidays, between the hours of 8:00 A.M. and 6:00 P.M., New
York time. For your protection and to prevent fraudulent exchanges, your
telephone call will be recorded and you will be asked to provide your personal
identification number. A written confirmation of the exchange transaction will
be sent to you. NEITHER THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS,
LIABILITY OR COST WHICH RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY
BELIEVED TO BE GENUINE UNDER THE FOREGOING PROCEDURES. All exchanges will be
made on the basis of the relative NAV of the two funds next determined after
the request is received in good order. The Exchange Privilege is available
only in states where the exchange may legally be made.
32
<PAGE>
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON
THE FACE OF THE CERTIFICATES MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC, AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV (see "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges"
above) and for shareholders who qualify to purchase Class Z shares (see
"Alternative Purchase Plan--Class Z Shares" above). Under this exchange
privilege, amounts representing any Class B and Class C shares (which are not
subject to a CDSC) held in such a shareholder's account will be automatically
exchanged for Class A shares for shareholders who qualify to purchase Class A
shares at NAV on a quarterly basis, unless the shareholder elects otherwise.
Similarly, shareholders who qualify to purchase Class Z shares will have their
Class B and Class C shares which are not subject to a CDSC and their Class A
shares exchanged for Class Z shares on a quarterly basis. Eligibility for this
exchange privilege will be calculated on the business day prior to the date of
the exchange. Amounts representing Class B or Class C shares which are not
subject to a CDSC include the following: (1) amounts representing Class B or
Class C shares acquired pursuant to the automatic reinvestment of dividends
and distributions, (2) amounts representing the increase in the net asset
value above the total amount of payments for the purchase of Class B or Class
C shares and (3) amounts representing Class B or Class C shares held beyond
the applicable CDSC period. Class B and Class C shareholders must notify the
Transfer Agent either directly or through Prudential Securities or Prusec that
they are eligible for this special exchange privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares
when they elect to have those assets become a part of the fee-based program.
Upon leaving the program (whether voluntarily or not), such Class Z shares
(and, to the extent provided for in the program, Class Z shares acquired
through participation in the program) will be exchanged for Class A shares at
net asset value. Similarly, participants in PSI's 401(k) Plan for which the
Fund's Class Z shares is an available option and who wish to transfer their
Class Z shares out of the PSI 401(k) Plan following separation from service
(i.e., voluntary or involuntary termination of employment or retirement) will
have their Class Z shares exchanged for Class A shares at NAV.
The Fund reserves the right to reject any exchange order including exchanges
(and market timing transactions) which are of size and/or frequency engaged in
by one or more accounts acting in concert or otherwise, that have or may have
an adverse effect on the ability of the Subadviser to manage the portfolio.
The determination that such exchanges or activity may have an adverse effect
and the determination to reject any exchange order shall be in the discretion
of the Manager and the Subadviser.
The Exchange Privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in the Portfolio you
can take advantage of the following additional services and privileges.
. AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are
automatically reinvested in full and fractional shares of the Portfolio at NAV
without a sales
33
<PAGE>
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
. AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP, you may make
regular purchases of the Portfolio's shares in amounts as little as $50 via an
automatic debit to a bank account or Prudential Securities account (including
a Command Account). For additional information about this service, you may
contact your Prudential Securities financial adviser, Prusec representative or
the Transfer Agent directly.
. TAX DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the Distributor. These plans are for use by both self-
employed individuals and corporate employers. These plans permit either self-
direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from Prudential Securities or
the Transfer Agent. If you are considering adopting such a plan, you should
consult with your own legal or tax adviser with respect to the establishment
and maintenance of such a plan.
. SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" above.
. REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at Gateway Center
Three, Newark, New Jersey 07102. In addition, monthly unaudited financial data
are available upon request from the Fund.
. SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at
Gateway Center Three, Newark, New Jersey 07102, or by telephone, at (800) 225-
1852 (toll-free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
34
<PAGE>
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
BOND RATINGS
AAA: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than the Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment some time in the future.
BAA: Bonds which are rated Baa are considered as medium grade obligations
(i.e., they are neither highly protected nor poorly secured.) Interest
payments and principal security appear adequate for the present, but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds rated within the Aa, A, Baa, Ba and B categories which Moody's
believes possess the strongest credit attributes within those categories are
designated by the symbols Aa1, A1, Baa1, Ba1 and B1.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
CA: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations.
STANDARD & POOR'S RATINGS GROUP
DEBT RATINGS
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
A-1
<PAGE>
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher-rated categories.
BB, B, CCC, CC AND C: Debt rated BB, B, CCC, CC and C is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
COMMERCIAL PAPER RATINGS
S&P's commercial paper ratings are current assessments of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-1: This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-2
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the
investment options available through our family of funds. For more information
on the Prudential Mutual Funds, including charges and expenses, contact your
Prudential Securities financial adviser or Prusec representative or telephone
the Funds at (800) 225-1852 for a free prospectus. Read the prospectus
carefully before you invest or send money.
TAXABLE BOND FUNDS EQUITY FUNDS
Prudential Allocation Fund
Prudential Diversified Bond Fund, Inc. Balanced Portfolio
Prudential Government Income Fund, Inc. Strategy Portfolio
Prudential Government Securities Trust
Short-Intermediate Term Series Prudential Distressed Securities
Fund, Inc.
Prudential High Yield Fund, Inc.
Prudential Dryden Fund
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc. Prudential Active Balanced Fund
Income Portfolio
Prudential Stock Index Fund
The BlackRock Government Income Trust
Prudential Emerging Growth Fund,
Inc.
TAX-EXEMPT BOND FUNDS Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential California Municipal Fund Prudential Jennison Series Fund,
Inc.
California Series
California Income Series Prudential Jennison Growth Fund
Prudential Municipal Bond Fund
High Yield Series Prudential Jennison Growth &
Income Fund
Insured Series Prudential Multi-Sector Fund, Inc.
Intermediate Series
Prudential Municipal Series Fund Prudential Small Companies Fund,
Inc.
Florida Series Prudential Utility Fund, Inc.
Hawaii Income Series Nicholas-Applegate Fund, Inc.
Maryland Series Nicholas-Applegate Growth Equity
Fund
Massachusetts Series . Taxable Money Market Funds
Michigan Series Prudential Government Securities
Trust
New Jersey Series MONEY MARKET FUNDS
New York Series Money Market Series
North Carolina Series U.S. Treasury Money Market
Ohio Series Series
Pennsylvania Series Prudential Special Money Market
Prudential National Municipals Fund, Inc. Fund, Inc.
Money Market Series
GLOBAL FUNDS Prudential MoneyMart Assets, Inc.
. Tax-Free Money Market Funds
Prudential Europe Growth Fund, Inc. Prudential Tax-Free Money Fund,
Prudential Global Genesis Fund, Inc. Inc.
Prudential California Municipal
Fund
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
California Money Market Series
Prudential Intermediate Global Income Fund, Inc.
Prudential Municipal Series Fund
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc. Connecticut Money Market Series
Massachusetts Money Market
Prudential World Fund, Inc. Series
Global Series New Jersey Money Market Series
International Stock Series New York Money Market Series
The Global Government Plus Fund, Inc.
The Global Total Return Fund, Inc.
Global Utility Fund, Inc. . Command Funds
Command Money Fund
Command Government Fund
Command Tax-Free Fund
. Institutional Money Market Funds
Prudential Institutional Liquidity
Portfolio, Inc.
Institutional Money Market
Series
B-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given
or made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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FUND HIGHLIGHTS............................................................ 2
What are the Fund's Risk Factors and Special Characteristics?............. 2
FUND EXPENSES.............................................................. 4
FINANCIAL HIGHLIGHTS....................................................... 5
HOW THE FUND INVESTS....................................................... 8
Investment Objective and Policies......................................... 8
Hedging and Return Enhancement Strategies................................. 13
Other Investments and Policies............................................ 14
Investment Restrictions................................................... 16
HOW THE FUND IS MANAGED.................................................... 17
Manager................................................................... 17
Distributor............................................................... 17
Fee Waivers and Subsidy................................................... 19
Portfolio Transactions.................................................... 19
Custodian and Transfer and Dividend Disbursing Agent...................... 20
HOW THE FUND VALUES ITS SHARES............................................. 20
HOW THE FUND CALCULATES PERFORMANCE........................................ 20
TAXES, DIVIDENDS AND DISTRIBUTIONS......................................... 21
GENERAL INFORMATION........................................................ 22
Description of Common Stock............................................... 22
Additional Information.................................................... 23
SHAREHOLDER GUIDE.......................................................... 23
How to Buy Shares of the Fund............................................. 23
Alternative Purchase Plan................................................. 24
How to Sell Your Shares................................................... 28
Conversion Feature--Class B Shares........................................ 31
How to Exchange Your Shares............................................... 32
Shareholder Services...................................................... 33
DESCRIPTION OF SECURITY RATINGS............................................ A-1
THE PRUDENTIAL MUTUAL FUND FAMILY.......................................... B-1
</TABLE>
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MF 140A 444131D
<TABLE>
<S> <C>
Class A: 743924-10-2
CUSIP Nos.: Class B: 743924-20-1
Class C: 743924-30-0
Class Z: 743924-70-6
</TABLE>
PRUDENTIAL STRUCTURED
MATURITY FUND, INC.
----------------------------------------------------------------------------
INCOME PORTFOLIO
PROSPECTUS
MARCH 3, 1997
[LOGO OF PRUDENTIAL INVESTSMENTS APPEARS HERE]
<PAGE>
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
<TABLE>
<CAPTION>
CROSS-REFERENCE
TO PAGE IN
PROSPECTUS
---------------
INCOME
PAGE PORTFOLIO
----- ---------------
<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
<PAGE>
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
B-2
<PAGE>
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.
B-3
<PAGE>
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.
B-4
<PAGE>
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
B-5
<PAGE>
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, Prudential Investments (since May
Gateway Center Three 1996); Executive Vice President and Treasurer,
Newark, NJ 07102 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), 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 St. 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 (since 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 and Chief Financial
Gateway Center Three Officer of PMF (since May 1996); formerly Chief
Newark, NJ 07102 Operating Officer and Managing Director of
Prudential Investments (March 1995-May 1996)
and formerly Senior Vice President-Fund
Administration (September 1983-February 1995)
of PMF.
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; First Vice President (January 1990-
Newark, NJ 07102 and Accounting September 1996) of Prudential Mutual Fund
Officer Management, Inc.
Stephen M. Ungerman (43) Assistant Treasurer Tax Director of Prudential Investments and the
Gateway Center Three Private Asset Group of Prudential (since March
Newark, NJ 07102 1996); 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 PMF; 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) is a wholly-owned subsidiary of PMF and 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 PIC (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., a money market fund. No contingent deferred sales charge will be
payable upon such exchange, but a CDSC may be payable upon the redemption of
Class B and Class C shares acquired as a result of the exchange. The
applicable sales charge will be that imposed by the fund in which shares were
initially purchased and the purchase date will be deemed to be the first day
of the month after the initial purchase, rather than the date of the exchange.
Class B and Class C shares of 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>
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>
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.
- -------
/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.
III-1
<PAGE>
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.
- -------
/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.
III-2
<PAGE>
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.
- -------
/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.
III-3
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS:
(1) Financial Statements for the Income Portfolio included in the
Prospectus constituting Part A of this Registration Statement:
Financial Highlights
(2) Financial Statements for the Income Portfolio included in the
Statement of Additional Information constituting Part B of this
Registration Statement:
Portfolio of Investments at December 31, 1996
Statement of Assets and Liabilities at December 31, 1996
Statement of Operations for the Year ended December 31, 1996
Statement of Changes in Net Assets for the Years Ended December 31,
1996 and 1995
Notes to Financial Statements
Financial Highlights
Independent Auditors' Report
(B) EXHIBITS:
1. (a) Articles of Restatement of the Registrant, incorporated by
reference to Exhibit No. 1 to Post-Effective Amendment No. 12 to the
Registration Statement on Form N-1A filed via EDGAR on February 28,
1995 (File No. 33-22363).
(b) Articles Supplementary, incorporated by reference to Exhibit No.
1(b) to Post-Effective Amendment No. 14 to the Registration Statement
on Form N-1A filed via EDGAR on December 9, 1996 (File No. 33-22363).
2. By-Laws of the Registrant, incorporated by reference to Exhibit No.
2 to Post-Effective Amendment No. 12 to the Registration Statement
on Form N-1A filed via EDGAR on February 28, 1995 (File No. 33-
22363).
3. Not Applicable.
4. (a) Specimen certificate for shares of common stock, $.01 par value
per share, of the Registrant.*
(b) Instruments defining rights of shareholders, incorporated by
reference to Exhibit No. 4(e) to Post-Effective Amendment No. 9 to the
Registration Statement on Form N-1A filed via EDGAR on February 28,
1994 (File No. 33-22363).
5. (a) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc.*
(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation.*
6. Restated Distribution Agreement, incorporated by reference to
Exhibit No. 6 to Post-Effective Amendment No. 14 to the Registration
Statement on Form N-1A filed via EDGAR on December 9, 1996 (File No.
33-22363).
7. Not Applicable.
8. Custodian Contract between the Registrant and State Street Bank and
Trust Company.*
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc.*
10. (a) Opinion of Counsel.*
(b) Opinion of Counsel.*
11. Consent of Independent Auditors.*
12. Not Applicable.
13. Not Applicable.
C-1
<PAGE>
14. Not Applicable.
15. (a) Form of Distribution and Service Plan pursuant to Rule 12b-1
under the Investment Company Act of 1940 (Class A Shares) (Municipal
Income Portfolio), incorporated by reference to Exhibit No. 15(d) to
Post-Effective Amendment No. 10 to the Registration Statement on
Form N-1A filed via EDGAR on May 12, 1994 (File No. 33-22363).
(b) Form of Distribution and Service Plan pursuant to Rule 12b-1 under
the Investment Company Act of 1940 (Class B Shares) (Municipal Income
Portfolio), incorporated by reference to Exhibit No. 15(e) to Post-
Effective Amendment No. 10 to the Registration Statement on Form N-1A
filed via EDGAR on May 12, 1994 (File No. 33-22363).
(c) Distribution and Service Plan for Class A shares (Income
Portfolio), incorporated by reference to Exhibit No. 15(c) to Post-
Effective Amendment No. 12 to the Registration Statement on Form N-1A
filed via EDGAR on February 28, 1995 (File No. 33-22363).
(d) Distribution and Service Plan for Class B shares (Income
Portfolio), incorporated by reference to Exhibit No. 15(d) to Post-
Effective Amendment No. 12 to the Registration Statement on Form N-1A
filed via EDGAR on February 28, 1995 (File No. 33-22363).
(e) Form of Distribution and Service Plan for Class C shares
(Municipal Income Portfolio), incorporated by reference to Exhibit No.
15(h) to Post-Effective Amendment No. 10 to the Registration Statement
on Form N-1A filed via EDGAR on May 12, 1994 (File No. 33-22363).
(f) Distribution and Service Plan for Class C shares (Income
Portfolio), incorporated by reference to Exhibit No. 15(f) to Post-
Effective Amendment No. 12 to the Registration Statement on Form N-1A
filed via EDGAR on February 28, 1995 (File No. 33-22363).
16. (a) Schedule of Computation of Performance Quotations relating to
Average Annual Total Return incorporated by reference to Exhibit No.
16 to Post-Effective Amendment No. 1 to the Registration Statement
on Form N-1A filed on January 25, 1990 (File No. 33-22363).
(b) Schedule of Computation of Performance Quotations relating to
Aggregate Total Return.*
17. Financial Data Schedules.*
18. Rule 18f-3 Plan, incorporated by reference to Exhibit No. 18 to
Post-Effective Amendment No. 14 to the Registration Statement on
Form N-1A filed via EDGAR on December 9, 1996 (File No. 33-22363).
- ------------
* Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of February 7, 1997, there were 6,776, 7,191, 323 and 2 record holders of
Class A, Class B, Class C and Class Z shares of common stock, $.01 par value
per share, of the Income Portfolio. As of February 7, 1997, the Municipal
Income Portfolio did not have any record holders of shares of common stock.
ITEM 27. INDEMNIFICATION.
As permitted by Sections 17(h) and (i) of the Investment Company Act of 1940
(the 1940 Act) and pursuant to Article VI of the Fund's By-Laws (Exhibit 2 to
the Registration Statement), officers, directors, employees and agents of the
Registrant will not be liable to the Registrant, any stockholder, officer,
director, employee, agent or other person for any action or failure to act,
except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
Section 2-418 of Maryland General Corporation Law permits indemnification of
directors who acted in good faith and reasonably believed that the conduct was
in the best interests of the Registrant. As permitted by Section 17(i) of the
1940 Act, pursuant to Section 10 of the Distribution Agreement (Exhibit 6 to
the Registration Statement), the Distributor of the Registrant may be
indemnified against liabilities which it may incur, except liabilities arising
from bad faith, gross negligence, willful misfeasance or reckless disregard of
duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (Securities Act) may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the 1940 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in connection with the
successful defense of any action, suit or proceeding) is asserted against the
Registrant by such director, officer or controlling person in connection
C-2
<PAGE>
with the shares being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the 1940 Act and will be
governed by the final adjudication of such issue.
The Registrant has purchased an insurance policy insuring its officers and
directors against liabilities, and certain costs of defending claims against
such officers and directors, to the extent such officers and directors are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of
indemnification payments to officers and directors under certain
circumstances.
Section 9 of the Management Agreement (Exhibit 5(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 5(b) to the
Registration Statement) limit the liability of Prudential Mutual Fund
Management LLC (PMF) and The Prudential Investment Corporation (PIC),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective duties or from
reckless disregard by them of their respective obligations and duties under
the agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and each Distribution Agreement in a manner
consistent with Release No. 11330 of the Securities and Exchange Commission
under the 1940 Act so long as the interpretation of Sections 17(h) and 17(i)
of such Act remain in effect and are consistently applied.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) Prudential Mutual Fund Management LLC
See "How the Fund is Managed--Manager" in the Prospectus constituting Part A
of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of the officers of PMF are listed in
Schedules A and D of Form ADV of PMF as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104).
The business and other connections of PMF's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, Newark, NJ 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PMF PRINCIPAL OCCUPATIONS
- ---------------- ------------------------- ---------------------
<S> <C> <C>
Brian M. Storms Officer-in-Charge, Officer-in-Charge, President, Chief Executive
President, Chief Officer and Chief Operating Officer, PMF
Executive Officer and
Chief Operating Officer
Robert F. Gunia Executive Vice President Comptroller, Prudential Investments;
and Treasurer Executive Vice President and Treasurer, PMF;
Senior Vice President of Prudential
Securities Incorporated (Prudential
Securities)
Thomas A. Early Executive Vice President, Executive Vice President, Secretary and
Secretary and General General Counsel, PMF; Vice President and
Counsel General Counsel, Prudential Retirement
Services
Susan C. Cote Executive Vice President Executive Vice President and Chief Financial
and Chief Financial Officer, PMF
Officer
Neil A. McGuinness Executive Vice President Executive Vice President, PMF
Robert J. Sullivan Executive Vice President Executive Vice President, PMF
</TABLE>
(b) The Prudential Investment Corporation (PIC)
See "How the Fund is Managed--Manager" in the Prospectus constituting Part A
of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
C-3
<PAGE>
The business and other connections of PIC's directors and executive officers
are as set forth below. Except as otherwise indicated, the address of each
person is Prudential Plaza, Newark, NJ 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ---------------- ------------------ ---------------------
<S> <C> <C>
E. Michael Caulfield Chairman of the Chief Executive Officer of Prudential
Board, President, Investments
Chief Executive
Officer and
Director
Jonathan M. Greene Senior Vice President--Investment Management of
President and Prudential Investments
Director
John R. Strangfeld Vice President and President of Private Asset Management Group
Director of Prudential
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Prudential Securities Incorporated
Prudential Securities is distributor for The BlackRock Government Income
Trust, Command Government Fund, Command Money Fund, Command Tax-Free Fund, The
Global Government Plus Fund, Inc., The Global Total Return Fund, Inc., Global
Utility Fund, Inc., Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth
Equity Fund), Prudential Allocation Fund, Prudential California Municipal
Fund, Prudential Distressed Securities Fund, Inc., Prudential Diversified Bond
Fund, Inc., Prudential Dryden Fund, Prudential Emerging Growth Fund, Inc.,
Prudential Equity Fund, Inc., Prudential Equity Income Fund, Prudential Europe
Growth Fund, Inc., Prudential Global Genesis Fund, Inc., Prudential Global
Limited Maturity Fund, Inc., Prudential Government Income Fund, Inc.,
Prudential Government Securities Trust, Prudential High Yield Fund, Inc.,
Prudential Intermediate Global Income Fund, Inc., Prudential Institutional
Liquidity Portfolio, Inc., Prudential Jennison Series Fund, Inc., Prudential
MoneyMart Assets, Inc., Prudential Mortgage Income Fund, Inc., Prudential
Multi-Sector Fund, Inc., Prudential Municipal Bond Fund, Prudential Municipal
Series Fund, Prudential National Municipals Fund, Inc., Prudential Natural
Resources Fund, Inc., Prudential Pacific Growth Fund, Inc., Prudential Small
Companies Fund, Inc., Prudential Special Money Market Fund, Inc., Prudential
Structured Maturity Fund, Inc., Prudential Tax-Free Money Fund, Inc.,
Prudential Utility Fund, Inc., Prudential World Fund, Inc. and The Target
Portfolio Trust. Prudential Securities is also a depositor for the following
unit investment trusts:
Corporate Investment Trust Fund
Prudential Equity Trust Shares
National Equity Trust
Prudential Unit Trusts
Government Securities Equity Trust
National Municipal Trust
C-4
<PAGE>
(b) Information concerning the officers and directors of Prudential
Securities Incorporated is set forth below:
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(/1/) UNDERWRITER REGISTRANT
- --------- ------------- -------------
<S> <C> <C>
Robert Golden.............. Executive Vice President and Director None
One New York Plaza,
New York, NY 10292
Alan D. Hogan.............. Executive Vice President, Chief None
Administrative Officer and Director
George A. Murray........... Executive Vice President and Director None
Leland B. Paton............ Executive Vice President and Director None
One New York Plaza,
New York, NY 10292
Martin Pfinsgraff.......... Executive Vice President, Chief None
Financial Officer and Director
Vincent T. Pica II......... Executive Vice President and Director None
One New York Plaza,
New York, NY 10292
Hardwick Simmons........... Chief Executive Officer, President None
and Director
Lee B. Spencer, Jr. ....... Executive Vice President, Secretary, None
General Counsel and Director
</TABLE>
- -----------
(/1/)The address of each person named is One Seaport Plaza, New York, NY 10292
unless otherwise indicated.
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices
of State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171; The Prudential Investment Corporation, Prudential Plaza,
745 Broad Street, Newark, New Jersey 07102; the Registrant, Gateway Center
Three, Newark, New Jersey 07102; and Prudential Mutual Fund Services LLC,
Raritan Plaza One, Edison, New Jersey 08837. Documents required by Rules 31a-
1(b)(5), (6), (7), (9), (10) and (11) and 31a-1(f) will be kept at Two Gateway
Center, Newark, New Jersey 07102, documents required by Rules 31a-1(b)(4) and
(11) and 31a-1(d) at Gateway Center Three and the remaining accounts, books
and other documents required by such other pertinent provisions of Section
31(a) and the Rules promulgated thereunder will be kept by State Street Bank
and Trust Company and Prudential Mutual Fund Service LLC.
ITEM 31. MANAGEMENT SERVICES
Other than as set forth under the captions "How the Fund is Managed--
Manager" and "How the Fund is Managed--Distributor" in the Prospectus and the
captions "Manager" and "Distributor" in the Statement of Additional
Information, constituting Parts A and B, respectively, of this Registration
Statement, Registrant is not a party to any management-related service
contract.
ITEM 32. UNDERTAKINGS
The Registrant hereby undertakes to furnish each person to whom a Prospectus
is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of
1933 and has duly caused this Post-Effective Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Newark, and State of New Jersey, on the 27th day of
February, 1997.
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
/s/ Richard A. Redeker
----------------------------------
Richard A. Redeker, President
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Eugene S. Stark Treasurer and Principal February 27, 1997
- ------------------------------ Financial and Accounting
Eugene S. Stark Officer
/s/ Edward D. Beach Director February 27, 1997
- ------------------------------
Edward D. Beach
/s/ Eugene C. Dorsey Director February 27, 1997
- ------------------------------
Eugene C. Dorsey
/s/ Delayne Dedrick Gold Director February 27, 1997
- ------------------------------
Delayne Dedrick Gold
/s/ Robert F. Gunia Director February 27, 1997
- ------------------------------
Robert F. Gunia
/s/ Harry A. Jacobs, Jr. Director February 27, 1997
- ------------------------------
Harry A. Jacobs, Jr.
/s/ Donald D. Lennox Director February 27, 1997
- ------------------------------
Donald D. Lennox
/s/ Mendel A. Melzer Director February 27, 1997
- ------------------------------
Mendel A. Melzer
/s/ Thomas T. Mooney Director February 27, 1997
- ------------------------------
Thomas T. Mooney
/s/ Thomas O'Brien Director February 27, 1997
- ------------------------------
Thomas O'Brien
/s/ Richard A. Redeker President and Director February 27, 1997
- ------------------------------
Richard A. Redeker
/s/ Nancy H. Teeters Director February 27, 1997
- ------------------------------
Nancy H. Teeters
/s/ Louis A. Weil, III Director February 27, 1997
- ------------------------------
Louis A. Weil, III
</TABLE>
C-6
<PAGE>
EXHIBIT INDEX
EXHIBIT PAGE
NO. ----
- ----
1. (a) Articles of Restatement of the Registrant, incorporated by
reference to Exhibit No. 1 to Post-Effective Amendment No. 12 to the
Registration Statement on Form N-1A filed via EDGAR on February 28,
1995 (File No. 33-22363).
(b) Articles Supplementary, incorporated by reference to Exhibit No.
1(b) to Post-Effective Amendment No. 14 to the Registration Statement
on Form N-1A filed via EDGAR on December 9, 1996 (File No. 33-22363).
2. By-Laws of the Registrant, incorporated by reference to Exhibit No. 2
to Post-Effective Amendment No. 12 to the Registration Statement on
Form N-1A filed via EDGAR on February 28, 1995 (File No. 33-22363).
3. Not Applicable.
4. (a) Specimen certificate for shares of common stock, $.01 par value
per share, of the Registrant.*
(b) Instruments defining rights of shareholders, incorporated by
reference to Exhibit No. 4(e) to Post-Effective Amendment No. 9 to
the Registration Statement on Form N-1A filed via EDGAR on February
28, 1994 (File No. 33-22363).
5. (a) Management Agreement between the Registrant and Prudential Mutual
Fund Management, Inc.*
(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation.*
6. Restated Distribution Agreement, incorporated by reference to Exhibit
No. 6 to Post-Effective Amendment No. 14 to the Registration
Statement on Form N-1A filed via EDGAR on December 9, 1996 (File No.
33-22363).
7. Not Applicable.
8. Custodian Contract between the Registrant and State Street Bank and
Trust Company.*
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc.*
10. (a) Opinion of Counsel.*
(b) Opinion of Counsel.*
11. Consent of Independent Auditors.*
12. Not Applicable.
13. Not Applicable.
14. Not Applicable.
15. (a) Form of Distribution and Service Plan pursuant to Rule 12b-1
under the Investment Company Act of 1940 (Class A Shares) (Municipal
Income Portfolio), incorporated by reference to Exhibit No. 15(d) to
Post-Effective Amendment No. 10 to the Registration Statement on Form
N-1A filed via EDGAR on May 12, 1994 (File No. 33-22363).
(b) Form of Distribution and Service Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940 (Class B Shares) (Municipal Income
Portfolio), incorporated by reference to Exhibit No. 15(e) to Post-
Effective Amendment No. 10 to the Registration Statement on Form N-1A
filed via EDGAR on May 12, 1994 (File No. 33-22363).
(c) Distribution and Service Plan for Class A shares (Income
Portfolio), incorporated by reference to Exhibit No. 15(c) to Post-
Effective Amendment No. 12 to the Registration Statement on Form N-
1A filed via EDGAR on February 28, 1995 (File No. 33-22363).
(d) Distribution and Service Plan for Class B shares (Income
Portfolio), incorporated by reference to Exhibit No. 15(d) to Post-
Effective Amendment No. 12 to the Registration Statement on Form N-
1A filed via EDGAR on February 28, 1995 (File No. 33-22363).
(e) Form of Distribution and Service Plan for Class C shares
(Municipal Income Portfolio), incorporated by reference to Exhibit
No. 15(h) to Post-Effective Amendment No. 10 to the Registration
Statement on Form N-1A filed via EDGAR on May 12, 1994 (File No. 33-
22363).
(f) Distribution and Service Plan for Class C shares (Income
Portfolio), incorporated by reference to Exhibit No. 15(f) to Post-
Effective Amendment No. 12 to the Registration Statement on Form N-
1A filed via EDGAR on February 28, 1995 (File No. 33-22363).
<PAGE>
EHIBITX PAGE
NO. ----
- ----
16. (a) Schedule of Computation of Performance Quotations relating to
Average Annual Total Return incorporated by reference to Exhibit No.
16 to Post-Effective Amendment No. 1 to the Registration Statement on
Form N-1A filed on January 25, 1990 (File No. 33-22363).
(b) Schedule of Computation of Performance Quotations relating to
Aggregate Total Return.*
17. Financial Data Schedules.*
18. Rule 18f-3 Plan, incorporated by reference to Exhibit No. 18 to Post-
Effective Amendment No. 14 to the Registration Statement on Form N-1A
filed via EDGAR on December 9, 1996 (File No. 33-22363).
- -----------
* Filed herewith.
<PAGE>
EX99.B4A
Form of Stock Certificate
This is to certify that is the owner of fully-paid and
------------ -------------
non-assessable shares of the par value of $ .01 each of the common stock of
Prudential Structured Maturity Fund Inc., hereafter called the "Corporation",
transferable on the books of the Corporation by the owner in person or by only
duly authorized attorney under surrender of this Certificate properly endorsed.
This Certificate and the shares represented hereby are issued and shall be held
subject to the Charter and by-Laws of the Corporation and all amendments
thereof, copies of which are at the office of the Corporation, to all of which
the holder, by acceptance hereof assents.
This Certificate is not valid unless countersigned by the Transfer Agent.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be signed in
its name by its proper officers and to be sealed with the Corporate Seal.
<PAGE>
Exhibit 99.B5(a)
Prudential-Bache Structured Maturity Fund, Inc.
Management Agreement
--------------------
Agreement made this 25th day of July, 1989 between Prudential-Bache
Structured Maturity Fund, Inc., a Maryland corporation (the Fund), and
Prudential Mutual Fund Management, Inc., a Delaware corporation (the Manager).
W I T N E S S E T H
WHEREAS, the Fund is a diversified, open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
1940 Act); and
WHEREAS, the Fund desires to retain the Manager to render or contract
to obtain as hereinafter provided investment advisory services to the Fund and
the Fund also desires to avail itself of the facilities available to the Manager
with respect to the administration of its day to day corporate affairs, and the
Manager is willing to render such investment advisory and administrative
services;
NOW, THEREFORE, the parties agree as follows:
1. The Fund hereby appoints the Manager to act as manager of the Fund
and administrator of its corporate affairs for the period and on the terms set
forth in this Agreement. The Manager accepts such appointment and agrees to
render the services herein described, for the compensation herein provided. The
Manager is authorized to enter into an agreement with The Prudential Investment
Corporation (PIC) pursuant to which PIC shall furnish to the Fund the investment
advisory services in connection with the management of the Fund (the Subadvisory
Agreement). The Manager
<PAGE>
will continue to have responsibility for all investment advisory services
furnished pursuant to the Subadvisory Agreement.
2. Subject to the supervision of the Board of Directors of the Fund,
the Manager shall administer the Fund's corporate affairs and, in connection
therewith, shall furnish the Fund with office facilities and with clerical,
bookkeeping and recordkeeping services at such office facilities and, subject to
Section 1 hereof and the Subadvisory Agreement, the Manager shall manage the
investment operations of the Fund and the composition of the Fund's portfolio,
including the purchase, retention and disposition thereof, in accordance with
the Fund's investment objectives, policies and restrictions as stated in the
Prospectus (hereinafter defined) and subject to the following understandings:
(a) The Manager shall provide supervision of the Fund's investments
and determine from time to time what investments or securities will be
purchased, retained, sold or loaned by the Fund, and what portion of the
assets will be invested or held uninvested as cash.
(b) The Manager, in the performance of its duties and obligations
under this Agreement, shall act in conformity with the Articles of
Incorporation, By-Laws and Prospectus (hereinafter defined) of the Fund and
with the instructions and directions of the Board of Directors of the Fund
and will conform to and comply with the requirements of the 1940 Act and all
other applicable federal and state laws and regulations.
(c) The Manager shall determine the securities and
2
<PAGE>
futures contracts to be purchased or sold by the Fund and will place orders
pursuant to its determinations with or through such persons, brokers,
dealers or futures commission merchants (including but not limited to
Prudential Securities Incorporated) in conformity with the policy with
respect to brokerage as set forth in the Fund's Registration Statement and
Prospectus (hereinafter defined) or as the Board of Directors may direct
from time to time. In providing the Fund with investment supervision, it is
recognized that the Manager will give primary consideration to securing the
most favorable price and efficient execution. Consistent with this policy,
the Manager may consider the financial responsibility, research and
investment information and other services provided by brokers, dealers or
futures commission merchants who may effect or be a party to any such
transaction or other transactions to which other clients of the Manager may
be a party. It is understood that Prudential Securities Incorporated may be
used as principal broker for securities transactions but that no formula has
been adopted for allocation of the Fund's investment transaction business.
It is also understood that it is desirable for the Fund that the Manager
have access to supplemental investment and market research and security and
economic analysis provided by brokers or futures commission merchants and
that such brokers may execute brokerage transactions at a higher cost to the
Fund than may result when allocating brokerage to other brokers or futures
commission
3
<PAGE>
merchants on the basis of seeking the most favorable price and efficient
execution. Therefore, the Manager is authorized to pay higher brokerage
commissions for the purchase and sale of securities and futures contracts
for the Fund to brokers or futures commission merchants who provide such
research and analysis, subject to review by the Fund's Board of Directors
from time to time with respect to the extent and continuation of this
practice. It is understood that the services provided by such broker or
futures commission merchant may be useful to the Manager in connection with
its services to other clients.
On occasions when the Manager deems the purchase or sale of a security
or a futures contract to be in the best interest of the Fund as well as
other clients of the Manager or the Subadviser, the Manager, to the extent
permitted by applicable laws and regulations, may, but shall be under no
obligation to, aggregate the securities or futures contracts to be so sold
or purchased in order to obtain the most favorable price or lower brokerage
commissions and efficient execution. In such event, allocation of the
securities or futures contracts so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Manager in the
manner it considers to be the most equitable and consistent with its
fiduciary obligations to the Fund and to such other clients.
(d) The Manager shall maintain all books and records with respect to
the Fund's portfolio transactions and shall render to the Fund's Board of
Directors such periodic and special
4
<PAGE>
reports as the Board may reasonably request.
(e) The Manager shall be responsible for the financial and accounting
records to be maintained by the Fund (including those being maintained by
the Fund's Custodian).
(f) The Manager shall provide the Fund's Custodian on each business
day with information relating to all transactions concerning the Fund's
assets.
(g) The investment management services of the Manager to the Fund
under this Agreement are not to be deemed exclusive, and the Manager shall
be free to render similar services to others.
3. The Fund has delivered to the Manager copies of each of the
following documents and will deliver to it all future amendments and
supplements, if any:
(a) Articles of Incorporation of the Fund, as filed with the Secretary
of State of Maryland (such Articles of Incorporation, as in effect on the
date hereof and as amended from time to time, are herein called the
"Articles of Incorporation");
(b) By-Laws of the Fund (such By-Laws, as in effect on the date hereof
and as amended from time to time, are herein called the "By-Laws");
(c) Certified resolutions of the Board of Directors of the Fund
authorizing the appointment of the Manager and approving the form of this
agreement;
(d) Registration Statement under the 1940 Act and the
5
<PAGE>
Securities Act of 1933, as amended, on Form N-1A (the Registration
Statement), as filed with the Securities and Exchange Commission (the
Commission) relating to the Fund and shares of the Fund's Common Stock and
all amendments thereto;
(e) Notification of Registration of the Fund under the 1940 Act on
Form N-8A as filed with the Commission and all amendments thereto; and
(f) Prospectus of the Fund (such Prospectus and Statement of
Additional Information, as currently in effect and as amended or
supplemented from time to time, being herein called the "Prospectus").
4. The Manager shall authorize and permit any of its directors,
officers and employees who may be elected as directors or officers of the Fund
to serve in the capacities in which they are elected. All services to be
furnished by the Manager under this Agreement may be furnished through the
medium of any such directors, officers or employees of the Manager.
5. The Manager shall keep the Fund's books and records required to be
maintained by it pursuant to paragraph 2 hereof. The Manager agrees that all
records which it maintains for the Fund are the property of the Fund and it will
surrender promptly to the Fund any such records upon the Fund's request,
provided however that the Manager may retain a copy of such records. The
Manager further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act any such records as are required to be maintained by the
Manager pursuant to Paragraph 2 hereof.
6
<PAGE>
6. During the term of this Agreement, the Manager shall pay the
following expenses:
(i) the salaries and expenses of all personnel of the Fund and the
Manager except the fees and expenses of directors who are not affiliated
persons of the Manager or the Fund's investment adviser,
(ii) all expenses incurred by the Manager or by the Fund in connection
with managing the ordinary course of the Fund's business other than those
assumed by the Fund herein, and
(iii) the costs and expenses payable to PIC pursuant to the Subadvisory
Agreement.
The Fund assumes and will pay the expenses described below:
(a) the fees and expenses incurred by the Fund in connection with the
management of the investment and reinvestment of the Fund's assets,
(b) the fees and expenses of directors who are not affiliated persons
of the Manager or the Fund's investment adviser,
(c) the fees and expenses of the Custodian that relate to (i) the
custodial function and the recordkeeping connected therewith, (ii) preparing
and maintaining the general accounting records of the Fund and the providing
of any such records to the Manager useful to the Manager in connection with
the Manager's responsibility for the accounting records of the Fund pursuant
to Section 31 of the 1940 Act and the rules promulgated thereunder, (iii)
the pricing of the shares of the
7
<PAGE>
Fund, including the cost of any pricing service or services which may be
retained pursuant to the authorization of the Board of Directors of the
Fund, and (iv) for both mail and wire orders, the cashiering function in
connection with the issuance and redemption of the Fund's securities,
(d) the fees and expenses of the Fund's Transfer and Dividend
Disbursing Agent, which may be the Custodian, that relate to the maintenance
of each shareholder account,
(e) the charges and expenses of legal counsel and independent
accountants for the Fund,
(f) brokers' commissions and any issue or transfer taxes chargeable to
the Fund in connection with its securities and futures transactions,
(g) all taxes and corporate fees payable by the Fund to federal, state
or other governmental agencies,
(h) the fees of any trade associations of which the Fund may be a
member,
(i) the cost of stock certificates representing, and/or non-negotiable
share deposit receipts evidencing, shares of the Fund,
(j) the cost of fidelity, directors and officers and errors and
omissions insurance,
(k) the fees and expenses involved in registering and maintaining
registration of the Fund and of its shares with the Securities and Exchange
Commission, registering the Fund as a broker or dealer and qualifying its
shares under state
8
<PAGE>
securities laws, including the preparation and printing of the Fund's
registration statements, prospectuses and statements of additional
information for filing under federal and state securities laws for such
purposes,
(l) allocable communications expenses with respect to investor
services and all expenses of shareholders' and directors' meetings and of
preparing, printing and mailing reports to shareholders in the amount
necessary for distribution to the shareholders,
(m) litigation and indemnification expenses and other extraordinary
expenses not incurred in the ordinary course of the Fund's business, and
(n) any expenses assumed by the Fund pursuant to a Plan of
Distribution adopted in conformity with Rule 12b-1 under the 1940 Act.
7. In the event the expenses of the Fund for any fiscal year
(including the fees payable to the Manager 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) exceed the lowest applicable annual expense limitation
established and enforced pursuant to the statute or regulations of any
jurisdictions in which shares of the Fund are then qualified for offer and sale,
the compensation due the Manager will be reduced by the amount of such excess,
or, if such reduction exceeds the compensation payable to the Manager, the
Manager will pay to
9
<PAGE>
the Fund the amount of such reduction which exceeds the amount of such
compensation.
8. For the services provided and the expenses assumed pursuant to this
Agreement, the Fund will pay to the Manager as full compensation therefor a fee
at an annual rate of .50 of 1% of the Fund's average daily net assets up to $50
million and .30 of 1% of the Fund's average daily net assets in excess of $50
million. This fee will be computed daily and will be paid to the Manager
monthly. Any reduction in the fee payable and any payment by the Manager to the
Fund pursuant to paragraph 7 shall be made monthly. Any such reductions or
payments are subject to readjustment during the year.
9. Nothing in this Agreement shall prohibit the Manager from paying
any expenses which might be considered as indirectly financing any activity
primarily intended to result in the sale of Fund shares.
10. The Manager shall not be liable for any error of judgment or for
any loss suffered by the Fund in connection with the matters to which this
Agreement relates, except a loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services (in which case any award of
damages shall be limited to the period and the amount set forth in Section
36(b)(3) of the 1940 Act) or loss resulting from willful misfeasance, bad faith
or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations and duties under this Agreement.
10
<PAGE>
11. This Agreement shall continue in effect for a period of more than
two years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Fund at any
time, without the payment of any penalty, by the Board of Directors of the Fund
or by vote of a majority of the outstanding voting securities (as defined in the
1940 Act) of the Fund, or by the Manager at any time, without the payment of any
penalty, on not more than 60 days' nor less than 30 days' written notice to the
other party. This Agreement shall terminate automatically in the event of its
assignment (as defined in the 1940 Act).
12. Nothing in this Agreement shall limit or restrict the right of any
director, officer or employee of the Manager who may also be a director, officer
or employee of the Fund to engage in any other business or to devote his or her
time and attention in part to the management or other aspects of any business,
whether of a similar or dissimilar nature, nor limit or restrict the right of
the Manager to engage in any other business or to render services of any kind to
any other corporation, firm, individual or association.
13. Except as otherwise provided herein or authorized by the Board of
Directors of the Fund from time to time, the Manager shall for all purposes
herein be deemed to be an independent contractor and shall have no authority to
act for or represent the Fund in any way or otherwise be deemed an agent of the
Fund.
11
<PAGE>
14. During the term of this Agreement, the Fund agrees to furnish the
Manager at its principal office all prospectuses, proxy statements, reports to
shareholders, sales literature, or other material prepared for distribution to
shareholders of the Fund or the public, which refer in any way to the Manager,
prior to use thereof and not to use such material if the Manager reasonably
objects in writing within five business days (or such other time as may be
mutually agreed) after receipt thereof. In the event of termination of this
Agreement, the Fund will continue to furnish to the Manager copies of any of the
above mentioned materials which refer in any way to the Manager. Sales
literature may be furnished to the Manager hereunder by first-class or overnight
mail, facsimile transmission equipment or hand delivery. The Fund shall furnish
or otherwise make available to the Manager such other information relating to
the business affairs of the Fund as the Manager at any time, or from time to
time, reasonably requests in order to discharge its obligations hereunder.
15. This Agreement may be amended by mutual consent, but the consent
of the Fund must be obtained in conformity with the requirements of the 1940
Act.
16. Any notice or other communication required to be given pursuant to
this Agreement shall be deemed duly given if delivered or mailed by registered
mail, postage prepaid, (1) to the Manager at One Seaport Plaza, New York, N.Y.
10292, Attention: Secretary; or (2) to the Fund at One Seaport Plaza, New York,
N.Y. 10292, Attention: President.
12
<PAGE>
17. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York.
18. The Fund may use the name "Prudential-Bache Structured Maturity
Fund, Inc." or any name including the word "Prudential" or "Bache" only for so
long as this Agreement or any extension, renewal or amendment hereof remains in
effect, including any similar agreement with any organization which shall have
succeeded to the Manager's business as Manager or any extension, renewal or
amendment thereof remain in effect. At such time as such an agreement shall no
longer be in effect, the Fund will (to the extent that it lawfully can) cease to
use such a name or any other name indicating that it is advised by, managed by
or otherwise connected with the Manager, or any organization which shall have so
succeeded to such businesses. In no event shall the Fund use the name
"Prudential-Bache Structured Maturity Fund, Inc." or any name including the word
"Prudential" or "Bache" if the Manager's function is transferred or assigned to
a company of which The Prudential Insurance Company of America does not have
control.
13
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
PRUDENTIAL-BACHE STRUCTURED
MATURITY FUND, INC.
By /s/ Lawrence C. McQuade
----------------------------
Lawrence C. McQuade
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC.
By /s/ Robert F. Gunia
-------------------
Robert F. Gunia
14
<PAGE>
Exhibit 99.B5(b)
PRUDENTIAL-BACHE STRUCTURED MATURITY FUND, INC.
Subadvisory Agreement
Agreement made as of this 25th day of July, 1989 between Prudential Mutual
Fund Management Inc., a Delaware Corporation ("PMF" or the "Manager"), and The
Prudential Investment Corporation, a New Jersey Corporation (the "Subadviser").
WHEREAS, the Manager has entered into a Management Agreement, dated July
25, 1989(the "Management Agreement"), with Prudential-Bache Structured Maturity
Fund, Inc. (the "Fund"), a Maryland corporation and a diversified open-end
management investment company registered under the Investment Company Act of
1940 (the "1940 Act"), pursuant to which PMF will act as Manager of the Fund.
WHEREAS, PMF desires to retain the Subadviser to provide investment
advisory services to the Fund in connection with the management of the Fund and
the Subadviser is willing to render such investment advisory services.
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the Board of
Directors of the Fund, the Subadviser shall manage the investment
operations of the Fund and the composition of the Fund's portfolio,
including the purchase, retention and disposition thereof, in accordance
with the Fund's investment objectives, policies and restrictions as stated
in the Prospectus, (such Prospectus and Statement of Additional Information
as currently in effect and as amended or supplemented from time to time,
being herein called the "Prospectus"), and subject to the following
understandings:
(i) The Subadviser shall provide supervision of the Fund's
investments and determine from time to time what investments and
securities will be purchased, retained, sold or loaned by the Fund,
and what portion of the assets will be invested or held uninvested as
cash.
(ii) In the performance of its duties and obligations under this
Agreement, the Subadviser shall act in conformity with the Articles
of Incorporation, By-Laws and Prospectus of the Fund and with the
instructions and directions of the Manager and of the Board of
Directors of the Fund and will conform to and comply with the
requirements of the 1940 Act, the Internal Revenue Code of 1986 and
all other applicable federal and state laws and regulations.
<PAGE>
(iii) The Subadviser shall determine the securities to be
purchased or sold by the Fund and will place orders with or through
such persons, brokers or dealers (including but not limited to
Prudential-Bache Securities Inc.) to carry out the policy with
respect to brokerage as set forth in the Fund's Registration
Statement and Prospectus or as the Board of Directors may direct from
time to time. In providing the Fund with investment supervision, it
is recognized that the Subadviser will give primary consideration to
securing the most favorable price and efficient execution. Within
the framework of this policy, the Subadviser may consider the
financial responsibility, research and investment information and
other services provided by brokers or dealers who may effect or be a
party to any such transaction or other transactions to which the
Subadviser's other clients may be a party. It is understood that
Prudential-Bache Securities Inc. may be used as principal broker for
securities transactions but that no formula has been adopted for
allocation of the Fund's investment transaction business. It is also
understood that it is desirable for the Fund that the Subadviser have
access to supplemental investment and market research and security
and economic analysis provided by brokers who may execute brokerage
transactions at a higher cost to the Fund than may result when
allocating brokerage to other brokers on the basis of seeking the
most favorable price and efficient execution. Therefore, the
Subadviser is authorized to place orders for the purchase and sale of
securities for the Fund with such brokers subject to review by the
Fund's Board of Directors from time to time with respect to the
extent and continuation of this practice. It is understood that the
services provided by such brokers may be useful to the Subadviser in
connection with the Subadviser's services to other clients.
On occasions when the Subadviser deems the purchase or sale of
a security to be in the best interest of the Fund as well as other
clients of the Subadviser, the Subadviser, to the extent permitted by
applicable laws and regulations, may, but shall be under no
obligation to, aggregate the securities to be sold or purchased in
order to obtain the most favorable price or lower brokerage
commissions and efficient execution. In such event, allocation of
the securities so purchased or sold, as well as the expenses incurred
in the transaction, will be made by the Subadviser in the manner the
Subadviser considers to be the most equitable and consistent with its
fiduciary obligations to the Fund and to such other clients.
2
<PAGE>
(iv) The Subadviser shall maintain all books and records with
respect to the Fund's portfolio transactions required by
subparagraphs (b)(5), (6), (7), (9), (10) and (11) and paragraph (f)
of Rule 31a-1 under the 1940 Act and shall render to the Fund's Board
of Directors such periodic and special reports as the Board may
reasonably request.
(v) The Subadviser shall provide the Fund's Custodian on each
business day with information relating to all transactions concerning
the Fund's assets and shall provide the Manager with such information
upon request of the Manager.
(vi) The investment management services provided by the Subadviser
hereunder are not to be deemed exclusive, and the Subadviser shall be
free to render similar services to others.
(b) The Subadviser shall authorize and permit any of its directors,
officers and employees who may be elected as directors or officers of the
Fund to serve in the capacities in which they are elected. Services to be
furnished by the Subadviser under this Agreement may be furnished through
the medium of any of such directors, officers or employees.
(c) The Subadviser shall keep the Fund's books and records required to be
maintained by the Subadviser pursuant to paragraph 1(a) hereof and shall
timely furnish to the Manager all information relating to the Subadviser's
services hereunder needed by the Manager to keep the other books and
records of the Fund required by Rule 31a-1 under the 1940 Act. The
Subadviser agrees that all records which it maintains for the Fund are the
property of the Fund and the Subadviser will surrender promptly to the
Fund any of such records upon the Fund's request, provided however that
the Subadviser may retain a copy of such records. The Subadviser further
agrees to preserve for the periods prescribed by Rule 31a-2 of the
Commission under the 1940 Act any such records as are required to be
maintained by it pursuant to paragraph 1(a) hereof.
2. The Manager shall continue to have responsibility for all services to
be provided to the Fund pursuant to the Management Agreement and shall
oversee and review the Subadviser's performance of its duties under this
Agreement.
3. The Manager shall reimburse the Subadviser for reasonable costs and
expenses incurred by the Subadviser determined in a manner acceptable to
the Manager in furnishing the services described in paragraph 1 hereof.
3
<PAGE>
4. The Subadviser shall not be liable for any error of judgment or for
any loss suffered by the Fund or the Manager in connection with the
matters to which this Agreement relates, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the Subadviser's
part in the performance of its duties or from its reckless disregard of
its obligations and duties under this Agreement.
5. This Agreement shall continue in effect for a period of more than two
years from the date hereof only so long as such continuance is
specifically approved at least annually in conformity with the
requirements of the 1940 Act; provided, however, that this Agreement may
be terminated by the Fund at any time, without the payment of any penalty,
by the Board of Directors of the Fund or by vote of a majority of the
outstanding voting securities (as defined in the 1940 Act) of the Fund, or
by the Manager or the Subadviser at any time, without the payment of any
penalty, on not more than 60 days' nor less than 30 days' written notice
to the other party. This Agreement shall terminate automatically in the
event of its assignment (as defined in the 1940 Act) or upon the
termination of the Management Agreement.
6. Nothing in this Agreement shall limit or restrict the right of any of
the Subadviser's directors, officers, or employees who may also be a
director, officer or employee of the Fund to engage in any other business
or to devote his or her time and attention in part to the management or
other aspects of any business, whether of a similar or a dissimilar
nature, nor limit or restrict the Subadviser's right to engage in any
other business or to render services of any kind to any other corporation,
firm, individual or association.
7. During the term of this Agreement, the Manager agrees to furnish the
Subadviser at its principal office all prospectuses, proxy statements,
reports to stockholders, sales literature or other material prepared for
distribution to stockholders of the Fund or the public, which refer to the
Subadviser in any way, prior to use thereof and not to use material if the
Subadviser reasonably objects in writing five business days (or such other
time as may be mutually agreed) after receipt thereof. Sales literature
may be furnished to the Subadviser hereunder by first-class or overnight
mail, facsimile transmission equipment or hand delivery.
4
<PAGE>
8. This Agreement may be amended by mutual consent, but the consent of
the Fund must be obtained in conformity with the requirements of the 1940
Act.
9. This Agreement shall be governed by the laws of the State of New York.
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC.
BY /s/ Michael J. Downey
------------------------------------
President
THE PRUDENTIAL INVESTMENT CORPORATION
BY /s/ John Bookmeyer, Jr.
------------------------------------
5
<PAGE>
Exhibit 9
CUSTODIAN CONTRACT
Between
EACH OF THE PARTIES INDICATED ON APPENDIX A
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Employment of Custodian and Property to be Held By It.................................................................. -1-
2. Duties to the Custodian with Respect to Property of the Fund Held by the Custodian in the United States................ -2-
2.1 Holding Securities.............................................................................................. -2-
2.2 Delivery of Securities.......................................................................................... -2-
2.3 Registration of Securities...................................................................................... -6-
2.4 Bank Accounts................................................................................................... -7-
2.5 Availability of Federal Funds................................................................................... -7-
2.6 Collection of Income............................................................................................ -8-
2.7 Payment of Fund Monies.......................................................................................... -8-
2.8 Liability for Payment in Advance of Receipt of Securities Purchased............................................. -11-
2.9 Appointment of Agents........................................................................................... -11-
2.10 Deposit of Securities in Securities Systems..................................................................... -11-
2.10A Fund Assets Held in the Custodian's Direct Paper System......................................................... -13-
2.11 Segregated Account.............................................................................................. -14-
2.12 Ownership Certificates for Tax Purposes......................................................................... -15-
2.13 Proxies......................................................................................................... -16-
2.14 Communications Relating to Fund Portfolio Securities............................................................ -16-
2.15 Reports to Fund by Independent Public Accountants............................................................... -16-
3. Duties of the Custodian with Respect to Property of the Fund Held Outside of the United States......................... -17-
3.1 Appointment of Foreign Sub-Custodians........................................................................... -17-
3.2 Assets to be Held............................................................................................... -17-
3.3 Foreign Securities Depositories................................................................................. -18-
3.4 Segregation of Securities....................................................................................... -18-
3.5 Agreements with Foreign Banking Institutions.................................................................... -18-
3.6 Access of Independent Accountants of the Fund................................................................... -19-
3.7 Reports by Custodian............................................................................................ -19-
3.8 Transactions in Foreign Custody Account......................................................................... -19-
3.9 Liability of Foreign Sub-Custodians............................................................................. -20-
3.10 Liability of Custodian.......................................................................................... -21-
3.11 Reimbursements for Advances..................................................................................... -21-
3.12 Monitoring Responsibilities..................................................................................... -22-
3.13 Branches of U.S. Banks.......................................................................................... -22-
4. Payments for Repurchases or Redemptions and Sales of Shares of the Fund................................................ -23-
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
5. Proper Instructions.................................................................................................... -24-
6. Actions Permitted Without Express Authority............................................................................ -24-
7. Evidence of Authority.................................................................................................. -25-
8. Duties of Custodian with Respect to the Books of Account and Calculation of Net Asset Value and Net Income............. -26-
9. Records................................................................................................................ -26-
10. Opinion of Fund's Independent Accountant............................................................................... -27-
11. Compensation of Custodian.............................................................................................. -27-
12. Responsibility of Custodian............................................................................................ -27-
13. Effective Period, Termination and Amendment............................................................................ -29-
14. Successor Custodian.................................................................................................... -30-
15. Interpretive and Additional Provisions................................................................................. -32-
16. Massachusetts Law to Apply............................................................................................. -32-
17. Prior Contracts........................................................................................................ -32-
18. The Parties............................................................................................................ -32-
19. Limitation of Liability................................................................................................ -33-
</TABLE>
-ii-
<PAGE>
CUSTODIAN CONTRACT
------------------
This Contract between State Street Bank and Trust Company, a
Massachusetts trust company, having its principal place of business at 225
Franklin Street, Boston, Massachusetts, 02110, hereinafter called the
"Custodian", and each Fund listed on Appendix A which evidences its agreement to
be bound hereby by executing a copy of this Contract (each such Fund
individually hereinafter referred to as the "Fund").
WITNESSETH: That in consideration of the mutual covenants and
agreements hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
-----------------------------------------------------
The Fund hereby employs the Custodian as the custodian of its assets,
including securities it desires to be held in places within the United States
("domestic securities") and securities it desires to be held outside the United
States ("foreign securities") pursuant to the provisions of the Articles of
Incorporation/ Declaration of Trust. The Fund agrees to deliver to the
Custodian all securities and cash owned by it, and all payments of income,
payments of principal or capital distributions received by it with respect to
all securities owned by the Fund from time to time, and the cash consideration
received by it for such new or treasury shares of capital stock, ("Shares") of
the Fund as may be issued or sold from time to time. The Custodian shall not be
responsible for any property of the Fund held or received by the Fund and not
delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article
5), the Custodian shall from time to time employ one or more sub-custodians
located in the United States, but only in accordance with an applicable vote by
the Board of Directors/ Trustees of the Fund, and provided that the Custodian
shall have the same responsibility or liability to the Fund on account
<PAGE>
of any actions or omissions of any sub-custodian so employed as any such
sub-custodian has to the Custodian, provided that the Custodian agreement with
any such domestic sub-custodian shall impose on such sub-custodian
responsibilities and liabilities similar in nature and scope to those imposed by
this Agreement with respect to the functions to be performed by such
sub-custodian. The Custodian may employ as sub-custodians for the Fund's
securities and other assets the foreign banking institutions and foreign
securities depositories designated in Schedule "A" hereto but only in accordance
with the provisions of Article 3.
2. Duties of the Custodian with Respect to Property of The Fund Held By
--------------------------------------------------------------------
the Custodian in the United States
- ----------------------------------
2.1 Holding Securities. The Custodian shall hold and physically
-------------------
segregate for the account of the Fund all non-cash property, to be held by it in
the United States, including all domestic securities owned by the Fund, other
than (a) securities which are maintained pursuant to Section 2.10 in a clearing
agency which acts as a securities depository or in a book-entry system
authorized by the U.S. Department of the Treasury, collectively referred to
herein as "Securities System" and (b) commercial paper of an issuer for which
State Street Bank and Trust Company acts as issuing and paying agent ("Direct
Paper") which is deposited and/or maintained in the Direct Paper System of the
Custodian pursuant to Section 2.10A.
2.2 Delivery of Securities. The Custodian shall release and deliver
-----------------------
domestic securities owned by the Fund held by the Custodian or in a Securities
System account of the Custodian or in the Custodian's Direct Paper book-entry
system account ("Direct Paper System") only upon receipt of Proper Instructions,
which may be continuing instructions when deemed appropriate by the parties, and
only in the following cases:
-2-
<PAGE>
(1) Upon sale of such securities for the account of the Fund
and receipt of payment therefor;
(2) Upon the receipt of payment in connection with any
repurchase agreement related to such securities entered
into by the Fund;
(3) In the case of a sale effected through a Securities System,
in accordance with the provisions of Section 2.10 hereof;
(4) To the depository agent in connection with tender or other
similar offers for portfolio securities of the Fund;
(5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable;
provided that, in any such case, the cash or other
consideration is to be delivered to the Custodian;
(6) To the issuer thereof, or its agent, for transfer into the
name of the Fund or into the name of any nominee or
nominees of the Custodian or into the name or nominee name
of any agent appointed pursuant to Section 2.9 or into the
name or nominee name of any sub-custodian appointed
pursuant to Article 1; or for exchange for a different
number of bonds, certificates or other evidence
representing the same aggregate face amount or number of
units; provided that, in any such case, the new securities
--------
are to be delivered to the Custodian;
(7) Upon the sale of such securities for the account of the
Fund, to the broker or its clearing agent, against a
receipt, for examination in accordance with "street
delivery" custom; provided that in any such case, the
Custodian
-3-
<PAGE>
shall have no responsibility or liability for any loss
arising from the delivery of such securities prior to
receiving payment for such securities except as may arise
from the Custodian's own negligence or willful misconduct;
(8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion
contained in such securities, or pursuant to any deposit
agreement; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the
Custodian;
(9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights
or similar securities or the surrender of interim receipts
or temporary securities for definitive securities; provided
that, in any such case, the new securities and cash, if
any, are to be delivered to the Custodian;
(10) For delivery in connection with any loans of securities
made by the Fund, but only against receipt of adequate
--------
collateral as agreed upon from time to time by the
Custodian and the Fund, which may be in the form of cash or
obligations issued by the United States government, its
agencies or instrumentalities, except that in connection
with any loans for which collateral is to be credited to
the Custodian's account in the book-entry system authorized
by the U.S. Department of the Treasury, the Custodian
-4-
<PAGE>
will not be held liable or responsible for the delivery of
securities owned by the Fund prior to the receipt of such
collateral;
(11) For delivery as security in connection with any borrowings
by the Fund requiring a pledge of assets by the Fund, but
---
only against receipt of amounts borrowed;
-----
(12) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934 (the
"Exchange Act") and a member of The National Association of
Securities Dealers, Inc. ("NASD"), relating to compliance
with the rules of The Options Clearing Corporation and of
any registered national securities exchange, or of any
similar organization or organizations, regarding escrow or
other arrangements in connection with transactions by the
Fund;
(13) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, and a Futures
Commission Merchant registered under the Commodity Exchange
Act, relating to compliance with the rules of the Commodity
Futures Trading Commission and/or any Contract Market, or
any similar organization or organizations, regarding
account deposits in connection with transactions by the
Fund;
(14) Upon receipt of instructions from the transfer agent
("Transfer Agent") for the Fund, for delivery to such
Transfer Agent or to the holders of shares in connection
with distributions in kind, as may be described from time
to
-5-
<PAGE>
time in the Fund's currently effective prospectus and
statement of additional information ("prospectus"), in
satisfaction of requests by holders of Shares for
repurchase or redemption; and
(15) For any other proper business purpose, but only upon
--------
receipt of, in addition to Proper Instructions, a certified
copy of a resolution of the Board of Directors/Trustees or
of the Executive Committee signed by an officer of the Fund
and certified by the Secretary or an Assistant Secretary,
specifying the securities to be delivered, setting forth
the purpose for which such delivery is to be made,
declaring such purpose to be a proper business purpose, and
naming the person or persons to whom delivery of such
securities shall be made.
2.3 Registration of Securities. Domestic securities held by the
---------------------------
Custodian (other than bearer securities) shall be registered in the name of the
Fund or in the name of any nominee of the Fund or of any nominee of the
Custodian which nominee shall be assigned exclusively to the Fund, unless the
------
Fund has authorized in writing the appointment of a nominee to be used in common
with other registered investment companies having the same investment adviser as
the Fund, or in the name or nominee name of any agent appointed pursuant to
Section 2.9 or in the name or nominee name of any sub-custodian appointed
pursuant to Article 1. All securities accepted by the Custodian on behalf of
the Fund under the terms of this Contract shall be in "street name" or other
good delivery form. If, however, the Fund directs the Custodian to maintain
securities in "street name", the Custodian shall utilize its best efforts to
timely collect income due
-6-
<PAGE>
the Fund on such securities and to notify the Fund on a best efforts basis of
relevant corporate actions including, without limitation, pendency of calls,
maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate
--------------
bank account or accounts in the United States in the name of the Fund, subject
only to draft or order by the Custodian acting pursuant to the terms of this
Contract, and shall hold in such account or accounts, subject to the provisions
hereof, all cash received by it from or for the account of the Fund, other than
cash maintained by the Fund in a bank account established and used in accordance
with Rule 17f-3 under the Investment Company Act of 1940. Funds held by the
Custodian for the Fund may be deposited by it to its credit as Custodian in the
Banking Department of the Custodian or in such other banks or trust companies as
it may in its discretion deem necessary or desirable; provided, however, that
--------
every such bank or trust company shall be qualified to act as a custodian under
the Investment Company Act of 1940 and that each such bank or trust company and
the funds to be deposited with each such bank or trust company shall be approved
by vote of a majority of the Board of Directors/Trustees of the Fund. Such funds
shall be deposited by the Custodian in its capacity as Custodian and shall be
withdrawable by the Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between
------------------------------
the Fund and the Custodian, the Custodian shall, upon the receipt of Proper
Instructions, make federal funds available to the Fund as of specified times
agreed upon from time to time by the Fund and the Custodian in the amount of
checks received in payment for Shares of the Fund which are deposited into the
Fund's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3,
---------------------
the Custodian shall collect on a timely basis all income and other payments with
respect to registered securities held
-7-
<PAGE>
hereunder to which the Fund shall be entitled either by law or pursuant to
custom in the securities business, and shall collect on a timely basis all
income and other payments with respect to bearer securities if, on the date of
payment by the issuer, such securities are held by the Custodian or its agent
thereof and shall credit such income, as collected, to the Fund's custodian
account. Without limiting the generality of the foregoing, the Custodian shall
detach and present for payment all coupons and other income items requiring
presentation as and when they become due and shall collect interest when due on
securities held hereunder. Income due the Fund on securities loaned pursuant to
the provisions of Section 2.2 (10) shall be the responsibility of the Fund. The
Custodian will have no duty or responsibility in connection therewith, other
than to provide the Fund with such information or data as may be necessary to
assist the Fund in arranging for the timely delivery to the Custodian of the
income to which the Fund is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions,
-----------------------
which may be continuing instructions when deemed appropriate by the parties, the
Custodian shall pay out monies of the Fund in the following cases only:
(1) Upon the purchase of securities held domestically, options,
futures contracts or options on futures contracts for the
account of the Fund but only (a) against the delivery of
such securities, or evidence of title to such options,
futures contracts or options on futures contracts, to the
Custodian (or any bank, banking firm or trust company doing
business in the United States or abroad which is qualified
under the Investment Company Act of 1940, as amended, to
act as a custodian and has been designated by the Custodian
as its agent for this purpose) registered in the name of
the Fund
-8-
<PAGE>
or in the name of a nominee of the Custodian referred to in
Section 2.3 hereof or in proper form for transfer; (b) in
the case of a purchase effected through a Securities
System, in accordance with the conditions set forth in
Section 2.10 hereof; (c) in the case of a purchase
involving the Direct Paper System, in accordance with the
conditions set forth in Section 2.10A; (d) in the case of
repurchase agreements entered into between the Fund and the
Custodian, or another bank, or a broker-dealer which is a
member of NASD, (i) against delivery of the securities
either in certificate form or through an entry crediting
the Custodian's account at the Federal Reserve Bank with
such securities or (ii) against delivery of the receipt
evidencing purchase by the Fund of securities owned by the
Custodian along with written evidence of the agreement by
the Custodian to repurchase such securities from the Fund
or (e) for transfer to a time deposit account of the Fund
in any bank, whether domestic or foreign; such transfer may
be effected prior to receipt of a confirmation from a
broker and/or the applicable bank pursuant to Proper
Instructions from the Fund as defined in Article 5;
(2) In connection with conversion, exchange or surrender of
securities owned by the Fund as set forth in Section 2.2
hereof;
(3) For the redemption or repurchase of Shares issued by the
Fund as set forth in Article 4 hereof;
-9-
<PAGE>
(4) For the payment of any expense or liability incurred by
the Fund, including but not limited to the following
payments for the account of the Fund: interest, taxes,
management, accounting, transfer agent and legal fees, and
operating expenses of the Fund whether or not such expenses
are to be in whole or part capitalized or treated as
deferred expenses;
(5) For the payment of any dividends declared pursuant to the
governing documents of the Fund;
(6) For payment of the amount of dividends received in respect
of securities sold short;
(7) For any other proper purpose, but only upon receipt of, in
--------
addition to Proper Instructions, a certified copy of a
resolution of Board of Directors/Trustees or of the
Executive Committee of the Fund signed by an officer of the
Fund and certified by its Secretary or an Assistant
Secretary, specifying the amount of such payment, setting
forth the purpose for which such payment is to be made,
declaring such purpose to be a proper purpose, and naming
the person or persons to whom such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities
---------------------------------------------------------
Purchased. Except as specifically stated otherwise in this Contract, in any and
- ----------
every case where payment for purchase of securities for the account of the Fund
is made by the Custodian in advance of receipt of the securities purchased in
the absence of specific written instructions from the Fund to so pay in advance,
the Custodian shall be absolutely liable to the Fund for such securities to the
same extent as if the securities had been received by the Custodian.
-10-
<PAGE>
2.9 Appointment of Agents. The Custodian may at any time or times
----------------------
in its discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of 1940, as
amended, to act as a custodian, as its agent to carry out such of the provisions
of this Article 2 as the Custodian may from time to time direct; provided,
--------
however, that the appointment of any agent shall not relieve the Custodian of
its responsibilities or liabilities hereunder.
2.10 Deposit of Securities in Securities Systems. The Custodian may
--------------------------------------------
deposit and/or maintain domestic securities owned by the Fund in a clearing
agency registered with the Securities and Exchange Commission under Section 17A
of the Securities Exchange Act of 1934, which acts as a securities depository,
or in the book-entry system authorized by the U.S. Department of the Treasury
and certain federal agencies, collectively referred to herein as "Securities
System" in accordance with applicable Federal Reserve Board and Securities and
Exchange Commission rules and regulations, if any, and subject to the following
provisions:
(1) The Custodian may keep domestic securities of the Fund in a
Securities System provided that such securities are
represented in an account ("Account") of the Custodian in
the Securities System which shall not include any assets of
the Custodian other than assets held as a fiduciary,
custodian or otherwise for customers;
(2) The records of the Custodian with respect to domestic
securities of the Fund which are maintained in a Securities
System shall identify by book-entry those securities
belonging to the Fund;
-11-
<PAGE>
(3) The Custodian shall pay for domestic securities purchased
for the account of the Fund upon (i) receipt of advice from
the Securities System that such securities have been
transferred to the Account, and (i.) the making of an entry
on the records of the Custodian to reflect such payment and
transfer for the account of the Fund. The Custodian shall
transfer domestic securities sold for the account of the
Fund upon (i) receipt of advice from the Securities System
that payment for such securities has been transferred to
the Account, and (ii) the making of an entry on the records
of the Custodian to reflect such transfer and payment for
the account of the Fund. Copies of all advices from the
Securities System of transfers of domestic securities for
the account of the Fund shall identify the Fund, be
maintained for the Fund by the Custodian and be provided to
the Fund at its request. Upon request, the Custodian shall
furnish the Fund confirmation of each transfer to or from
the account of the Fund in the form of a written advice or
notice and shall furnish promptly to the Fund copies of
daily transaction sheets reflecting each day's transactions
in the Securities System for the account of the Fund.
(4) The Custodian shall provide the Fund with any report
obtained by the Custodian on the Securities System's
accounting system, internal accounting control and
procedures for safeguarding securities deposited in the
Securities System;
-12-
<PAGE>
(5) The Custodian shall have received the initial or annual
certificate, as the case may be, required by Article 13
hereof;
(6) Anything to the contrary in this Contract notwithstanding,
the Custodian shall be liable to the Fund for any loss or
damage to the Fund resulting from use of the Securities
System by reason of any negligence, misfeasance or
misconduct of the Custodian or any of its agents or of any
of its or their employees or from failure of the Custodian
or any such agent to enforce effectively such rights as it
may have against the Securities System; at the election of
the Fund, it shall be entitled to be subrogated to the
rights of the Custodian with respect to any claim against
the Securities System or any other person which the
Custodian may have as a consequence of any such loss or
damage if and to the extent that the Fund has not been made
whole for any such loss or damage.
2.10A Fund Assets Held in the Custodian's Direct Paper System. The
--------------------------------------------------------
Custodian may deposit and/or maintain securities owned by the Fund in the Direct
Paper System of the Custodian subject to the following provisions:
(1) No transaction relating to securities in the Direct Paper
System will be effected in the absence of Proper
Instructions;
(2) The Custodian may keep securities of the Fund in the Direct
Paper System only if such securities are represented in an
account ("Account") of the Custodian in the Direct Paper
System which shall not include any assets of
-13-
<PAGE>
the Custodian other than assets held as a fiduciary,
custodian or otherwise for customers;
(3) The records of the Custodian with respect to securities of
the Fund which are maintained in the Direct Paper System
shall identify by book-entry those securities belonging to
the Fund;
(4) The Custodian shall pay for securities purchased for the
account of the Fund upon the making of an entry on the
records of the Custodian to reflect such payment and
transfer of securities to the account of the Fund. The
Custodian shall transfer securities sold for the account of
the Fund upon the making of an entry on the records of the
Custodian to reflect such transfer and receipt of payment
for the account of the Fund;
(5) The Custodian shall furnish the Fund confirmation of each
transfer to or from the account of the Fund, in the form of
a written advice or notice, of Direct Paper on the next
business day following such transfer and shall furnish to
the Fund copies of daily transaction sheets reflecting each
day's transaction in the Direct Paper System for the
account of the Fund;
(6) The Custodian shall provide the Fund with any report on its
system of internal accounting control as the Fund may
reasonably request from time to time;
2.11 Segregated Account. The Custodian shall upon receipt of Proper
-------------------
Instructions establish and maintain a segregated account or accounts for and on
behalf of the Fund, into which account or accounts may be transferred cash
and/or securities, including securities maintained in
-14-
<PAGE>
an account by the Custodian pursuant to Section 2.10 hereof, (i) in accordance
with the provisions of any agreement among the Fund, the Custodian and a
broker-dealer registered under the Exchange Act and a member of the NASD (or any
futures commission merchant registered under the Commodity Exchange Act),
relating to compliance with the rules of The Options Clearing Corporation and of
any registered national securities exchange (or the Commodity Futures Trading
Commission or any registered contract market), or of any similar organization or
organizations, regarding escrow or other arrangements in connection with
transactions by the Fund, (ii) for purposes of segregating cash, government
securities or liquid, high-grade debt obligations in connection with options
purchased, sold or written by the Fund or commodity futures contracts or options
thereon purchased or sold by the Fund, (iii) for the purposes of compliance by
the Fund with the procedures required by Investment Company Act Release No.
10666, or any subsequent release or releases of the Securities and Exchange
Commission relating to the maintenance of segregated accounts by registered
investment companies and (iv) for other proper corporate purposes, but only, in
--------
the case of clause (iv), upon receipt of, in addition to Proper Instructions, a
certified copy of a resolution of the Board of Directors/Trustees or of the
Executive Committee signed by an officer of the Fund and certified by the
Secretary or an Assistant Secretary, setting forth the purpose or purposes of
such segregated account and declaring such purposes to be proper corporate
purposes.
2.12 Ownership Certificates for Tax Purposes. The Custodian shall
----------------------------------------
execute ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other payments with
respect to domestic securities of the Fund held by it and in connection with
transfers of such securities.
-15-
<PAGE>
2.13 Proxies. The Custodian shall, with respect to the domestic
--------
securities held hereunder, cause to be promptly executed by the registered
holder of such securities, if the securities are registered otherwise than in
the name of the Fund or a nominee of the Fund, all proxies, without indication
of the manner in which such proxies are to be voted, and shall promptly deliver
to the Fund such proxies, all proxy soliciting materials and all notices
relating to such securities.
2.14 Communications Relating to Fund Portfolio Securities. Subject
-----------------------------------------------------
to the provisions of Section 2.3, the Custodian shall transmit promptly to the
Fund all written information (including, without limitation, pendency of calls
and maturities of securities held domestically and expirations of rights in
connection therewith and notices of exercise of call and put options written by
the Fund and the maturity of futures contracts purchased or sold by the Fund)
received by the Custodian from issuers of the securities being held for the
Fund. With respect to tender or exchange offers, the Custodian shall transmit
promptly to the Fund all written information received by the Custodian from
issuers of the securities whose tender or exchange is sought and from the party
(or his agents) making the tender or exchange offer. If the Fund desires to
take action with respect to any tender offer, exchange offer or any other
similar transaction, the Fund shall notify the Custodian at least three business
days prior to the date on which the Custodian is to take such action.
2.15 Reports to Fund by Independent Public Accountants. The
--------------------------------------------------
Custodian shall provide the Fund, at such times as the Fund may reasonably
require, with reports by independent public accountants on the accounting
system, internal accounting control and procedures for safeguarding securities,
futures contracts and options on futures contracts, including securities
deposited and/or
-16-
<PAGE>
maintained in a Securities System, relating to the services provided by the
Custodian under this Contract; such reports shall be of sufficient scope and in
sufficient detail, as may reasonably be required by the Fund to provide
reasonable assurance that any material inadequacies would be disclosed by such
examination, and, if there are no such inadequacies, the reports shall so state.
3. Duties of the Custodian with Respect to Property of the Fund Held
-----------------------------------------------------------------
Outside of the United States
- ----------------------------
3.1 Appointment of Foreign Sub-Custodians. The Fund hereby
--------------------------------------
authorizes and instructs the Custodian to employ as sub-custodians for the
Fund's securities and other assets maintained outside the United States the
foreign banking institutions and foreign securities depositories designated on
Schedule A hereto ("foreign sub-custodians"). Upon receipt of "Proper
Instructions", as defined in Section 5 of this Contract, together with a
certified resolution of the Fund's Board of Directors/Trustees, the Custodian
and the Fund may agree to amend Schedule A hereto from time to time to designate
additional foreign banking institutions and foreign securities depositories to
act as sub-custodian. Upon receipt of Proper Instructions, the Fund may
instruct the Custodian to cease the employment of any one or more such
sub-custodians for maintaining custody of the Fund's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and
------------------
other assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities", as defined in paragraph (c)(1) of Rule 17f-5 under the
Investment Company Act of 1940, and (b) cash and cash equivalents in such
amounts as the Custodian or the Fund may determine to be reasonably necessary to
effect the Fund's foreign securities transactions.
-17-
<PAGE>
3.3 Foreign Securities Depositories. Except as may otherwise be
--------------------------------
agreed upon in writing by the Custodian and the Fund, assets of the Fund shall
be maintained in foreign securities depositories only through arrangements
implemented by the foreign banking institutions serving as sub-custodians
pursuant to the terms hereof. Where possible, such arrangements shall include
entry into agreements containing the provisions set forth in Section 3.5 hereof.
3.4 Segregation of Securities. The Custodian shall identify on its
--------------------------
books as belonging to the Fund, the foreign securities of the Fund held by each
foreign sub-custodian. Each agreement pursuant to which the Custodian employs a
foreign banking institution shall require that such institution establish a
custody account for the Custodian on behalf of the Fund and physically segregate
in that account, securities and other assets of the Fund, and, in the event that
such institution deposits the Fund's securities in a foreign securities
depository, that it shall identify on its books as belonging to the Custodian,
as agent for the Fund, the securities so deposited.
3.5 Agreements with Foreign Banking Institutions. Each agreement
---------------------------------------------
with a foreign banking institution shall be substantially in the form set forth
in Exhibit 1 hereto and shall provide that: (a) the Fund's assets will not be
subject to any right, charge, security interest, lien or claim of any kind in
favor of the foreign banking institution or its creditors or agent, except a
claim of payment for their safe custody or administration; (b) beneficial
ownership of the Fund's assets will be freely transferable without the payment
of money or value other than for custody or administration; (c) adequate records
will be maintained identifying the assets as belonging to the Fund; (d) officers
of or auditors employed by, or other representatives of the Custodian, including
to the extent permitted under applicable law the independent public accountants
for the Fund, will be given access to the books and records of the foreign
banking institution relating to its actions
-18-
<PAGE>
under its agreement with the Custodian; and (e) assets of the Fund held by the
foreign sub-custodian will be subject only to the instructions of the Custodian
or its agents.
3.6 Access of Independent Accountants of the Fund. Upon request of
----------------------------------------------
the Fund, the Custodian will use its best efforts to arrange for the independent
accountants of the Fund to be afforded access to the books and records of any
foreign banking institution employed as a foreign sub-custodian insofar as such
books and records relate to the performance of such foreign banking institution
under its agreement with the Custodian.
3.7 Reports by Custodian. The Custodian will supply to the Fund
---------------------
from time to time, as mutually agreed upon, statements in respect of the
securities and other assets of the Fund held by foreign sub-custodians,
including but not limited to an identification of entities having possession of
the Fund's securities and other assets and advices or notifications of any
transfers of securities to or from each custodial account maintained by a
foreign banking institution for the Custodian on behalf of the Fund indicating,
as to securities acquired for the Fund, the identity of the entity having
physical possession of such securities.
3.8 Transactions in Foreign Custody Account
---------------------------------------
(a) Except as otherwise provided in paragraph (b) of this
Section 3.8, the provision of Sections 2.2 and 2.7 of this Contract shall apply,
in their entirety to the foreign securities of the Fund held outside the United
States by foreign sub-custodians.
(b) Notwithstanding any provision of this Contract to the
contrary, settlement and payment for securities received for the account of the
Fund and delivery of securities maintained for the account of the Fund may be
effected in accordance with the customary
-19-
<PAGE>
established securities trading or securities processing practices and procedures
in the jurisdiction or market in which the transaction occurs, including,
without limitation, delivering securities to the purchaser thereof or to a
dealer therefor (or an agent for such purchaser or dealer) against a receipt
with the expectation of receiving later payment for such securities from such
purchaser or dealer.
(c) Securities maintained in the custody of a foreign sub-
custodian may be maintained in the name of such entity's nominee to the same
extent as set forth in Section 2.3 of this Contract, and the Fund agrees to hold
any such nominee harmless from any liability as a holder of record of such
securities.
3.9 Liability of Foreign Sub-Custodians. Each agreement pursuant to
------------------------------------
which the Custodian employs a foreign banking institution as a foreign
sub-custodian shall require the institution to exercise reasonable care in the
performance of its duties and to indemnify, and hold harmless, the Custodian and
each Fund from and against any loss, damage, cost, expense, liability or claim
arising out of or in connection with the institution's performance of such
obligations. At the election of the Fund, it shall be entitled to be subrogated
to the rights of the Custodian with respect to any claims against a foreign
banking institution as a consequence of any such loss, damage, cost, expense,
liability or claim if and to the extent that the Fund has not been made whole
for any such loss, damage, cost, expense, liability or claim.
3.10 Liability of Custodian. The Custodian shall be liable for the
-----------------------
acts or omissions of a foreign banking institution to the same extent as set
forth with respect to sub-custodians generally in this Contract and, regardless
of whether assets are maintained in the custody of a foreign banking
institution, a foreign securities depository or a branch of a U.S. bank as
contemplated by
-20-
<PAGE>
paragraph 3.13 hereof, the Custodian shall not be liable for any loss, damage,
cost, expense, liability or claim resulting from nationalization, expropriation,
currency restrictions, or acts of war or terrorism or any loss where the sub-
custodian has otherwise exercised reasonable care. Notwithstanding the
foregoing provisions of this paragraph 3.10, in delegating custody duties to
State Street London Ltd., the Custodian shall not be relieved of any
responsibility to the Fund for any loss due to such delegation, except such loss
as may result from (a) political risk (including, but not limited to, exchange
control restrictions, confiscation, expropriation, nationalization,
insurrection, civil strife or armed hostilities) or (b) other losses (excluding
a bankruptcy or insolvency of State Street London Ltd. not caused by political
risk) due to Acts of God, nuclear incident or other losses under circumstances
where the Custodian and State Street London Ltd. have exercised reasonable care.
3.11 Reimbursement for Advances. If the Fund requires the Custodian
---------------------------
to advance cash or securities for any purpose including the purchase or sale of
foreign exchange or of contracts for foreign exchange, or in the event that the
Custodian or its nominee shall incur or be assessed any taxes, charges,
expenses, assessments, claims or liabilities in connection with the performance
of this Contract, except such as may arise from its or its nominee's own
negligent action, negligent failure to act or wilful misconduct, any property at
any time held for the account of the Fund shall be security therefor and should
the Fund fail to repay the Custodian promptly, the Custodian shall be entitled
to utilize available cash and to dispose of the Fund assets to the extent
necessary to obtain reimbursement.
3.12 Monitoring Responsibilities. The Custodian shall furnish
----------------------------
annually to the Fund, during the month of June, information concerning the
foreign sub-custodians employed by the
-21-
<PAGE>
Custodian. Such information shall be similar in kind and scope to that
furnished to the Fund in connection with the initial approval of this Contract.
In addition, the Custodian will promptly inform the Fund in the event that the
Custodian learns of a material adverse change in the financial condition of a
foreign sub-custodian or any material loss of the assets of the Fund or in the
case of any foreign sub-custodian not the subject of an exemptive order from the
Securities and Exchange Commission is notified by such foreign sub-custodian
that there appears to be a substantial likelihood that its shareholders', equity
will decline below $200 million (U.S. dollars or the equivalent thereof) or that
its shareholders', equity has declined below $200 million (in each case computed
in accordance with generally accepted U.S. accounting principles).
3.13 Branches of U.S. Banks
-----------------------
(a) Except as otherwise set forth in this Contract, the
provisions of Article 3 shall not apply where the custody of the Fund assets are
maintained in a foreign branch of a banking institution which is a "bank" as
defined by Section 2(a)(5) of the Investment Company Act of 1940 meeting the
qualification set forth in Section 26(a) of said Act. The appointment of any
such branch as a sub-custodian shall be governed by paragraph 1 of this
Contract.
(b) Cash held for the Fund in the United Kingdom shall be
maintained in an interest bearing account established for the Fund with the
Custodian's London branch, which account shall be subject to the direction of
the Custodian, State Street London Ltd. or both.
4. Payments for Repurchases or Redemptions and Sales of Shares of the
------------------------------------------------------------------
Fund.
- -----
From such funds as may be available for the purpose but subject to the
limitations of the Articles of Incorporation/Declaration of Trust and any
applicable votes of the Board of Directors/Trustees of the Fund pursuant
thereto, the Custodian shall, upon receipt of instructions
-22-
<PAGE>
from the Transfer Agent, make funds available for payment to holders of Shares
who have delivered to the Transfer Agent a request for redemption or repurchase
of their Shares. In connection with the redemption or repurchase of Shares of
the Fund, the Custodian is authorized upon receipt of instructions from the
Transfer Agent to wire funds to or through a commercial bank designated by the
redeeming shareholders. In connection with the redemption or repurchase of
Shares of the Fund, the Custodian shall honor checks drawn on the Custodian by a
holder of Shares, which checks have been furnished by the Fund to the holder of
Shares, when presented to the Custodian in accordance with such procedures and
controls as are mutually agreed upon from time to time between the Fund and the
Custodian.
The Custodian shall receive from the distributor for the Fund's Shares
or from the Transfer Agent of the Fund and deposit into the Fund's account such
payments as are received for Shares of the Fund issued or sold from time to time
by the Fund. The Custodian will provide timely notification to the Fund and the
Transfer Agent of any receipt by it of payments for Shares of the Fund.
5. Proper Instructions.
--------------------
Proper Instructions as used herein means a writing signed or
initialled by one or more person or persons as the officers of the Fund shall
have from time to time authorized. Each such writing shall set forth the
specific transaction or type of transaction involved, including a specific
statement of the purpose for which such action is requested. Oral instructions
will be considered Proper Instructions if the Custodian reasonably believes them
to have been given by a person authorized to give such instructions with respect
to the transaction involved. The Fund shall cause
-23-
<PAGE>
all oral instructions to be confirmed in writing. It is understood and agreed
that the Board of Directors/Directors/Trustees has authorized (i) Prudential
Mutual Fund Management, Inc., as Manager of the Fund, and (ii) The Prudential
Investment Corporation (or Prudential-Bache Securities Inc.), as Subadviser to
the Fund, to deliver proper instructions with respect to all matters for which
proper instructions are required by this Article 5. The Custodian may rely upon
the certificate of an officer of the Manager or Subadviser, as the case may be,
with respect to the person or persons authorized on behalf of the Manager and
Subadviser, respectively, to sign, initial or give proper instructions for the
purpose of this Article 5. Proper Instructions may include communications
effected directly between electro-mechanical or electronic devices provided that
the Fund and the Custodian are satisfied that such procedures afford adequate
safeguards for the Fund's assets. For purposes of this Section, Proper
Instructions shall include instructions received by the Custodian pursuant to
any three-party agreement which requires a segregated asset account in
accordance with Section 2.11.
6. Actions Permitted without Express Authority.
--------------------------------------------
The Custodian may in its discretion, without express authority from
the Fund:
(1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this Contract,
provided that all such payments shall be accounted for to the Fund;
- --------
(2) surrender securities in temporary form for securities in
definitive form;
(3) endorse for collection, in the name of the Fund, checks, drafts
and other negotiable instruments; and
-24-
<PAGE>
(4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase, transfer and other
dealings with the securities and property of the Fund except as otherwise
directed by the Board of Directors/Trustees of the Fund.
7. Evidence of Authority
---------------------
The Custodian shall be protected in acting upon any instructions,
notice, request, consent, certificate or other instrument or paper believed by
it to be genuine and to have been properly executed by or on behalf of the
Fund. The Custodian may receive and accept a certified copy of a vote of the
Board of Directors/Trustees of the Fund as conclusive evidence (a) of the
authority of any person to act in accordance with such vote or (b) of any
determination or of any action by the Board of Directors/ Trustees pursuant to
the Articles of Incorporation/Declaration of Trust as described in such vote,
and such vote may be considered as in full force and effect until receipt by the
Custodian of written notice to the contrary.
8. Duties of Custodian with Respect to the Books of Account and
------------------------------------------------------------
Calculation of Net Asset Value and Net Income.
- ----------------------------------------------
The Custodian shall cooperate with and supply necessary information to
the entity or entities appointed by the Board of Directors/Trustees of the Fund
to keep the books of account of the Fund and/or compute the net asset value per
share of the outstanding shares of the Fund or, if directed in writing to do so
by the Fund, shall itself keep such books of account and/or compute such net
asset value per share. If so directed, the Custodian shall also calculate daily
the net income of the Fund as described in the Fund's currently effective
prospectus and shall advise the Fund and the Transfer Agent daily of the total
amounts of such net income and, if instructed in
-25-
<PAGE>
writing by an officer of the Fund to do so, shall advise the Transfer Agent
periodically of the division of such net income among its various components.
The calculations of the net asset value per share and the daily income of the
Fund shall be made at the time or times described from time to time in the
Fund's currently effective prospectus.
9. Records
-------
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder.
All such records shall be the property of the Fund and shall at all times during
the regular business hours of the Custodian be open for inspection by duly
authorized officers, employees or agents of the Fund and employees and agents of
the Securities and Exchange Commission. The Custodian shall, at the Fund's
request, supply the Fund with a tabulation of securities owned by the Fund and
held by the Custodian and shall, when requested to do so by the Fund and for
such compensation as shall be agreed upon between the Fund and the Custodian,
include certificate numbers in such tabulations.
10. Opinion of Fund's Independent Accountant
----------------------------------------
The Custodian shall take all reasonable action, as the Fund may from
time to time request, to obtain from year to year favorable opinions from the
Fund's independent accountants with respect to its activities hereunder in
connection with the preparation of the Fund's Form N-1A, Form N-2 (in the case
of a closed end Fund) and Form N-SAR or other periodic reports to the Securities
and Exchange Commission and with respect to any other requirements of such
Commission.
-26-
<PAGE>
11. Compensation of Custodian
-------------------------
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between the
Fund and the Custodian.
12. Responsibility of Custodian
---------------------------
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. The Custodian shall be held to the
exercise of reasonable care in carrying out the provisions of this Contract, but
shall be kept indemnified by and shall be without liability to the Fund for any
action taken or omitted by it in good faith without negligence. It shall be
entitled to rely on and may act upon advice of counsel (who may be counsel for
the Fund) on all matters, and shall be without liability for any action
reasonably taken or omitted pursuant to such advice. Notwithstanding the
foregoing, the responsibility of the Custodian with respect to redemptions
effected by check shall be in accordance with a separate Agreement entered into
between the Custodian and the Fund.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 to the
same extent as set forth in Article 1 hereof with respect to sub-custodians
located in the United States and, regardless of whether assets are maintained in
the custody of a foreign banking institution, a foreign securities depository or
a branch of a U.S. bank as contemplated by paragraph 3.11 hereof, the Custodian
shall not be liable
-27-
<PAGE>
for any loss, damage, cost, expense, liability or claim resulting from, or
caused by, the direction of or authorization by the Fund to maintain custody or
any securities or cash of the Fund in a foreign country including, but not
limited to, losses resulting from nationalization, expropriation, currency
restrictions, or acts of war or terrorism.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned to
the Fund being liable for the payment of money or incurring liability of some
other form, the Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
If the Fund requires the Custodian to advance cash or securities for
any purpose or in the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Contract, except such as may arise from
its or its nominee's own negligent action, negligent failure to act or wilful
misconduct, any property at any time held for the account of the Fund shall be
security therefor and should the Fund fail to repay the Custodian promptly, the
Custodian shall be entitled to utilize available cash and to dispose of the Fund
assets to the extent necessary to obtain reimbursement provided, however that,
prior to disposing of Fund assets hereunder, the Custodian shall give the Fund
notice of its intention to dispose of assets identifying such assets and the
Fund shall have one business day from receipt of such notice to notify the
Custodian if the Fund wishes the Custodian to dispose of Fund assets of equal
value other than those identified in such notice.
13. Effective Period, Termination and Amendment
-------------------------------------------
-28-
<PAGE>
This Contract shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided, may
be amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than sixty (60) days after the date of such delivery or mailing; provided,
--------
however that the Custodian shall not act under Section 2.10 hereof in the
absence of receipt of an initial certificate of the Secretary or an Assistant
Secretary that the Board of Directors/Trustees of the Fund has approved the
initial use of a particular Securities System and the receipt of an annual
certificate of the Secretary or an Assistant Secretary that the Board of
Directors/Trustees has reviewed the use by the Fund of such Securities System,
as required in each case by Rule 17f-4 under the Investment Company Act of 1940,
as amended and that the Custodian shall not act under Section 2.10A hereof in
the absence of receipt of an initial certificate of the Secretary or an
Assistant Secretary that the Board of Directors/Trustees has approved the
initial use of the Direct Paper System and the receipt of an annual certificate
of the Secretary or an Assistant Secretary that the Board of Directors/Trustees
has reviewed the use by the Fund of the Direct Paper System; provided further,
-------- -------
however, that the Fund shall not amend or terminate this Contract in
contravention of any applicable federal or state regulations, or any provision
of the Articles of Incorporation/Declaration of Trust, and further, provided,
that the Fund may at any time by action of its Board of Directors/Trustees (i)
substitute another bank or trust company for the Custodian by giving notice as
described above to the Custodian, or (ii) immediately terminate this Contract in
the event of the appointment of a conservator or receiver for the Custodian by
the Comptroller of the Currency or upon the
-29-
<PAGE>
happening of a like event at the direction of an appropriate regulatory agency
or court of competent jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian
such compensation as may be due as of the date of such termination and shall
likewise reimburse the Custodian for its costs, expenses and disbursements.
14. Successor Custodian
-------------------
If a successor custodian shall be appointed by the Board of
Directors/Trustees of the Fund, the Custodian shall, upon termination, deliver
to such successor custodian at the office of the Custodian, duly endorsed and in
the form for transfer, all securities then held by it hereunder and shall
transfer to an account of the successor custodian all of the Fund's securities
held in a Securities System.
If no such successor custodian shall be appointed, the Custodian
shall, in like manner, upon receipt of a certified copy of a vote of the Board
of Directors/Trustees of the Fund, deliver at the office of the Custodian and
transfer such securities, funds and other properties in accordance with such
vote.
In the event that no written order designating a successor custodian
or certified copy of a vote of the Board of Directors/Trustees shall have been
delivered to the Custodian on or before the date when such termination shall
become effective, then the Custodian shall have the right to deliver to a bank
or trust company, which is a "bank" as defined in the Investment Company Act of
1940, doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, funds and other
properties held by the Custodian and all instruments
-30-
<PAGE>
held by the Custodian relative thereto and all other property held by it under
this Contract and to transfer to an account of such successor custodian all of
the Fund's securities held in any Securities System. Thereafter, such bank or
trust company shall be the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Directors/Trustees to appoint a successor custodian, the Custodian
shall be entitled to fair compensation for its services during such period as
the Custodian retains possession of such securities, funds and other properties
and the provisions of this Contract relating to the duties and obligations of
the Custodian shall remain in full force and effect.
15. Interpretive and Additional Provisions
----------------------------------------
In connection with the operation of this Contract, the Custodian and
the Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
--------
shall contravene any applicable federal or state regulations or any provision of
the Articles of Incorporation/ Declaration of Trust of the Fund. No
interpretive or additional provisions made as provided in the preceding
sentence shall be deemed to be an amendment of this Contract.
16. Massachusetts Law to Apply
--------------------------
-31-
<PAGE>
This Contract shall be construed and the provisions thereof
interpreted under and in accordance with laws of the Commonwealth of
Massachusetts.
17. Prior Contracts
---------------
This Contract supersedes and terminates, as of the date hereof, all
prior contracts between the Fund and the Custodian relating to the custody of
the Fund's assets.
18. The Parties
-----------
All references herein to the "Fund" are to each of the Funds listed on
Appendix A individually, as if this Contract were between such individual Fund
and the Custodian. With respect to any Fund listed on Appendix A which is
organized as a Massachusetts Business Trust, references to Board of Directors
and Articles of Incorporation shall be deemed a reference to Board of
Directors/Trustees and Articles of Incorporation/Declaration of Trust
respectively and reference to shares of capital stock shall be deemed a
reference to shares of beneficial interest.
19. Limitation of Liability
-----------------------
Each Fund listed on Appendix A that is referenced as a Massachusetts
Business Trust is the designation of the Directors/Trustees under a Articles of
Incorporation/Declaration of Trust, dated (see Appendix A) and all persons
dealing with the Fund must look solely to the property of the Fund for the
enforcement of any claims against the Fund as neither the Directors/Trustees,
officers, agents or shareholders assume any personal liability for obligations
entered into on behalf of the Fund.
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the dates set forth on Appendix A.
-32-
<PAGE>
ATTEST STATE STREET BANK AND TRUST COMPANY
[ILLEGIBLE] By [ILLEGIBLE]
- ------------------------- ------------------------------------------
Assistant Secretary Vice President
ATTEST EACH OF THE FUNDS LISTED ON APPENDIX A
/s/ S. Jane Rose By /s/ Robert F. Gunia
- ---------------- -------------------
Secretary Vice President
<PAGE>
Exhibit 99.B8
TRANSFER AGENCY AND SERVICE AGREEMENT
between
PRUDENTIAL BACHE STRUCTURED MATURITY FUND, INC.
and
PRUDENTIAL MUTUAL FUND SERVICES, INC.
<PAGE>
TABLE OF CONTENTS
Article 1 Terms of Appointment; Duties of the Agent..................... 1
Article 2 Fees and Expenses............................................. 5
Article 3 Representations and Warranties of the Agent................... 5
Article 4 Representations of Warranties of the Fund..................... 6
Article 5 Duty of Care and Indemnification.............................. 7
Article 6 Documents and Covenants of the Fund and the Agent............. 10
Article 7 Termination of Agreement...................................... 12
Article 8 Assignment.................................................... 12
Article 9 Affiliations.................................................. 13
Article 10 Amendment..................................................... 14
<PAGE>
Article 11 Applicable Law........................................... 14
Article 12 Miscellaneous............................................ 14
Article 13 Merger of Agreement...................................... 15
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
-------------------------------------
AGREEMENT made as of the 25th day of July, 1989 by and between
PRUDENTIAL BACHE STRUCTURED MATURITY FUND, INC., a Maryland corporation, having
its principal office and place of business at One Seaport Plaza, New York,
New York 10292 (the Fund), and PRUDENTIAL MUTUAL FUND SERVICES, INC., a New
Jersey corporation, having its principal office and place of business at
Raritan Plaza One, Edison, New Jersey 08818 (the Agent or PMFS).
WHEREAS, the Fund desires to appoint PMFS as its transfer agent, dividend
disbursing agent and shareholder servicing agent in connection with certain
other activities, and PMFS desires to accept such appointment;
NOW THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
Article 1 Terms of Appointment; Duties of PMFS
------------------------------------
1.01 Subject to the terms and conditions set forth in this Agreement,
the Fund hereby employs and appoints PMFS to act as, and PMFS agrees to act
as, the transfer agent for the authorized and issued shares of the common
stock of each series of the Fund, $.01 par value (Shares), dividend disbursing
agent and shareholder servicing agent in connection with any accumulation,
open-account or similar plans provided to the
<PAGE>
shareholders of the Fund or any series thereof (Shareholders) and set out
in the currently effective prospectus and statement of additional information
(prospectus) of the Fund, including without limitation any periodic investment
plan for periodic withdrawal program.
1.02 PMFS agrees that it will perform the following services:
(a) In accordance with procedures established from time to time by
agreement between the Fund and PMFS, PMFS shall:
(i) Receive for acceptance, orders for the purchase of Shares, and
promptly deliver payment and appropriate documentation therefor to the
Custodian of the Fund authorized pursuant to the Articles of Incorporation
of the Fund (the Custodian);
(ii) Pursuant to purchase orders, issue the appropriate number of Shares
and hold such Shares in the appropriate Shareholder account;
(iii) Receive for acceptance redemption requests and redemption directions
and deliver the appropriate documentation therefor to the Custodian;
(iv) At the appropriate time as and when it receives monies paid to
it by the Custodian with respect to any redemption, pay over or cause to
be paid over in the appropriate manner such monies as instructed by the
redeeming Shareholders;
2
<PAGE>
(v) Effect transfers of Shares by the registered owners thereof
upon receipt of appropriate instructions;
(vi) Prepare and transmit payments for dividends and distributions
declared by the Fund;
(vii) Calculate any sales charges payable by a Shareholder on purchases
and/or redemptions of Shares of the Fund as such charges may be reflected
in the prospectus;
(viii) Maintain records of account for and advise the Fund and its
Shareholders as to the foregoing; and
(ix) Record the issuance of Shares of the Fund and maintain pursuant
to Rule 17Ad-10(e) under the Securities Exchange Act of 1934 (1934 Act)
a record of the total number of Shares of the Fund which are authorized,
based upon data provided to it by the Fund, and issued and outstanding.
PMFS shall also provide to the Fund on a regular basis the total number
of Shares which are authorized, issued and outstanding and shall notify
the Fund in case any proposed issue of Shares by the Fund would result in
an overissue. In case any issue of Shares would result in an overissue,
PMFS shall refuse to issue such Shares and shall not countersign and issue
any certificates requested for such Shares. When recording the issuance
of Shares, PMFS shall have no obligation to take cognizance of any Blue
Sky laws relating to the issue or sale of such Shares, which functions shall
be the sole responsibility of the Fund.
(b) In addition to and not in lieu of the services set
3
<PAGE>
forth in the above paragraph (a), PMFS shall: (i) perform all of the customary
services of a transfer agent, dividend disbursing agent and, as relevant,
shareholder servicing agent in connection with accumulation, open-account
or similar plans (including without limitation any periodic investment plan
or periodic withdrawal program), including but not limited to, maintaining
all Shareholder accounts, preparing Shareholder meeting lists, mailing proxies,
receiving and tabulating proxies, mailing Shareholder reports and prospectuses
to current Shareholders, withholding taxes on non-resident alien accounts,
preparing and filing appropriate forms required with respect to dividends
and distributions by federal tax authorities for all Shareholders, preparing
and mailing confirmation forms and statements of account to Shareholders
for all purchases and redemptions of Shares and other confirmable transactions
in Shareholder accounts, preparing and mailing activity statements for
Shareholders and providing Shareholder account information and (ii) provide
a system which will enable the Fund to monitor the total number of Shares
sold in each State or other jurisdiction.
(c) In addition, the Fund shall (i) identify to PMFS in writing those
transactions and assets to be treated as exempt from Blue Sky reporting
for each State and (ii) verify the establishment of transactions for each
State on the system prior to activation and thereafter monitor the daily
activity for each State. The responsibility of PMFS for the Fund's registration
4
<PAGE>
status under the Blue Sky or securities laws of any State or other jurisdiction
is solely limited to the initial establishment of transactions subject to
Blue Sky compliance by the Fund and the reporting of such transactions to
the Fund as provided above and as agreed from time to time by the Fund and
PMFS.
PMFS may also provide such additional services and functions not
specifically described herein as may be mutually agreed between PMFS and
the Fund and set forth in Schedule B hereto.
Procedures applicable to certain of these services may be established
from time to time by agreement between the Fund and PMFS.
Article 2 Fees and Expenses
-----------------
2.01 For performance by PMFS pursuant to this Agreement, the
Fund agrees to pay PMFS an annual maintenance fee for each Shareholder account
and certain transactional fees as set out in the fee schedule attached hereto
as Schedule A. Such fees and out-of-pocket expenses and advances identified
under Section 2.02 below may be changed from time to time subject to mutual
written agreement between the Fund and PMFS.
2.02 In addition to the fees paid under Section 2.01 above, the
Fund agrees to reimburse PMFS for out-of-pocket expenses or advances incurred
by PMFS for the items set out in Schedule A attached hereto. In addition,
any other expenses incurred by PMFS at the request or with the consent of
the Fund
5
<PAGE>
will be reimbursed by the Fund.
2.03 The Fund agrees to pay all fees and reimbursable expenses
within a reasonable period of time following the mailing of the respective
billing notice. Postage for mailing of dividends, proxies, Fund reports
and other mailings to all Shareholder accounts shall be advanced to PMFS
by the Fund upon request prior to the mailing date of such materials.
Article 3 Representations and Warranties of PMFS
--------------------------------------
PMFS represents and warrants to the Fund that:
3.01 It is a corporation duly organized and existing and in good
standing under the laws of New Jersey and it is duly qualified to carry
on its business in New Jersey.
3.02 It is and will remain registered with the U.S. Securities
and Exchange Commission (SEC) as a Transfer Agent pursuant to the requirements
of Section 17A of the 1934 Act.
3.03 It is empowered under applicable laws and by its charter
and By-Laws to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement.
3.05 It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations
under this Agreement.
Article 4 Representations and Warranties of the Fund
------------------------------------------
The Fund represents and warrants to PMFS that:
6
<PAGE>
4.01 It is a corporation duly organized and existing and in good
standing under the laws of Maryland.
4.02 It is empowered under applicable laws and by its Articles
of Incorporation and By-Laws to enter into and perform this Agreement.
4.03 All corporate proceedings required by said Articles of
Incorporation and By-Laws have been taken to authorize it to enter into
and perform this Agreement.
4.04 It is an investment company registered with the SEC under
the Investment Company Act of 1940, as amended (the 1940 Act).
4.05 A registration statement under the Securities Act of 1993
(the 1993 Act) is currently effective and will remain effective, and
appropriate state securities law filings have been made and will continue
to be made, with respect to all Shares of the Fund being offered for sale.
Article 5 Duty of Care and Indemnification
--------------------------------
5.01 PMFS shall not be responsible for, and the Fund shall indemnify
and hold PMFS harmless from and against, any and all losses, damages, costs,
charges, counsel fees, payments, expenses and liability arising out of or
attributable to:
(a) All actions of PMFS or its agents or subcontractors required to
be taken pursuant to this Agreement, provided that such actions are taken
in good faith and without negligence or willful misconduct.
7
<PAGE>
(b) The Fund's refusal or failure to comply with the terms of this
Agreement, or which arise out of the Fund's lack of good faith, negligence
or willful misconduct or which arise out of the breach of any representation
or warranty of the Fund hereunder.
(c) The reliance on or use by PMFS or its agents or subcontractors
of information, records and documents which (i) are received by PMFS or
its agents or subcontractors and furnished to it by or on behalf of the
Fund, and (ii) have been prepared and/or maintained by the Fund or any other
person or firm on behalf of the Fund.
(d) The reliance on, or the carrying out by PMFS or its agents or
subcontractors of, any instructions or requests of the Fund.
(e) The offer or sale of Shares in violation of any requirement under
the federal securities laws or regulations or the securities or Blue Sky
laws of any State or other jurisdiction that such Shares be registered in
such State or other jurisdiction or in violation of any stop order or other
determination or ruling by any federal agency or any State or other
jurisdiction with respect to the offer or sale of such Shares in such State
or other jurisdiction.
5.02 PMFS shall indemnify and hold the Fund harmless from and
against any and all losses, damages, costs, charges, counsel fees, payments,
expenses and liability arising out of or
8
<PAGE>
attributable to any action or failure or omission to act by PMFS as a result
of PMFS' lack of good faith, negligence or willful misconduct.
5.03 At any time PMFS may apply to any officer of the Fund for
instructions, and may consult with legal counsel, with respect to any matter
arising in connection with the services to be performed by PMFS under this
Agreement, and PMFS and its agents or subcontractors shall not be liable
and shall be indemnified by the Fund for any action taken or omitted by
it in reliance upon such instructions or upon the opinion of such counsel.
PMFS, its agents and subcontractors shall be protected and indemnified in
acting upon any paper or document furnished by or on behalf of the Fund,
reasonably believed to be genuine and to have been signed by the proper
person or persons, or upon any instruction, information, data, records or
documents provided to PMFS or its agents or subcontractors by machine readable
input, telex, CRT data entry or other similar means authorized by the Fund,
and shall not be held to have notice of any change of authority of any person,
until receipt of written notice thereof from the Fund. PMFS, its agents
and subcontractors shall also be protected and indemnified in recognizing
stock certificates which are reasonably believed to bear the proper manual
or facsimile signature of the officers of the Fund, and the proper
countersignature of any former transfer agent or registrar, or of a co-transfer
agent or co-registrar.
9
<PAGE>
5.04 In the event either party is unable to perform its
obligations under the terms of this Agreement because of acts of God, strikes,
equipment or transmission failure or damage reasonably beyond its control, or
other causes reasonably beyond its control, such party shall not be liable for
damages to the other for any damages resulting from such failure to perform or
otherwise from such causes.
5.05 Neither party to this Agreement shall be liable to the
other party for consequential damages under any provision of this Agreement
or for any act or failure to act hereunder.
5.06 In order that the indemnification provisions contained
in this Article 5 shall apply, upon the assertion of a claim for which either
party may be required to indemnify the other, the party seeking indemnification
shall promptly notify the other party of such assertion, and shall keep the
other party advised with respect to all developments concerning such claim. The
party who may be required to indemnify shall have the option to participate with
the party seeking indemnification in the defense of such claim. The party
seeking indemnification shall in no case confess any claim or make any
compromise in any case in which the other party may be required to indemnify
it except with the other party's prior written consent.
Article 6 Documents and Covenants of the Fund and PMFS
--------------------------------------------
6.01 The Fund shall promptly furnish to PMFS the following:
10
<PAGE>
(a) A certified copy of the resolution of the Board of Directors
of the Fund authorizing the appointment of PMFS and the execution and delivery
of this Agreement;
(b) A certified copy of the Articles of Incorporation and By-Laws
of the Fund and all amendments thereto;
(c) The current registration statements and any amendments and
supplements thereto filed with the SEC pursuant to the requirements of the
1933 Act and the 1940 Act;
(d) A specimen of the certificate for Shares of the Fund in the form
approved by the Board of Directors, with a certificate of the Secretary
of the Fund as to such approval;
(e) All account application forms or other documents relating to
Shareholder accounts and/or relating to any plan program or service offered
or to be offered by the Fund; and
(f) Such other certificates, documents or opinions as the Agent deems
to be appropriate or necessary for the proper performance of its duties.
6.02 PMFS hereby agrees to establish and maintain facilities
and procedures reasonably acceptable to the Fund for safekeeping of stock
certificates, check forms and facsimile signature imprinting devices, if
any; and for the preparation or use, and for keeping account of, such
certificates, forms and devices.
6.03 PMFS shall prepare and keep records relating to the services
to be performed hereunder, in the form and manner as it
11
<PAGE>
may deem advisable. To the extent required by Section 31 of the 1940 Act,
and the Rules and Regulations thereunder, PMFS agrees that all such records
prepared or maintained by PMFS relating to the services to be performed
by PMFS hereunder are the property of the Fund and will be preserved,
maintained and made available in accordance with such Section 31 of the
1940 Act, and the Rules and Regulations thereunder, and will be surrendered
promptly to the Fund on and in accordance with its request.
6.04 PMFS and the Fund agree that all books, records, information
and data pertaining to the business of the other party which are exchanged
or received pursuant to the negotiation or the carrying out of this Agreement
shall remain confidential and shall not be voluntarily disclosed to any
other person except as may be required by law or with the prior consent of PMFS
and the Fund.
6.05 In case of any requests or demands for the inspection of the
Shareholder records of the Fund, PMFS will endeavor to notify the Fund and
to secure instructions from an authorized officer of the Fund as to such
inspection. PMFS reserves the right, however, to exhibit the Shareholder
records to any person whenever it is advised by its counsel that it may
be held liable for the failure to exhibit the Shareholder records to such
person.
Article 7 Termination of Agreement
------------------------
7.01 This Agreement may be terminated by either party
12
<PAGE>
upon one hundred twenty (120) days written notice to the other.
7.02 Should the Fund exercise its right to terminate, all
out-of-pocket expenses associated with the movement of records and other
materials will be borne by the Fund. Additionally, PMFS reserves the right to
charge for any other reasonable fees and expenses associated with such
termination.
Article 8 Assignment
----------
8.01 Except as provided in Section 8.03 below, neither this Agreement
nor any rights or obligations hereunder may be assigned by either party without
the written consent of the other party.
8.02 This Agreement shall inure to the benefit of and be binding
upon the parties and their respective permitted successors and assigns.
8.03 PMFS may, in its sole discretion and without further consent by
the Fund, subcontract, in whole or in part, for the performance of its
obligations and duties hereunder with any person or entity including but not
limited to: (i) Prudential-Bache Securities Inc. ("Prudential-Bache"), a
registered broker-dealer, (ii) The Prudential Insurance Company of America
("Prudential"), (iii) Pruco Securities Corporation, a registered
broker-dealer, (iv) any Prudential-Bache or Prudential subsidiary or affiliate
duly registered as a broker-dealer and/or a transfer agent pursuant to the 1934
Act or (vi) any other Prudential-Bache or Prudential affiliate or subsidiary;
13
<PAGE>
provided, however, that PMFS shall be as fully responsible to the Fund for the
acts and omissions of any agent or subcontractor as it is for its own acts and
omissions.
Article 9 Affiliations
------------
9.01 PMFS may now or hereafter, without the consent of or notice to the
Fund, function as Transfer Agent and/or Shareholder Servicing Agent for any
other investment company registered with the SEC under the 1940 Act, including
without limitation any investment company whose adviser, administrator, sponsor
or principal underwriter is or may become affiliated with Prudential Securities
and/or Prudential or any of its or their direct or indirect subsidiaries or
affiliates.
9.02 It is understood and agreed that the directors, officers,
employees, agents and Shareholders of the Fund, and the directors, officers,
employees, agents and shareholders of the Fund's investment adviser and/or
distributor, are or may be interested in the Agent as directors, officers,
employees, agents, shareholders or otherwise, and that the directors, officers,
employees, agents or shareholders of the Agent may be interested in the Fund as
directors, officers, employees, agents, Shareholders or otherwise, or in the
investment adviser and/or distributor as officers, directors, employees, agents,
shareholders or otherwise.
14
<PAGE>
Article 10 Amendment
---------
10.01 This Agreement may be amended or modified by a written
agreement executed by both parties and authorized or approved by a resolution
of the Board of Directors of the Fund.
Article 11 Applicable Law
--------------
11.01 This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of the State of New Jersey.
Article 12 Miscellaneous
-------------
12.01 In the event of an alleged loss or destruction of any
Share certificate, no new certificate shall be issued in lieu thereof, unless
there shall first be furnished to PMFS an affidavit of loss or non-receipt
by the holder of Shares with respect to which a certificate has been lost
or destroyed, supported by an appropriate bond satisfactory to PMFS and
the Fund issued by a surety company satisfactory to PMFS, except that PMFS
may accept an affidavit of loss and indemnity agreement executed by the
registered holder (or legal representative) without surety in such form
as PMFS deems appropriate indemnifying PMFS and the Fund for the issuance
of a replacement certificate, in cases where the alleged loss is in the
amount of $1000 or less.
12.02 In the event that any check or other order for payment
of money on the account of any Shareholder or new investor is returned unpaid
for any reason, PMFS will (a) give
15
<PAGE>
prompt notification to the Fund's distributor (Distributor) of such
non-payment; and (b) take such other action, including imposition of a
reasonable processing or handling fee, as PMFS may, in its sole discretion,
deem appropriate or as the Fund and the Distributor may instruct PMFS.
12.03 Any notice or other instrument authorized or required
by this Agreement to be given in writing to the Fund or to PMFS shall be
sufficiently given if addressed to that party and received by it at its
office set forth below or at such other place as it may from time to time
designate in writing.
To the Fund:
Prudential Structured Maturity Fund, Inc.
One Seaport Plaza
New York, NY 10292
Attention: President
To PMFS:
Prudential Mutual Fund Services, Inc.
Raritan Plaza One
Edison, NJ 08818
Attention: President
Article 13 Merger of Agreement
-------------------
13.01 This Agreement constitutes the entire agreement between
the parties hereto and supersedes any prior agreement with respect to the
subject matter hereof whether oral or written.
16
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed in their names and on their behalf under their seals by and
through their duly authorized officers, as of the day and year first above
written.
PRUDENTIAL BACHE STRUCTURED MATURITY FUND, INC.
BY:/s/Lawrence C. McQuade
------------------
ATTEST:
/s/Deborah A. Docs
- ------------------
PRUDENTIAL MUTUAL FUND
SERVICES, INC.
BY:/s/Fred A. Fiandaca
------------------
ATTEST:
/s/S. Jane Rose
- ------------------
17
<PAGE>
EXHIBIT 99.B 10 (a)
GARDNER, CARTON & DOUGLAS
Suite 3400 - Quaker Tower
321 North Clark Street
Chicago, Illinois 60610-4795
(312) 644-3000
Telecopier: (312) 644-3381
July 17, 1989
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Prudential-Bache Structured Maturity
Fund, Inc. Indefinite Number of Shares
of Common Stock, $.01 Par Value
--------------------------------------
Ladies and Gentlemen:
As counsel for Prudential-Bache Structured Maturity Fund, Inc., a Maryland
corporation (the "Fund"), we have examined the proceedings taken and being taken
for the registration by the Fund on Form N-1A of an indefinite number of shares
of its Common Stock, $.01 par value.
We have examined all instruments, documents and records which, in our
opinion, were necessary of examination for the purpose of rendering this
opinion. Based upon such examination, we are of the opinion that the above-
described shares of Common Stock will be, if and when issued by the Fund in the
manner and upon the terms set forth in said Form N-1A, validly authorized and
issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the Fund's
Registration Statement on Form N-1A, as it may be amended.
Very truly yours,
/s/ GARDNER, CARTON & DOUGLAS
PHD/AJS/KJF/cav
<PAGE>
EXHIBIT 99.B10(b)
GARDNER, CARTON & DOUGLAS
SUITE 3400--QUAKER TOWER
321 NORTH CLARK STREET
CHICAGO, ILLINOIS 60610-4795
(312) 644-3000
TELECOPIER: (312) 644-3381
February 28, 1997
Securities and Exchange commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Prudential Structured Maturity Fund, Inc.
Shares of Common Stock $0.01 par value per share
------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Prudential Structured Maturity Fund, Inc., a
Maryland corporation (the "Fund"), in connection with its filing of
Post-Effective Amendment No. 15 to its Registration Statement on Form N-1A(File
No. 33-22363)(the "Amendment"). In addition to updating the information
contained therein, the Amendment registers 2,811,973 shares of Common Stock,
$0.01 par value per share, of the Fund.
We have examined all instruments, documents and records which, in our
opinion, were necessary of examination for the purpose of rendering this
opinion. Based upon such examination, we are of the opinion that the
above-described shares of Common Stock will be, if and when issued by the Fund
in the manner and upon the terms set forth in said Amendment, validly authorized
and issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Amendment.
Very truly yours,
/s/ GARDNER, CARTON & DOUGLAS
<PAGE>
EXHIBIT 99.B11
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Post-Effective Amendment No. 15 to Registration
Statement No. 33-22363 of Prudential Structured Maturity Fund, Inc.of our report
dated February 14, 1997, appearing in the Statement of Additional Information,
which is a part of such Registration Statement, and to the references to us
under the headings "Financial Highlights" in the Prospectus, which is a part of
such Registration Statement, and "Custodian, Transfer and Dividend Disbursing
Agent and Independent Accountants" in the Statement of Additional Information.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
New York, New York
February 27, 1997
<PAGE>
EXHIBIT 99.B16(b)
PRUDENTIAL STRUCTURED MATURITY FUND
CLASS "A"
EXHIBIT
AGGREGATE TOTAL RETURN
CALCULATION
ERV - P
T = ---------
P
P = hypothetical initial payment of $1,000
ERV = ending redeemable value
T = Aggregate total return
================================================================================
1 Year Inception
ended through
December 31, December 31,
1992 1992
----------- -----------
P = $1,000.00 $1,000.00
ERV = $1,068.40 $1,361.70
T = 6.84% 36.17%
<PAGE>
PRUDENTIAL STRUCTURED MATURITY FUND
CLASS "B"
EXHIBIT
AGGREGATE TOTAL RETURN
CALCULATION
ERV - P
T = ----------
P
P = hypothetical initial payment of $1,000
ERV = ending redeemable value
T = Aggregate total return
================================================================================
Inception
through
December 31,
1992
------------
P = $1,000.00
ERV = $970.00
T = -3.00%
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000834126
<NAME> PRUDENTIAL STRUCTURED MATURITY FUND INCOME PORTFOLIO
<SERIES>
<NUMBER> 001
<NAME> PRUDENTIAL STRUCTURED MATURIT
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 168,266,426
<INVESTMENTS-AT-VALUE> 169,370,419
<RECEIVABLES> 4,205,507
<ASSETS-OTHER> 17,701
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 173,593,627
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 675,284
<TOTAL-LIABILITIES> 675,284
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 182,159,468
<SHARES-COMMON-STOCK> 15,238,677
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (10,345,118)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,103,993
<NET-ASSETS> 172,918,343
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 13,695,218
<OTHER-INCOME> 0
<EXPENSES-NET> 2,324,385
<NET-INVESTMENT-INCOME> 11,370,833
<REALIZED-GAINS-CURRENT> (3,071,885)
<APPREC-INCREASE-CURRENT> (1,511,234)
<NET-CHANGE-FROM-OPS> 6,787,714
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (11,370,833)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (305,142)
<NUMBER-OF-SHARES-SOLD> 25,615,019
<NUMBER-OF-SHARES-REDEEMED> (65,822,535)
<SHARES-REINVESTED> 7,793,568
<NET-CHANGE-IN-ASSETS> (37,302,209)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 756,955
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,324,385
<AVERAGE-NET-ASSETS> 81,745,000
<PER-SHARE-NAV-BEGIN> 11.63
<PER-SHARE-NII> 0.73
<PER-SHARE-GAIN-APPREC> (0.25)
<PER-SHARE-DIVIDEND> (0.73)
<PER-SHARE-DISTRIBUTIONS> (0.02)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.36
<EXPENSE-RATIO> 0.86
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000834126
<NAME> PRUDENTIAL STRUCTURED MATURITY FUND INCOME PORTFOLIO
<SERIES>
<NUMBER> 002
<NAME> PRUDENTIAL STRUCTURED MATURIT
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 168,266,426
<INVESTMENTS-AT-VALUE> 169,370,419
<RECEIVABLES> 4,205,507
<ASSETS-OTHER> 17,701
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 173,593,627
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 675,284
<TOTAL-LIABILITIES> 675,284
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 182,159,468
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<NAME> PRUDENTIAL STRUCTURED MATURIT
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