<PAGE>
PRUDENTIAL STRUCTURED MATURITY FUND, INC. (INCOME PORTFOLIO)
- -------------------------------------------------------------------------------
PROSPECTUS DATED MARCH 4, 1998
- -------------------------------------------------------------------------------
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, 100 Mulberry Street, Newark, New Jersey 07102-4077, 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 and
is available at the Web site of the Prudential Insurance Company of America
(http://www.prudential.com). Additional information about the Fund and the
Portfolio has been filed with the Securities and Exchange Commission (the
Commission) in a Statement of Additional Information, dated March 4, 1998,
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. The Commission maintains
a Web site (http://www.sec.gov) that contains the Statement of Additional
Information, material incorporated by reference, and other information
regarding the Fund.
- -------------------------------------------------------------------------------
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 PORTFOLIO'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--Asset Backed Securities--Collateralized Mortgage Obligations" at
page 11. 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 PORTFOLIO?
Prudential Investments Fund Management LLC (PIFM 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, 1998,
PIFM served as manager or administrator to 64 investment companies, including
42 mutual funds, with aggregate assets of approximately $63 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 PIFM. See "How the Fund is Managed--Manager" at page 17.
WHO DISTRIBUTES THE PORTFOLIO'S SHARES?
Prudential Securities Incorporated (Prudential Securities or the
Distributor), 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 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.
2
<PAGE>
The Distributor 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 is $1,000 for Class A and Class B shares, 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 34.
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 NAV without any sales charge. See "How the Fund
Values its Shares" at page 19 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 sales charge or CDSC 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. Participants
in programs sponsored by Prudential Retirement Services should contact their
client representative for more information about selling their Class Z shares.
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 20.
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 None 3% during the first year, 1% on redemptions None
price or redemption decreasing by 1% annually to made within
proceeds, whichever is 1% in the third year and one year of
lower)................ 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......... .44 .44 .44 .44
--- --- --- ---
Total Fund Operating
Expenses (After
Reduction)............ .94% 1.59% 1.59% .84%
=== ==== ==== ===
</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................................... $42 $61 $83 $144
Class B................................... $46 $60 $87 $148
Class C................................... $26 $50 $87 $189
Class Z .................................. $ 9 $27 $47 $104
You would pay the following expenses on the
same investment assuming no redemption:
Class A................................... $42 $61 $83 $144
Class B................................... $16 $50 $87 $148
Class C................................... $16 $50 $87 $189
Class Z .................................. $ 9 $27 $47 $104
</TABLE>
The above example is based on data for the Fund's fiscal year ended December
31, 1997. 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,
1998. Total Fund Operating Expenses of the Class A shares without such
limitation would be 1.14%. See "How the Fund is Managed--Distributor."
+ 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, 1998. Total Fund Operating Expenses of the Class B and
Class C shares without such limitations would be 1.84% and 1.84%,
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 for the year ended December 31, 1997 have
been audited by Price Waterhouse LLP, independent accountants, and for the
periods ended December 31, 1996 have been audited by Deloitte and Touche LLP,
independent auditors, whose reports thereon were 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
--------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------
PER SHARE OPERATING 1997 1996 1995 1994 1993 1992 1991 1990
PERFORMANCE: ------- ------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period..... $ 11.36 $ 11.63 $ 10.97 $ 11.78 $ 11.79 $ 12.13 $ 11.67 $ 11.63
------- ------- ------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income.... .74 .73 .73 .65 .71 .86(c) .93(c) 1.00(c)
Net realized and
unrealized gain (loss)
on investment
transactions............ .01 (.25) .66 (.80) .12 (.08) .56 .04
------- ------- ------- -------- -------- -------- -------- --------
Total from investment
operations............. .75 .48 1.39 (.15) .83 .78 1.49 1.04
------- ------- ------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net
investment income....... (.74) (.73) (.73) (.65) (.71) (.86) (.93) (1.00)
Distributions in excess
of net investment
income.................. (.02) (.02) -- (.01) -- -- -- --
Distributions from net
realized gains.......... -- -- -- -- (.13) (.26) (.10) --
------- ------- ------- -------- -------- -------- -------- --------
Total distributions..... (.76) (.75) (.73) (.66) (.84) (1.12) (1.03) (1.00)
------- ------- ------- -------- -------- -------- -------- --------
Net asset value, end of
period.................. $ 11.35 $ 11.36 $ 11.63 $ 10.97 $ 11.78 $ 11.79 $ 12.13 $ 11.67
======= ======= ======= ======== ======== ======== ======== ========
TOTAL RETURN(D):......... 6.81% 4.32% 13.12% (1.16)% 7.19% 6.67% 13.35% 9.40%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $65,431 $77,031 $88,982 $91,680 $119,449 $109,828 $109,997 $113,125
Average net assets (000). $70,899 $81,745 $89,500 $106,737 $114,728 $107,937 $113,010 $107,276
Ratios to average net
assets:
Expenses, including
distribution fees...... .94% .86% .82% .94% .80% .70%(c) .37%(c) .13%(c)
Expenses, excluding
distribution fees...... .84% .76% .72% .84% .70% .60%(c) .27%(c) .10%(c)
Net investment income... 6.51% 6.38% 6.57% 5.88% 5.92% 7.15%(c) 7.89%(c) 8.67%(c)
Portfolio turnover rate.. 180% 170% 160% 123% 137% 91% 117% 46%
<CAPTION>
SEPTEMBER 1,
1989(A)
THROUGH
DECEMBER 31,
PER SHARE OPERATING 1989
PERFORMANCE: ------------------
<S> <C>
Net asset value,
beginning of period..... $ 11.61
------------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income.... .35(c)
Net realized and
unrealized gain (loss)
on investment
transactions............ .03
------------------
Total from investment
operations............. .38
------------------
LESS DISTRIBUTIONS
Dividends from net
investment income....... (.35)
Distributions in excess
of net investment
income.................. --
Distributions from net
realized gains.......... (.01)
------------------
Total distributions..... (.36)
------------------
Net asset value, end of
period.................. $ 11.63
==================
TOTAL RETURN(D):......... 3.30%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $98,414
Average net assets (000). $89,176
Ratios to average net
assets:
Expenses, including
distribution fees...... 0%(b)/(c)
Expenses, excluding
distribution fees...... 0%(b)/(c)
Net investment income... 8.41%(b)/(c)
Portfolio turnover rate.. 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, for the year ended December 31, 1997 have
been audited by Price Waterhouse LLP, independent accountants, and for the
periods ended December 31, 1996 have been audited by Deloitte and Touche LLP,
independent auditors, whose reports thereon were 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,
1997 1996 1995 1994 1993 1992
------- -------- -------- -------- -------- ------------
PER SHARE OPERATING
PERFORMANCE:
<S> <C> <C> <C> <C> <C> <C>
Net asset value, begin-
ning of period......... $ 11.36 $ 11.63 $ 10.97 $ 11.78 $ 11.79 $ 11.79
------- -------- -------- -------- -------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income... .67 .65 .66 .58 .62 .04
Net realized and
unrealized gain (loss)
on
investment transac-
tions.................. .01 (.25) .66 (.80) .12 --
------- -------- -------- -------- -------- -------
Total from investment
operations............ .68 .40 1.32 (.22) .74 .04
------- -------- -------- -------- -------- -------
LESS DISTRIBUTIONS
Dividends from net in-
vestment income........ (.67) (.65) (.66) (.58) (.62) (.04)
Distributions in excess
of net investment in-
come................... (.02) (.02) -- (.01) -- --
Distributions from net
realized gains......... -- -- -- -- (.13) --
------- -------- -------- -------- -------- -------
Total distributions.... (.69) (.67) (.66) (.59) (.75) (.04)
------- -------- -------- -------- -------- -------
Net asset value, end of
period................. $ 11.35 $ 11.36 $ 11.63 $ 10.97 $ 11.78 $ 11.79
======= ======== ======== ======== ======== =======
TOTAL RETURN(C):........ 6.13% 3.64% 12.40% (1.83)% 6.38% .32%
RATIOS/SUPPLEMENTAL DA-
TA:
Net assets, end of pe-
riod (000)............. $71,030 $ 94,490 $120,188 $130,258 $123,306 $11,981
Average net assets
(000).................. $81,673 $106,224 $125,230 $134,985 $ 69,314 $ 5,474
Ratios to average net
assets:
Expenses, including
distribution fees..... 1.59% 1.51% 1.47% 1.66% 1.55% 1.67%(b)
Expenses, excluding
distribution fees..... .84% .76% .72% .84% .70% .82%(b)
Net investment income.. 5.87% 5.73% 5.92% 5.17% 5.08% 6.31%(b)
Portfolio turnover rate. 180% 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 for the year ended December 31, 1997 have
been audited by Price Waterhouse LLP, independent accountants, and for the
periods ended December 31, 1996 have been audited by Deloitte and Touche LLP,
independent auditors, whose reports thereon were 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,
YEARS ENDED DECEMBER 1994(A) 1996(B)
31, THROUGH YEAR ENDED THROUGH
----------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994 1997 1996
------ ------ ------- ------------ ------------ ------------
PER SHARE OPERATING
PERFORMANCE:
<S> <C> <C> <C> <C> <C> <C>
Net asset value, begin-
ning of period......... $11.36 $11.63 $ 10.97 $ 11.30 $11.37 $11.41
------ ------ ------- ------- ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income... .67 .65 .66 .23 .74 .09
Net realized and
unrealized gain (loss)
on
investment transac-
tions.................. .01 (.25) .66 (.32) .02 (.02)
------ ------ ------- ------- ------ ------
Total from investment
operations............ .68 .40 1.32 (.09) .79 .07
------ ------ ------- ------- ------ ------
LESS DISTRIBUTIONS
Dividends from net in-
vestment income........ (.67) (.65) (.66) (.23) (.77) (.09)
Distributions in excess
of net investment in-
come................... (.02) (.02) -- (.01) (.04) (.02)
------ ------ ------- ------- ------ ------
Total distributions.... (.69) (.67) (.66) (.24) (.81) (.11)
------ ------ ------- ------- ------ ------
Net asset value, end of
period................. $11.35 $11.36 $ 11.63 $ 10.97 $11.35 $11.37
====== ====== ======= ======= ====== ======
TOTAL RETURN(D):........ 6.13% 3.64% 12.40% (0.68)% 7.01% .59%
RATIOS/SUPPLEMENTAL DA-
TA:
Net assets, end of pe-
riod (000)............. $1,314 $1,396 $ 1,050 $ 371 $ 784 $ 200(e)
Average net assets
(000).................. $1,329 $1,270 $ 667 $ 192 $ 313 $ 200(e)
Ratios to average net
assets:
Expenses, including
distribution fees..... 1.59% 1.51% 1.47% 1.90%(c) .84% .76%(c)
Expenses, excluding
distribution fees..... .84% .76% .72% 1.15%(c) .84% .76%(c)
Net investment income.. 5.87% 5.73% 5.92% 5.30%(c) 6.71% 6.48%(c)
Portfolio turnover rate. 180% 170% 160% 123% 180% 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 "Asset Backed Securities--Collateralized Mortgage
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--U.S. Government Securities--Mortgage--Related Securities Issued by
U.S. Government Instrumentalities" 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.
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<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 BB OR BA 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 (JUNK BONDS). See "Description of
Security Ratings" in the Appendix to this Prospectus. 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 and 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.
Subsequent to its purchase by the Fund, a security may be assigned a lower
rating or cease to be rated. Such an event would not require the elimination
of the issue from the Portfolio, but the investment adviser will consider such
an event in determining whether the Fund should continue to hold the security
in the Portfolio.
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<PAGE>
During the year ended December 31, 1997, 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 12.92%
AA/Aa .48
A/A 14.18
BBB/Baa 63.52
BB/Ba 8.90
B/B 0.00
Unrated 0.00
</TABLE>
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 Portfolio. 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--COLLATERALIZED MORTGAGE OBLIGATIONS
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.
11
<PAGE>
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 Commission, the Portfolio's
investments in certain qualifying CMOs and REMICs are not subject to the
Investment Company Act's limitation on acquiring interests in other investment
companies. See "Investment Objective and Policies--Mortgage-Backed
Securities-- Collateralized Mortgage Obligations" in the Statement of
Additional Information. CMOs and REMICs issued by an agency or instrumentality
of the U.S. Government are considered U.S. Government securities for purposes
of this Prospectus.
RISK FACTORS RELATING TO INVESTING IN MORTGAGE-BACKED AND ASSET-BACKED
SECURITIES. THE YIELD CHARACTERISTICS OF MORTGAGE-BACKED AND ASSET-BACKED
SECURITIES DIFFER FROM TRADITIONAL DEBT SECURITIES. Among the major
differences are that interest and principal payments are made more frequently,
usually monthly, and principal may be prepaid at any time because the
underlying mortgage loans or other assets generally may be prepaid at any
time. As a result, if the 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--U.S.
Government Securities" 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
12
<PAGE>
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
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. IN THE EVENT OF A DEFAULT WITH
RESPECT TO ANY FOREIGN DEBT OBLIGATIONS, IT MAY BE MORE DIFFICULT FOR THE FUND
TO OBTAIN OR ENFORCE A JUDGMENT AGAINST THE ISSUER OF SUCH SECURITIES.
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 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--Interest Rate Swap Transactions" 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.
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<PAGE>
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 PORTFOLIO, AND
THUS ITS INVESTORS, 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.
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; and (5) 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, Dividends and
Distributions" 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.
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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.
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 PIFM pursuant to an order of the Commission. 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 in which it will maintain
cash or other liquid assets 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
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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.
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 Portfolio will maintain in a segregated
account cash or other liquid assets 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 NAV.
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, 1997, the total expenses of Class A,
Class B, Class C and Class Z shares as a percentage of average net assets were
.94%, 1.59%, 1.59% and .84%, respectively. See "Financial Highlights."
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, 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. PIFM is organized
in New York as a limited liability company. It is the successor to Prudential
Mutual Fund Management, LLC, which transferred its assets to PIFM in September
1996. For the fiscal year ended December 31, 1997, the Portfolio paid
management fees to PIFM of .40% of the Portfolio's average net assets. See
"Manager" in the Statement of Additional Information.
As of January 31, 1998, PIFM served as the manager to 42 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 $63 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM 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 PIFM 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
PIFM FOR ITS REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH
SERVICES. PIFM 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,
Managing Director 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--Conservative
Balanced and Flexible Managed Portfolios.
PIFM and PIC are wholly-owned subsidiaries of Prudential, a major
diversified insurance and financial services company.
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR THE
DISTRIBUTOR), ONE SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION
ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES AS THE
DISTRIBUTOR OF THE CLASS A, CLASS B, CLASS C AND CLASS Z 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
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AGREEMENT (THE DISTRIBUTION AGREEMENT), 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 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 THE DISTRIBUTOR 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, 1998.
UNDER THE CLASS B AND CLASS C PLANS, THE PORTFOLIO MAY PAY THE DISTRIBUTOR
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. The
Distributor 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, 1998. The Distributor 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, 1997, 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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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 NAV 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.
FEE WAIVER
The Distributor has agreed to limit its distribution fee for Class A, Class
B and Class C shares as described above under "Distributor." Fee waivers will
increase the Fund's total return. See "Fund Expenses" above.
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.
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 PIFM. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
YEAR 2000
The services provided to the Fund and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of their outside service
providers. Many computer software systems in use today cannot distinguish the
year 2000 from the year 1900 because of the way dates are encoded and
calculated. Such event could have a negative impact on handling securities
trades, payments of interest and dividends, pricing and account services.
Although, at this time, there can be no assurance that there will be no
adverse impact on the Fund, the Manager, the Distributor, the Transfer Agent
and the Custodian have advised the Fund that they have been actively working
on necessary changes to their computer systems to prepare for the year 2000
and expect that their systems, and those of their outside service providers,
will be adapted in time for that event.
HOW THE FUND VALUES ITS SHARES
THE PORTFOLIO'S 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.
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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. For valuation purposes,
quotations of foreign securities in a foreign currency are converted to U.S.
dollar equivalents. 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.
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 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
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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, Dividends and Distributions"
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 capital gains from the sale of assets held for
more than 12 months 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% with respect to securities held by the Portfolio for more
than 12 months but not more than 18 months, and 20% with respect to securities
held by the Portfolio for more than 18 months. 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
capital gain or loss. Any such capital gain derived by an individual will be
subject to tax at the reduced rates described above depending upon the
shareholder's holding period of the shares sold. Any such loss will be a long-
term capital loss if the shares have been held for more than one year and
otherwise as short-term capital 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, Dividends
and Distributions" 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 regarding
the shareholder's status under the federal income tax law, or, generally, who
otherwise are 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, 1997, of approximately $8,540,000, of
which approximately $5,391,000 expires in 2002 and approximately $3,149,000
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
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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.
IF YOU BUY SHARES ON OR IMMEDIATELY BEFORE THE RECORD DATE (THE DATE THAT
DETERMINES WHO RECEIVES THE DIVIDEND), YOU WILL RECEIVE A PORTION OF THE MONEY
YOU INVESTED AS A TAXABLE DIVIDEND. THEREFORE, YOU SHOULD CONSIDER THE TIMING
OF DIVIDENDS WHEN BUYING SHARES OF THE PORTFOLIO.
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.
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.
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<PAGE>
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 Commission
under the Securities Act of 1933, as amended (Securities Act). Copies of the
Registration Statement may be obtained at a reasonable charge from the
Commission or may be examined, without charge, at the office of the Commission
in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE PORTFOLIO THROUGH THE DISTRIBUTOR, 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 the Distributor 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 NAV without any sales charge. Payments may be made by
cash, wire, check or through your brokerage account. 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.
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
23
<PAGE>
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 CDSC of 3% of 1% (Currently being Shares convert to Class A
the lesser of the amount charged at a rate shares approximately five
invested or the of .75 of 1%) years after purchase
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>
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.
24
<PAGE>
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 NAV, 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 "CLASS
A SHARES--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 from its own resources based on a percentage of the NAV 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 Prudential Securities or
its subsidiaries (Prudential Securities 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.
Prudential Retirement Programs. 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, for which Prudential serves as the
plan administrator or recordkeeper, provided that (i) the plan has at least $1
million in existing assets or 250 eligible employees and (ii) the Fund is an
available investment option. These plans include pension, profit-sharing,
stock-bonus or other employee benefit plans under Section 401 of the Internal
Revenue Code, deferred compensation and annuity plans under Sections 457 or
403(b)(7) of the Internal Revenue Code and plans that participate in the
Transfer Agent's PruArray and SmartPath Programs (benefit plan recordkeeping
services) (hereafter referred to as a PruArray or SmartPath Plan). All plans
of a company for which Prudential serves as plan administrator or recordkeeper
are aggregated in meeting the $1 million threshold. The term "existing assets"
as used herein includes stock issued by a plan sponsor, shares of Prudential
Mutual Funds and shares of certain unaffiliated mutual funds that participate
in the PruArray or SmartPath Program (Participating Funds). "Existing assets"
also include monies invested in The Guaranteed Interest Account (GIA), a group
annuity insurance product issued by Prudential, and units of The Stable Value
Fund (SVF), an unaffiliated bank collective fund. Class A shares
26
<PAGE>
may also 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.
PruArray Association Benefit Plans. Class A shares are also offered at NAV
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 NAV 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 NAV 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 NAV 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 of the Prudential Mutual Funds (including the Fund), (b) employees of
Prudential Securities and PIFM 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, (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, and (g) investors in Individual Retirement Accounts, provided the
purchase is made with the proceeds of a tax-free rollover of assets from a
Benefit Plan for which Prudential Investments serves as the recordkeeper or
administrator.
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, from its own
resources, sales commissions of up to 4% of the purchase price of Class B
shares to dealers, financial advisers and other persons who sell
27
<PAGE>
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 with the sale of Class C shares, the Distributor
will pay, from its own resources, 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 are currently 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 plans 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 that 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 or trust program sponsored
by Prudential Securities, The Prudential Savings Bank, F.S.B. (or any
affiliate) which includes mutual funds as investment options and for which the
Fund is an available option; (iii) certain participants in the MEDLEY Program
(group variable annuity contracts) sponsored by The Prudential Insurance
Company of America (Prudential) for whom Class Z shares of the Prudential
Mutual Funds are an available investment option; (iv) Benefit Plans for which
Prudential Retirement Services serves as record keeper and as of September 20,
1996, (a) were Class Z shareholders of the Prudential Mutual Funds, or (b)
executed a letter of intent to purchase Class Z shares of the Prudential
Mutual Funds; (v) the Prudential Securities Cash Balance Pension Plan, an
employee defined benefit plan sponsored by Prudential Securities (only
applicable to Prudential Equity Income Fund, Prudential Europe Growth Fund,
Inc. and Prudential Pacific Growth Fund, Inc.); (vi) current and former
Directors/Trustees of the Prudential Mutual Funds (including the Fund); and
(vii) employees of Prudential and/or Prudential Securities who participate in
a Prudential-sponsored employee savings plan.
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 from its own resources based on
a percentage of the NAV 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 CDSC, as described below. See "Contingent Deferred Sales Charges"
below.
IF YOU HOLD SHARES OF THE PORTFOLIO THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM YOUR SHARES THROUGH PRUDENTIAL SECURITIES. PLEASE CONTACT 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,
28
<PAGE>
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.
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 Commission, so permits; provided that
applicable rules and regulations of the Commission 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 CASHIER'S 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 Commission. 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 NAV 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 NAV 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 CDSC 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.
29
<PAGE>
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 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 NAV 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
NAV 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 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
30
<PAGE>
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 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 Prudential Securities 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 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.
The Transfer Agent will calculate the total amount available for this waiver
annually, on the anniversary date of your purchase or, for shares purchased
prior to March 1, 1997, on March 1 of the current year. The CDSC will be
waived (or reduced) on redemptions until this threshold 12% amount is reached.
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.
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 NAV 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
31
<PAGE>
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 NAVs, the number of Eligible Shares calculated as
described above will generally be either more or less than the number of
shares actually purchased approximately five years before such conversion
date. For example, if 100 shares were initially purchased at $10 per share
(for a total of $1,000) and a second purchase of 100 shares was subsequently
made at $11 per share (for a total of $1,100), 95.24 shares would convert
approximately five years from the initial purchase (i.e., $1,000 divided by
$2,100 (47.62%), multiplied by 200 shares equals 95.24 shares). The Manager
reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to
shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the NAV 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.
32
<PAGE>
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.
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 NAV 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
NAV. Similarly, participants in Prudential Securities' 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 Prudential Securities 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 Exchange Privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.
FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment
33
<PAGE>
strategies and excessive trading can have on efficient portfolio management,
each Prudential Mutual Fund and the Fund reserves the right to refuse purchase
orders and exchanges by any person, group or commonly controlled accounts, if,
in the Manager's sole judgment, such person, group or accounts were following
a market timing strategy or were otherwise engaging in excessive trading
(Market Timers).
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading.
The Fund may notify the Market Timer of rejection of an exchange or purchase
order subsequent to the day on which the order was placed.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in the Portfolio you
can take advantage of the following additional services and privileges.
. AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are
automatically reinvested in full and fractional shares of the Portfolio at NAV
without a sales charge. You may direct the Transfer Agent in writing not less
than 5 full business days prior to the record date to have subsequent
dividends and/or distributions sent in cash rather than reinvested. If you
hold shares through Prudential Securities, you should contact your financial
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, 100 Mulberry Street, Newark, New Jersey 07102-4077. 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, 100 Mulberry Street, Newark, New Jersey 07102-4077, 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 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 Diversified Bond Fund, Inc. Prudential Balanced Fund
Prudential Government Income Fund, Inc. Prudential Distressed Securities
Prudential Government Securities Trust Fund, Inc.
Short-Intermediate Term Series Prudential Emerging Growth Fund,
Prudential High Yield Fund, Inc. Inc.
Prudential Mortgage Income Fund, Inc. Prudential Equity Fund, Inc.
Prudential Structured Maturity Fund, Inc. Prudential Equity Income Fund
Income Portfolio Prudential Index Series Fund
Prudential Bond Market Index
TAX-EXEMPT BOND FUNDS Fund
Prudential Europe Index Fund
Prudential California Municipal Fund Prudential Pacific Index Fund
California Series
California Income Series Prudential Small-Cap Index Fund
Prudential Municipal Bond Fund Prudential Stock Index Fund
High Yield Series Prudential Jennison Series Fund,
Insured Series Inc.
Intermediate Series Prudential Jennison Active
Prudential Municipal Series Fund Balanced Fund
Florida Series Prudential Jennison Growth Fund
Maryland Series Prudential Jennison Growth &
Massachusetts Series Income Fund
Michigan Series Prudential Multi-Sector Fund, Inc.
New Jersey Series Prudential Small-Cap Quantum Fund,
New York Series Inc.
North Carolina Series Prudential Small Company Value
Ohio Series Fund, Inc.
Pennsylvania Series Prudential Utility Fund, Inc.
Prudential National Municipals Fund, Inc. Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity
GLOBAL FUNDS Fund
Prudential Europe Growth Fund, Inc. MONEY MARKET FUNDS
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, . Taxable Money Market Funds
Inc. Cash Accumulation Trust
Limited Maturity Portfolio Liquid Assets Fund
Prudential Intermediate Global Income National Money Market Fund
Fund, Inc. Prudential Government Securities
Prudential International Bond Fund, Inc. Trust
Prudential Natural Resources Fund, Inc. Money Market Series
Prudential Pacific Growth Fund, Inc. U.S. Treasury Money Market Series
Prudential World Fund, Inc. Prudential Special Money Market
Global Series Fund, Inc.
International Stock Series Money Market Series
The Global Total Return Fund, Inc. Prudential MoneyMart Assets, Inc.
Global Utility Fund, Inc.
. Tax-Free Money Market Funds
Prudential Tax-Free Money Fund,
Inc.
Prudential California Municipal
Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market
Series
New Jersey Money Market Series
New York Money Market Series
. Command Funds
Command Money Fund
Command Government Fund
Command Tax-Free Fund
. Institutional Money Market Funds
Prudential Institutional Liquidity
Portfolio, Inc.
Institutional Money Market
Series
B-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given
or made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS............................................................ 2
What are the Portfolio'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 Waiver................................................................ 19
Portfolio Transactions.................................................... 19
Custodian and Transfer and Dividend Disbursing Agent...................... 19
Year 2000................................................................. 19
HOW THE FUND VALUES ITS SHARES............................................. 19
HOW THE FUND CALCULATES PERFORMANCE........................................ 20
TAXES, DIVIDENDS AND DISTRIBUTIONS......................................... 20
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...................................................... 34
DESCRIPTION OF SECURITY RATINGS............................................ A-1
THE PRUDENTIAL MUTUAL FUND FAMILY.......................................... B-1
</TABLE>
- --------------------------------------------------------------------------------
MF140A
Class A: 743924-10-2
CUSIP Nos.: Class B: 743924-20-1
Class C: 743924-30-0
Class Z: 743924-70-6
Prudential
Structured
Maturity
Fund, Inc.
- --------------
Income
Portfolio
PROSPECTUS
March 2, 1998
www.prudential.com
[LOGO] PRUDENTIAL
INVESTMENTS
<PAGE>
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
Statement of Additional Information
dated March 4, 1998
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, 100 Mulberry Street, Newark, New
Jersey 07102-4077, 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
4, 1998, 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-10 16
Directors and Officers................................... B-11 17
Manager.................................................. B-14 17
Distributor.............................................. B-16 17
Portfolio Transactions................................... B-18 19
Purchase and Redemption of Fund Shares................... B-18 23
Shareholder Investment Account........................... B-21 23
Net Asset Value.......................................... B-24 19
Taxes, Dividends and Distributions....................... B-25 20
Performance Information.................................. B-27 20
Custodian, Transfer and Dividend Disbursing Agent and In-
dependent Accountants................................... B-29 19
Financial Statements..................................... B-30 --
Independent Auditors' Report............................. B-40 --
Appendix I--General Investment Information............... I-1 --
Appendix II--Historical Performance Data................. II-1 --
Appendix III--Information Relating to Prudential......... III-1 --
</TABLE>
- -------------------------------------------------------------------------------
MF140B
<PAGE>
GENERAL INFORMATION
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. 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.
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 paid back monthly by the borrower over the
term of the loan rather than returned in a lump sum at maturity. GNMA
Certificates that
B-2
<PAGE>
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 (Commission), and the Portfolio may invest in the securities of
such issuers without the limitations imposed by the Investment Company Act of
1940, as amended (the Investment Company Act) on investments by the Portfolio
in other investment companies. In addition, in reliance on an earlier
Commission 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 Commission'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 Investments Fund Management LLC (PIFM)
pursuant to an order of the Commission. 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 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.
B-5
<PAGE>
Under adverse economic conditions, there is a risk that highly leveraged
issuers may be unable to service their debt obligations or to repay their
obligations upon maturity. During an economic downturn or recession,
securities of highly leveraged issuers are more likely to default than
securities of higher rated issuers. In addition, the secondary market for high
yield securities, which is concentrated in relatively few market makers, may
not be as liquid as the secondary market for more highly rated securities.
Under adverse market or economic conditions, the secondary market for high
yield securities could contract further, independent of any specific adverse
changes in the condition of a particular issuer. As a result, the investment
adviser could find it more difficult to sell these securities or may be able
to sell the securities only at prices lower than if such securities were
widely traded. Prices realized upon the sale of such lower rated or unrated
securities, under these circumstances, may be less than the prices used in
calculating the Portfolio's value (NAV). The responsibility of the Fund's
Board of Directors to value the securities becomes more difficult and judgment
plays a greater role in valuation because there is less reliable, objective
data available. Moreover, under the circumstances where the Portfolio owns the
majority of an issue, market and credit risks may be greater.
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 rated securities, resulting
in a decline in the overall credit quality of the Portfolio's portfolio and
increasing the exposure of the Portfolio to the risks of high yield
securities.
Ratings of fixed income securities represent the rating agencies' opinions
regarding their credit quality and are not a guarantee of quality. Rating
agencies attempt to evaluate the safety of principal and interest payments and
do not evaluate the risks of fluctuations in market value. Also, rating
agencies may fail to make timely changes in credit ratings in response to
subsequent events, so that an issuer's current financial condition may be
better or worse than a rating indicates.
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 NAV 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 Commission 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.
B-6
<PAGE>
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 NAV at least equal to the accrued excess will be maintained in a
segregated account. 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 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 in a segregated account performing the transaction, an initial
margin of cash or liquid assets 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 for that purpose, or cash or liquid
assets, 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.
B-7
<PAGE>
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 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, cash or other liquid
assets 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 or other liquid assets equal to the purchase price of the
contract (less the amount of initial or variation margin on deposit) in a
segregated account. 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
B-8
<PAGE>
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 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 Commission 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 1997 and 1996
were 180% and 170%, 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.
SEGREGATED ACCOUNTS. When the Portfolio is required to segregate assets in
connection with certain hedging transactions, it will maintain cash or liquid
assets in a segregated account. "Liquid assets" means cash, U.S. Government
securities, equity securities (including foreign securities), debt obligations
or other liquid, unencumbered assets, marked-to-market daily.
B-9
<PAGE>
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.
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>
NAME, ADDRESS** AND POSITION WITH PRINCIPAL OCCUPATIONS
AGE THE FUND DURING PAST 5 YEARS
- ------------------- ------------- ---------------------
<S> <C> <C>
Edward D. Beach (73) Director President and Director of BMC Fund, Inc., a
closed-end investment company; formerly Vice
Chairman of Broyhill Furniture Industries,
Inc.; Certified Public Accountant; Secretary
and Treasurer of Broyhill Family Foundation,
Inc.; Member of the Board of Trustees of Mars
Hill College; Director of The High Yield Income
Fund, Inc.
Eugene C. Dorsey (71) Director Retired President, Chief Executive Officer and
Trustee of the Gannett Foundation (now Freedom
Forum); former Publisher of four Gannett
newspapers and Vice President of Gannett
Company; past 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, The High Yield Income Fund, Inc.;
President and Director of First Financial Fund,
Inc.
Delayne Dedrick Director Marketing and Management Consultant; Director of
Gold (59) The High Yield Income Fund, Inc.
*Robert F. Gunia (51) Vice President Vice President, Prudential Investments (since
and Director September 1997); Executive Vice President and
Treasurer (since December 1996), Prudential
Investments Fund Management LLC (PIFM); Senior
Vice President (since March 1987) of Prudential
Securities Incorporated (Prudential
Securities); formerly Chief Administrative
Officer (July 1990-September 1996), Director
(January 1989-September 1996) and Executive
Vice President, Treasurer and Chief Financial
Officer (June 1987-September 1996) of
Prudential Mutual Fund Management, Inc.; Vice
President and Director of The Asia Pacific
Fund, Inc. (since May 1989); Director of The
High Yield Income Fund, Inc.
*Harry A. Jacobs, Director Senior Director (since January 1986) of
Jr. (76) 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); formerly 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.
*Mendel A. Melzer, Director Chief Investment Officer (since October 1996) of
CFA (37) Prudential Mutual Funds; formerly Chief
751 Broad Street Financial Officer (November 1995-September
Newark, NJ 07102-4077 1996) of Prudential Investments; Senior Vice
President and Chief Financial Officer (April
1993-November 1995) of Prudential Preferred
Financial Services, Managing Director (April
1991-April 1993) of Prudential Investment
Advisors, and Senior Vice President (July 1989-
April 1991) of Prudential Capital Corporation;
Chairman and Director of Prudential Series
Fund, Inc.; Director of 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>
Thomas T. Mooney (56) Director President of Greater Rochester Metro Chamber of
Commerce; former Rochester City Manager;
Trustee of Center for Governmental Research,
Inc.; Director of Blue Cross of Rochester, The
Business Council of New York State, Monroe
County Water Authority, Rochester Jobs, Inc.,
Executive Service Corps of Rochester, Monroe
County Industrial Development Corporation,
Northeast Midwest Institute and The High Yield
Income Fund, Inc.; President, Director and
Treasurer of First Financial Fund, Inc. and The
High Yield Plus Fund, Inc.
Thomas H. O'Brien (73) Director President of O'Brien Associates Financial and
Management Consultants (since April 1984);
formerly President of Jamaica Water Securities
Corp. (February 1989-August 1990), Chairman of
the Board and Chief Executive Officer
(September 1987-February 1989) of Jamaica Water
Supply Company and Director (September 1987-
April 1991); Director and President of Winthrop
Regional Health Systems, Inc. and United
Presbyterian Homes; Director of Ridgewood
Savings Bank and The High Yield Income Fund,
Inc.; Trustee of Hofstra University.
*Richard A. Redeker (54) President and Employee of Prudential Investments; formerly
751 Broad Street Director President, Chief Executive Officer and Director
Newark, NJ 07102-4077 (October 1993-September 1996), Prudential
Mutual Fund Management, Inc., Executive Vice
President, formerly Director and Member of
Operating Committee (October 1993-September
1996) of Prudential Securities, Director
(October 1993-September 1996) of Prudential
Securities Group, Inc., Executive Vice
President, The Prudential Investment
Corporation; Executive Vice President, The
Prudential Investment Corporation (January
1994-September 1996), Director (January 1994-
September 1996) of Prudential Mutual Fund
Distributors, Inc. and Prudential Mutual Fund
Services, Inc. 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 (67) Director Economist; formerly Vice President and Chief
Economist of International Business Machines
Corporation (March 1986-June 1990); Member of
the Board of Governors of the Horace Rockham
School of Graduate Studies of the University of
Michigan; Director of Inland Steel Industries
(since July 1991) and The High Yield Income
Fund, Inc.
Louis A. Weil, III (56) Director Publisher and Chief Executive Officer (since
January 1996) and Director (since September
1991) of Central Newspapers, Inc.; Chairman of
the Board (since January 1996), Publisher and
Chief Executive Officer (August 1991-December
1995) of Phoenix Newspapers, Inc.; formerly
Publisher of Time Magazine (May 1989-March
1991), President, Publisher and Chief Executive
Officer of The Detroit News (February 1986-
August 1989), and member of the Advisory Board,
Chase Manhattan Bank-Westchester; Director of
The 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>
S. Jane Rose (52) Secretary Senior Vice President (since December 1996),
PIFM; Senior Vice President and Senior Counsel
(since July 1992) of Prudential Securities;
formerly Senior Vice President (January 1991-
September 1996) and Senior Counsel (June 1987-
September 1996) of Prudential Mutual Fund
Management, Inc.
Grace C. Torres (38) Treasurer and First Vice President (since December 1996) of
Principal Financial PIFM; First Vice President (since March 1994)
and Accounting of Prudential Securities; formerly First Vice
Officer President (March 1994-September 1996) of
Prudential Mutual Fund Management, Inc. and
Vice President (July 1989-March 1994) of
Bankers Trust Corporation.
Stephen M. Ungerman (45) Assistant Treasurer Tax Director (since March 1996) of Prudential
Investments and the Private Asset Group of the
Prudential Insurance Company of America
(Prudential); formerly First Vice President of
Prudential Mutual Fund Management, Inc.
(February 1993-September 1996); and Senior Tax
Manager (1981-January 1993) of Price Waterhouse
LLP.
Deborah A. Docs (40) Assistant Secretary Vice President (since December 1996) of PIFM;
Vice President and Associate General Counsel
(June 1991-September 1996) of PIFM; 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 PIFM.
** Unless otherwise indicated, the address of the Directors and Officers is
c/o Prudential Investments Fund Management LLC, Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102-4077.
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, and O'Brien are scheduled to retire on December 31, 1999, 1998
and 1999, respectively.
The Fund pays each of its Directors who is not an affiliated person of PIFM
annual compensation of $4,500, 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 a Commission 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.
B-13
<PAGE>
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, 1997 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 PIFM (Fund Complex) for the calendar year ended December
31, 1997. 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
COMPENSATION AS PART OF FUND BENEFITS UPON COMPLEX PAID
NAME AND POSITION FROM FUND EXPENSES RETIREMENT TO DIRECTORS
- ----------------- ------------ ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Edward D. Beach--
Director............... $4,500 None N/A $135,000(38/63)*
Eugene C. Dorsey--
Director**............. $4,500 None N/A $ 70,000(16/43)*
Delayne Dedrick Gold--
Director............... $4,500 None N/A $135,000(38/63)*
Robert F. Gunia--
Director and Vice
President(/1/)......... -- -- -- --
Harry A. Jacobs, Jr.--
Director(/1/).......... -- -- -- --
Donald D. Lennox--
Retired Director....... $4,500 None N/A $ 90,000(26/50)*
Mendel A. Melzer, CFA--
Director(/1/).......... -- -- -- --
Thomas T. Mooney--
Director**............. $4,500 None N/A $115,000(31/64)*
Thomas H. O'Brien--
Director............... $4,500 None N/A $ 45,000(11/29)*
Richard A. Redeker--
Director and
President(/1/)......... -- None N/A --
Nancy H. Teeters--
Director............... $4,500 None N/A $ 90,000(23/42)*
Louis A. Weil, III--
Director............... $4,500 -- -- $ 90,000(26/50)*
</TABLE>
- -------
(/1/) Directors who are "interested" do not receive compensation from the Fund
complex (including the Fund).
* 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, 1997, includes amounts deferred at the
election of Directors under the funds' deferred compensation plans.
Including accrued interest, total compensation amounted to $87,401, and
$143,909 for Dorsey and Mooney, respectively.
As of February 6, 1998, 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 6, 1998, Prudential Securities was record holder for other
beneficial owners of 3,740,642 Class A shares (64% of the outstanding Class A
shares), 3,767,085 Class B shares (61% of the outstanding Class B shares),
53,670 Class C shares (or 44% of the outstanding Class C shares) and 74,035
Class Z (99% of the outstanding Class Z shares) 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.
As of February 6, 1998, the beneficial owners, directly or indirectly, of
more than 5% of the outstanding Shares were: Thomas E. Fath and Dorothy A.
Fath, JT TEN 8613 Old National Pike, Boonsboro, MD 21713, who held 6,265 Class
C shares of the Fund (5.2%); Sallie M. Reeves TTEE, of the Evelyn M. Anderson
Trust, UA DTD 01/23/95, 8 Thyme Pl., Rancho Pallos Verdes, CA 90275, who held
7,194 Class C shares of the Fund (5.9%); Suzzane T. Shephard TTEE, 1815
Sheffield Dr., Kalamazoo, MI 49008, who held 14,569 Class C shares of the Fund
(12.0%); Chester G. Baumgardner III and Joanne M. Baumgartner JT TEN, 14901
Feather Cove Rd., Clearwater, FL 33762, who held 4,837 Class Z shares of the
Fund (6.5%); BSU Foundation TTEE, the Hamer D. Shafer Charitable Remainder TR
UA DTD 12/21/1992, PO Box 672, Muncie, IN 47308, who held 4,044 Class Z shares
of the Fund (5.5%); Mrs. Rita C. Smith TTEE, Rita C. Smith Survivors Trust,
2222 Francisco Dr. #510-180, El Dorado Hills, CA 95762-3762, who held 5,495
Class Z shares of the Fund (7.4%); and Janice May Ex, EST Ruby D. Peterson,
419 Allen Drive, Justin, TX 76247 who held 5,993 Class Z shares of the Fund
(8.1%).
MANAGER
The manager of the Fund is Prudential Investments Fund Management LLC (PIFM
or the Manager), Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077. PIFM 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 December 31, 1997, PIFM
managed and/or administered open-end and closed-end management investment
companies with assets of approximately $62 billion. According to the
Investment Company Institute, as of October 31, 1997, the Prudential Mutual
Funds were the 17th largest family of mutual funds in the United States.
B-14
<PAGE>
PIFM is a subsidiary of Prudential Securities and The Prudential Insurance
Company of America (Prudential). Prudential Mutual Fund Services LLC (PMFS or
the Transfer Agent), a wholly-owned subsidiary of PIFM, 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), PIFM, 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, PIFM
is obligated to keep certain books and records of the Fund. PIFM 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 PIFM for
the Fund are not exclusive under the terms of the Management Agreement and
PIFM is free to, and does, render management services to others.
For its services, PIFM 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 PIFM, 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 PIFM will be reduced by the amount of such
excess. Currently, the Fund believes that there are no such expense
limitations.
In connection with its management of the corporate affairs of the Fund, PIFM
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 PIFM or
the Fund's investment adviser;
(b) all expenses incurred by PIFM 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, the Subadviser or the investment
adviser), pursuant to the subadvisory agreement between PIFM and PI (the
Subadvisory Agreement).
Under the terms of the Management Agreement, the Portfolio is responsible
for the payment of the following expenses: (a) the fees payable to the
Manager, (b) the fees and expenses of Directors who are not affiliated persons
of the Manager or of the Fund's investment adviser, (c) the fees and certain
expenses of the Custodian and Transfer and Dividend Disbursing Agent,
including the cost of providing records to the Manager in connection with its
obligation of maintaining required records of the Portfolio and of pricing the
Portfolio's shares, (d) the charges and expenses of legal counsel and
independent accountants for the Fund, (e) brokerage commissions and any issue
or transfer taxes chargeable to the Portfolio in connection with its
securities transactions, (f) all taxes and corporate fees payable by the
Portfolio to governmental agencies, (g) the fees of any trade associations of
which the Fund may be a member, (h) the cost of stock certificates
representing shares of the Portfolio, (i) the cost of fidelity and liability
insurance, (j) the fees and expenses involved in registering and maintaining
registration of the Portfolio and of its shares with the Commission, including
the preparation and printing of the Fund's registration statements and
prospectuses for such purposes, and paying the fees and expenses of notice
filings made in accordance with state securities laws (k) allocable
communications expenses with respect to investor services and all expenses of
shareholders' and Directors' meetings and of preparing, printing and mailing
reports, proxy statements and prospectuses to shareholders in the amount
necessary for distribution to the shareholders, (l) litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Fund's business and (m) distribution fees.
The Management Agreement provides that PIFM 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 May 22, 1997 and by shareholders of the
Portfolio on April 25, 1990.
For the fiscal years ended December 31, 1997, 1996 and 1995, PIFM received
management fees of $616,855, $756,955, and $861,589, respectively, from the
Portfolio.
PIFM has entered into the Subadvisory Agreement with PI (the Subadviser), a
wholly-owned subsidiary of Prudential. The Subadvisory Agreement provides that
the Subadviser will furnish investment advisory services in connection with
the management of
B-15
<PAGE>
the Fund. In connection therewith, the Subadviser is obligated to keep certain
books and records of the Portfolio. PIFM continues to have responsibility for
all investment advisory services pursuant to the Management Agreement and
supervises PI's performance of such services. The Subadviser is reimbursed by
PIFM for the reasonable costs and expenses incurred by the Subadviser 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 May 22, 1997 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, PIFM or the Subadviser 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 the
Distributor), One Seaport Plaza, New York, New York 10292, acts as the
distributor of the 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 August 1, 1994, 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 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, 1998. The Class C
Plan provides that (i) up to .25 of 1% of the average daily net assets of the
Class C shares may be paid for providing service and/or maintaining
shareholder accounts, and (ii) up to .75 of 1% of the average daily net assets
of the Class C shares may be paid for distribution-related expenses with
respect to the Class C shares. The Plans were last approved by the Directors,
including a majority of the Rule 12b-1 Directors, on May 22, 1997. 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, 1997, PSI received
payments of $33,000 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 $65,000 in initial sales charges.
B-16
<PAGE>
CLASS B PLAN. For the fiscal year ended December 31, 1997, the Distributor
received $612,500 from the Portfolio under the Class B Plan and spent
approximately $183,200 in distributing the Class B shares of the Portfolio. It
is estimated that of the latter amount approximately 20.6% ($37,800) 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 4.3% ($7,800) on prospectus and other
printing costs; and 75.2% ($137,600) on the aggregate of (i) payments of
commissions and account servicing fees to financial advisers (52.9% or
$97,000) and (ii) an allocation on account of overhead and other branch office
distribution-related expenses (22.2% or $40,600). The term "overhead and other
branch office distribution-related expenses" represents (a) the expenses of
operating the Distributor's 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.
The Distributor 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, 1997,
Prudential Securities received approximately $141,000 in contingent deferred
sales charges attributable to Class B shares.
CLASS C PLAN. For the fiscal year ended December 31, 1997, the Distributor
received $9,967 under the Class C Plan and spent approximately $5,700 in
distributing Class C shares. It is estimated that of the latter amount,
approximately 11.5% ($700) was spent on printing and mailing of prospectuses
to other than current shareholders; 22.2% ($1,300) 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 66.3% ($3,700) was spent
on the aggregate of (i) payments of commissions and account servicing fees to
financial advisers (61.2% or $3,400) and (ii) an allocation of overhead and
other branch office distribution-related expenses for payments of related
expenses (5.1% or $300). For the fiscal year ended December 31, 1997, the
Distributor also received approximately $1,000 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 the
Distributor to the extent permitted by applicable law against certain
liabilities under federal securities laws. The restated Distribution Agreement
was last approved by the Board of Directors, including a majority of the Rule
12b-1 Directors, on May 22, 1997.
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.
B-17
<PAGE>
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 Commission. 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, 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, 1997, 1996, and 1995, 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
NAV 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."
B-18
<PAGE>
ISSUANCE OF FUND SHARES FOR SECURITIES
Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to (i) reorganizations, (ii) statutory mergers, or
(iii) other acquisitions of portfolio securities that: (a) meet the investment
objective and policies of the Fund, (b) are liquid and not subject to
restrictions on resale, (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange
or market, and (d) are approved by the Fund's investment adviser.
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 NAV.
Using the Portfolio's NAV at December 31, 1997, 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......... $11.35
Maximum sales charge (3.25% of offering price)................. .38
------
Maximum offering price to public............................... $11.73
======
CLASS B
Net asset value, offering price and redemption price per Class
B share*...................................................... $11.35
======
CLASS C
Net asset value, offering price and redemption price per Class
C share*...................................................... $11.35
======
CLASS Z
Net asset value, offering price and redemption price per Class
Z share....................................................... $11.35
======
</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.
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
B-19
<PAGE>
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 (NAV 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 NAV 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
enrollment 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.
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.
B-20
<PAGE>
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
The contingent deferred sales charge (CDSC) 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.
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 NAV 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 NAV per share next
determined after receipt of the check or proceeds by the Transfer Agent. Such
shareholder will receive credit for any CDSC 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
B-21
<PAGE>
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 the relative NAV 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) (Class A Shares)
(U.S. Treasury Money Market Series) (Class A Shares)
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. (Class A Shares)
Prudential Tax-Free Money Fund, Inc.
CLASS B AND CLASS C. Shareholders of the Portfolio may exchange their Class
B and Class C shares for Class B and Class C shares, respectively, of certain
other Prudential Mutual Funds and shares of Prudential Special Money Market
Fund, Inc. No contingent deferred sales charge will be payable upon such
exchange, but a CDSC may be payable upon the redemption of Class B and Class C
shares acquired as a result of the exchange. The applicable sales charge will
be that imposed by the fund in which shares were initially purchased and the
purchase date will be deemed to be the first day of the month after the
initial purchase, rather than the date of the exchange.
Class B and Class C shares of the Portfolio may also be exchanged for shares
of Prudential Special Money Market Fund, Inc. without imposition of any CDSC
at the time of exchange. Upon subsequent redemption from such money market
fund or after re-exchange into the Fund, such shares will be subject to the
CDSC calculated by excluding the time such shares were held in the money
market fund. In order to minimize the period of time in which shares are
subject to a CDSC, shares exchanged out of the money market fund will be
exchanged on the basis of their remaining holding periods, with the longest
remaining holding periods being transferred first. In measuring the time
period shares are held in a money market fund and "tolled" for purposes of
calculating the CDSC holding period, exchanges are deemed to have been made on
the last day of the month. Thus, if shares are exchanged into the Portfolio
from a money market fund during the month (and are held in the Portfolio at
the end of the month), the entire month will be included in the CDSC holding
period. Conversely, if shares are exchanged into a money market fund prior to
the last day of the month (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 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.
B-22
<PAGE>
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 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.
B-23
<PAGE>
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 (or in the case of a Roth IRA, the total
avoidance of federal income tax on such income).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 Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings
in a traditional IRA account will be subject to tax when withdrawn from the
account. Distributions from a Roth IRA which meet the conditions required
under the Internal Revenue Code will not be subject to tax upon withdrawal
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.
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
Under the Investment Company Act, the Board of Directors are 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
investments listed on a securities exchange and NASDAQ National Market System
securities (other than options on stock and stock indices) are valued at the
last sale price on the day of valuation or, if there was no sale on such day,
the mean between the last bid and asked prices on such day, as provided by a
B-24
<PAGE>
pricing service or principal market marker. Corporate bonds (other than
convertible debt securities) and U.S. Government securities that are actively
traded in the over-the-counter market, including listed securities for which
the primary market is believed to be over-the-counter, are valued on the basis
of valuations provided by a pricing service which uses information with
respect to transactions in bonds, quotations from bond dealers, agency
ratings, market transactions in comparable securities and various
relationships between securities in determining value. Convertible debt
securities that are actively traded in the over-the-counter market, including
listed securities for which the primary market is believed to be over-the-
counter, are valued at the mean between the last reported bid and asked prices
provided by principal market makers. Options on stock and stock indices traded
on an exchange are valued at the mean between the most recently quoted bid and
asked prices on the respective exchange and futures contracts and options
thereon are valued at their last sale prices as of the close of trading on the
applicable commodities exchange. Quotations of foreign securities in a foreign
currency are converted to U.S. dollar equivalents at the current rate obtained
from a recognized bank or dealer, and forward currency exchange contracts are
valued at the current cost of covering or offsetting such contacts. Should an
extraordinary event, which is likely to affect the value of the security,
occur after the close of an exchange on which a portfolio security is traded,
such security will be valued at fair value considering factors determined in
good faith by the investment adviser under procedures established by and under
the general supervision of the Fund's Board of Directors.
Securities or other assets for which reliable market quotations are not
available or for which the pricing agent or principal market maker does not
provide a valuation or methodology or provides a valuation or methodology
that, in the judgment of the Manager or Subadvisor (or Valuation Committee or
Board of Directors) does not represent fair value, are valued by the Valuation
Committee or Board of Directors in consultation with the Manager or
Subadviser. Short-term debt securities are valued at cost, with interest
accrued or discount amortized to the date of maturity, if their original
maturity was 60 days or less, unless this is determined by the Directors not
to represent fair value. Short-term securities with remaining maturities of
more than 60 days, for which market quotations are readily available, are
valued at their current market quotations as supplied by an independent
pricing agent or principal market maker. The Fund will compute its NAV 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 NAV. In the event the New York Stock
Exchange closes early on any business day, the NAV 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, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
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.
TAXES, 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."
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 capital gains from the
sale of assets held for more than 12 months over net short-term capital
losses) to be treated as 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 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.
B-25
<PAGE>
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 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 (c)
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.
The Portfolio may purchase debt securities that contain original issue
discount. Original issue discount that accrues in a taxable year is treated as
income earned by the Portfolio and therefore is subject to the distribution
requirements of the Internal Revenue Code. Because the original issue discount
income earned by the Portfolio in a taxable year may not be represented by
cash income, the Portfolio may have to dispose of other securities and use the
proceeds to make distributions to satisfy the Internal Revenue Code's
distribution requirements. Debt securities acquired by the Portfolio also may
be subject to the market discount rules.
Distributions of net investment income and realized net short-term capital
gains of the Portfolio are taxable to shareholders of the Portfolio as
ordinary income, whether such distributions are taken in cash or reinvested in
additional shares. Distributions of net capital gains (i.e., the excess of
capital gains from the sale of assets held for more than 12 months over net
short-term capital losses), if any, are taxable as capital gains regardless of
whether the shareholder received such distribution in additional shares or in
cash or of how long shares of the Portfolio have been held. The maximum
capital gains rate for individuals is 28% with respect to assets held by the
Portfolio for more than 12 months, but not more than 18 months, and 20% with
respect to assets held by the Portfolio for more than 18 months. The maximum
capital gains rate for corporate shareholders currently is the same as the
maximum tax rate for ordinary income. Distributions and dividends paid by the
Portfolio generally will not be eligible for the dividends-received deduction
for corporate shareholders. Tax-exempt shareholders will not be required to
pay taxes on amounts distributed to them.
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 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 gain or loss realized upon a sale or redemption of shares of the
Portfolio by a shareholder who is not a dealer in securities will be treated
as capital gain or loss. In the case of an individual, any such capital gain
will be treated as short-term capital loss if the shares were held for not
more than 12 months, gain taxable at the maximum rate of 28%, if such shares
were held for more than 12, but not more than 18 months, and gain taxable at
the maximum rate of 20%, if such shares were held for more than 18 months. In
the case of a corporation, any such capital gain will be treated as long-term
capital gain, taxable at the same rates as ordinary income, if such shares
were held for more than 12 months. Any such capital loss will be treated as
long-term capital loss if the shares have been held for more than one year and
otherwise as short-term capital loss. However, any loss realized by a
shareholder upon the sale of shares of the Portfolio held by the shareholder
for six months or less will be treated as long-term capital loss to the extent
of any capital gains distributions received by the shareholder.
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.
Income received by the Portfolio from sources within foreign countries may
be subject to withholding and other taxes imposed by such countries. Income
tax treaties between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine in advance the effective
rate of foreign tax to which the Portfolio will be subject, since the amount
of the Portfolio's assets to be invested in various countries will vary.
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.
B-26
<PAGE>
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 and sales of Portfolio shares also 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 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.
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)to the nth power = 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, 1997 were 3.34%, 5.26% and 7.06%, respectively. Without expense
subsidies and the management fee waiver, the average annual total returns for
these periods would have been 3.34%, 5.26% and 6.66%, 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, 1997 were 3.13% and 5.25%, respectively. The average annual
total returns for Class C shares of the Portfolio for the one year and since
inception (August 1, 1994) periods ended December 31, 1997 were 5.13% and
6.19%, respectively. The average annual total returns for Class Z shares of
the Portfolio for the one year and since inception (December 16, 1996) periods
ended December 31, 1997 were 7.01% and 7.33%, 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.
B-27
<PAGE>
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.
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 (September 1, 1989) periods ended December
31, 1997 were 6.81%, 33.54% and 82.47%, respectively. The aggregate total
returns for Class B shares of the Portfolio for the one year and since
inception (December 9, 1992) periods ended December 31, 1997 were 6.13% and
29.57%, respectively. The aggregate total returns for Class C shares of the
Portfolio for the one year and since inception (August 1, 1994) periods ended
December 31, 1997 were 6.13% and 22.79%, respectively. The aggregate total
returns for Class Z shares of the Portfolio for the one year and since
inception (December 16, 1996) periods ended December 31, 1997 were 7.01% and
7.64%, respectively.
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) /to the power of 6/ -1 ]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
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, 1997 for the Portfolio's
Class A, Class B, Class C and Class Z shares were 6.12%, 5.66%, 5.66% and
6.42%, 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/
A LOOK AT PERFORMANCE OVER THE LONG-TERM
AVERAGE ANNUAL RETURNS
1/1/26 - 12/31/97
[GRAPH APPEARS HERE]
Common Stocks 11.0%
Long-Term Gov't Bonds 5.2%
Inflation 3.1%
/1/Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation--1997
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 PIFM. 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 of $12.00
per shareholder account, a new account set up fee of $2.00 for each manually
established account and a monthly inactive zero balance account fee of $.20
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, 1997, the Portfolio incurred fees of approximately $207,000 for the
services of PMFS.
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, has audited the Fund's annual financial statements for the fiscal
year ending December 31, 1997.
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. (See + below.)
- --------------------------------------------------------------------------------
Portfolio of Investments as of December 31, 1997
- ----------------------------------------------------------------------
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
- ----------------------------------------------------------------------
5-6 YEARS-17.3%
Baa3 $ 7,000 RJR Nabisco, Inc.,
(Industrial Services)
7.63%, 9/15/03 $ 7,154,840
Bal 2,300 Seagull Energy Corp.,
(Utilities)
7.88%, 8/1/03 2,409,250
Bal 8,000 Tele-Communications, Inc.,
(Telecommunications)
8.25%, 1/15/03 8,543,120
Ba2 6,000 Viacom, Inc.,
(Media)
6.75%, 1/15/03 5,895,480
-----------
24,002,690
- ----------------------------------------------------------------------
4-5 YEARS-15.2%
Bal 7,500 Industrial Finance Corp.,
(Financial Services)
7.75%, 8/4/07++ 7,125,000
Baal 7,000 Lehman Brothers Holdings, Inc.,
(Investment Banking)
6.50%, 10/1/02 6,987,400
A2 6,750 Salomon Smith Barney Inc.,
(Investment Banking)
7.30%, 5/15/02 6,966,068
-----------
21,078,468
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
INCOME PORTFOLIO
- ----------------------------------------------------------------------
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
- ----------------------------------------------------------------------
3-4 YEARS-17.9%
Baa3 $ 7,000 Capital One Bank,
(Banking)
7.08%, 10/30/01 $ 7,162,540
Baa3 6,100 Continental Cablevision, Inc.,
(Telecommunications)
8.50%, 9/15/01 6,478,932
Baa2 4,000 Federated Department Stores, Inc.,
(Retail)
10.00%, 2/15/01 4,394,000
Ba2 7,000 Ministry of Finance,
(Foreign Government)
(Russia)
9.25%, 11/27/01 6,685,000
-----------
24,720,472
- ----------------------------------------------------------------------
2-3 YEARS-16.7%
BBB* 2,000 Banco de Commercio,
(Banking) (Colombia)
8.63%, 6/2/00 2,045,000
Ba2 5,000 City of Moscow,
(Foreign Government)
(Russia)
9.50%, 5/31/00 4,725,000
Baa3 8,000 News America Holdings, Inc.,
(Media)
7.50%, 3/1/00 8,179,680
Bal 8,000 Time Warner, Inc.,
(Media)
7.95%, 2/1/00 8,245,920
-----------
23,195,600
- ----------------------------------------------------------------------
See Notes to Financial Statements.
B-30
<PAGE>
Portfolio of Investments as of December 31, 1997
- ----------------------------------------------------------------------
Principal
Moody's Amount
Rating (000) Description Value (Note 1)
- ----------------------------------------------------------------------
1-2 YEARS-16.4%
Ba3 $ 7,000 Advanta Corp.,
(Consumer Finance)
7.25%, 8/16/99 $ 6,901,790
NR 3,000 Banco Ganadero S.A.,
(Banking) (Colombia)
9.75%, 8/26/99 3,082,500
Aaa 5,500 California Infrastructure &
Economic Development
Bank, (Asset-Backed)
(Average Life 1.79 years)+
6.14%, 3/25/02 5,511,000
Baa2 3,000 Crane Co.,
(Industrial Services)
7.25%, 6/15/99 3,041,850
Baa2 1,000 Federal Express COT.,
(Consumer Services)
10.05%, 6/15/99 1,055,290
Baa3 3,000 Republic of Colombia,
(Foreign Government)
8.75%, 10/6/99 3,089,460
-----------
22,681,890
- ----------------------------------------------------------------------
WITHIN 1 YEAR-15.0%
Baa2 6,500 Enterprise Rent-A, Car
Finance Co.,
(Financial Services)
7.88%, 3/15/98 6,524,180
A3 6,000 Kansallis-Osake-Pankki Bank,
(Banking) (Finland)
9.75%, 12/15/98 6,185,100
8,058 Joint Repurchase Agreement
Account, (Note 5)
6.63%, 1/2/98 8,058,000
-------------
20,767,280
- ----------------------------------------------------------------------
Total Investments-98.5%
(cost S137,234,577; Note 4) 136,446,400
Other assets in excess of
liabilities-1.5% 2,112,879
-------------
Net Assets-100% $ 138,559,279
============-
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
INCOME PORTFOLIO
- ----------------------------------------------------------------------
* Standard & Poor's Rating.
+ Average life is defined as the weighted average time to the return of a dollar
of principal and is commonly used as the measure of investment life for
pass-through securities such as asset-backed and mortgage-backed securities.
++Security is putable in August 2002.
The industry classification of portfolio holdings and other net assets shown as
a percentage of net assets as of December 31, 1997 were as follows:
Media . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.1%
Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.3
Telecommunications . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.8
Foreign Government . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.5
Investment Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.1
Financial Services . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.8
Industrial Services . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4
Repurchase Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 5.8
Consumer Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.0
Asset-Backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.0
Retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2
Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7
Consumer Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.8
Other assets in excess of liabilities . . . . . . . . . . . . . . . . . . 1.5
-----
100.0%
=====
- ----------------------------------------------------------------------
See Notes to Financial Statements.
B-31
<PAGE>
<TABLE>
<CAPTION>
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
Statement of Assets and Liabilities INCOME PORTFOLIO
- ----------------------------------------------------------------------------------------------------
<S> <C>
Assets December 31, 1997
-----------------
Investments, at value (cost $137,234,577)........................................ $136,446,400
Cash............................................................................. 43,864
Interest receivable.............................................................. 2,679,997
Receivable for Fund shares sold.................................................. 121,744
Prepaid expenses and other assets................................................ 4,069
------------
Total assets.................................................................. 139,296,074
------------
Liabilities
Payable for Fund shares reacquired............................................... 308,221
Accrued expenses................................................................. 305,362
Distribution fee payable......................................................... 52,004
Management fee payable........................................................... 47,138
Dividends payable................................................................ 24,070
------------
Total liabilities............................................................. 736,795
------------
Net Assets....................................................................... $138,559,279
============
Net assets were comprised of:
Common stock, at par.......................................................... $ 122,085
Paid-in capital in excess of par.............................................. 147,790,686
------------
147,912,771
Accumulated net realized loss on investments.................................. (8,565,315)
Net unrealized depreciation on investments.................................... (788,177)
------------
Net assets at December 31, 1997.................................................. $138,559,279
============
Class A:
Net asset value and redemption price per share
($65,430,640 / 5,763,821 shares of common stock issued and outstanding)... $11.35
Maximum sales charge (3.25% of offering price)................................ .38
------
Maximum offering price to public.............................................. $11.73
======
Class B:
Net asset value, offering price and redemption price per share
($71,030,410 / 6,259,761 shares of common stock issued and outstanding)... $11.35
======
Class C:
Net asset value, offering price and redemption price per share
($1,314,380 / 115,833 shares of common stock issued and outstanding)..... $11.35
======
Class Z:
Net asset value, offering price and redemption price per share
($783,849 / 69,064 shares of common stock issued and outstanding)......... $11.35
======
- ----------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
B-32
<PAGE>
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
INCOME PORTFOLIO
Statement of Operations
- -------------------------------------------------------------------
Year Ended
Net Investment Income December 31, 1997
-----------------
Income
Interest........................................... $11,501,621
-----------
Expenses
Distribution fee--Class A.......................... 70,899
Distribution fee--Class B.......................... 612,548
Distribution fee--Class C.......................... 9,967
Management fee.................................... 616,855
Transfer agent's fees and expenses................. 285,000
Reports to shareholders............................ 130,000
Registration fees.................................. 85,000
Custodian's fees and expenses...................... 77,000
Audit fee.......................................... 38,000
Directors' fees.................................... 30,000
Legal fees......................................... 15,000
Miscellaneous...................................... 17,007
-----------
Total expenses................................. 1,987,276
-----------
Net investment income............................... 9,514,345
-----------
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain on investment transactions....... 2,023,447
Net change in unrealized depreciation of
investments..................................... (1,892,170)
-----------
Net gain on investments............................ 131,277
-----------
Net Increase in Net Assets
Resulting from Operations.......................... 9,645,622
-----------
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
INCOME PORTFOLIO
Statement of Changes in Net Assets
- -------------------------------------------------------------------
Increase (Decrease)
in Net Assets Year Ended December 31,
------------------------------
1997 1996
------------ -----------
Operations
Net investment income............... $ 9,514,345 $ 11,370,833
Net realized gain (loss) on
investment transactions......... 2,023,447 (3,071,885)
Net change in unrealized
depreciation on
investments..................... (1,892,170) (1,511,234)
------------ ------------
Net increase in net assets
resulting from operations....... 9,645,622 6,787,714
------------ ------------
Dividends (Note 1)
Dividends from net
investment income
Class A......................... (4,623,453) (5,213,753)
Class B......................... (4,791,826) (6,084,170)
Class C......................... (78,062) (72,909)
Class Z......................... (21,004) (1)
------------ ------------
(9,514,345) (11,370,833)
------------ ------------
Dividends in excess of net
investment income
Class A......................... (114,961) (136,132)
Class B......................... (124,751) (166,601)
Class C......................... (2,340) (2,408)
Class Z......................... (1,592) (1)
------------ ------------
(243,644) (305,142)
------------ ------------
Fund share transactions
(Net of share conversions) (Note 6)
Net proceeds from shares
subscribed...................... 13,181,656 25,615,019
Net asset value of shares issued to
shareholders in reinvestment
of dividends and distributions.. 6,601,473 7,793,568
Cost of shares reacquired........... (54,029,826) (65,822,535)
------------ ------------
Net decrease in net assets from
Fund share transactions......... (34,246,697) (32,413,948)
------------ ------------
Total decrease....................... (34,359,064) (37,302,209)
Net Assets
Beginning of year.................... 172,918,343 210,220,552
------------ ------------
End of year......................... $138,559,279 $172,918,343
============ ============
- -------------------------------------------------------------------
See Notes to Financial Statements.
B-33
<PAGE>
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
Notes to Financial Statements INCOME PORTFOLIO
- --------------------------------------------------------------------------------
Prudential Structured Maturity Fund, Inc. (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.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to increase undistributed net investment income and increase
accumulated net realized loss by $243,644 due to the sale of securities
purchased with market discount. Net investment income, net realized gains and
net assets were not affected by this change.
- --------------------------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Investments Fund Management
LLC ("PIFM"). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM 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. PIFM 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.
- --------------------------------------------------------------------------------
B-34
<PAGE>
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
Notes to Financial Statements INCOME PORTFOLIO
- --------------------------------------------------------------------------------
The management fee paid PIFM 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 has 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 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, 1997 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, 1997.
PSI has advised the Portfolio that it has received approximately $33,000 in
front-end sales charges resulting from sales of Class A shares during the year
ended December 31, 1997. 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, 1997, it
received approximately $141,000 and $1,000 in contingent deferred sales
charges imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PSI, PIFM 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"), has a credit agreement (the "Agreement") with an unaffiliated
lender. The maximum commitment under the Agreement is $200,000,000. 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 did not borrow any amounts pursuant to the Agreement
during the year ended December 31, 1997. 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.
The Agreement expired on December 30, 1997 and has been extended through
December 29, 1998 under the same terms.
- --------------------------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Institutional Fund Services LLC ("PMFS"), a wholly owned subsidiary
of PIFM, serves as the Portfolio's transfer agent. During the year ended
December 31, 1997, the Portfolio incurred fees of approximately $207,000 for the
services of PMFS. As of December 31, 1997, approximately $16,500 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 nonaffiliates.
- --------------------------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities, excluding short-term investments,
for the year ended December 31, 1997 were $266,446,730 and $307,519,349,
respectively.
The federal income tax basis of the Portfolio's investments at December 31, 1997
was $137,234,577 and accordingly, net unrealized depreciation for federal income
tax purposes was $788,177 (gross unrealized appreciation--$932,679; gross
unrealized depreciation--$1,720,856).
For federal income tax purposes, the Portfolio had a capital loss carryforward
as of December 31, 1997 of approximately $8,540,000, of which $5,391,000 expires
in 2002 and $3,149,000 expires in 2004. Such carryforward is after utilization
of approximately $1,789,000 to offset the Portfolio's net taxable gains
recognized in the year ended December 31, 1997. 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, 1997, the Portfolio has a .68% undivided interest in the joint account. The
undivided interest for the Portfolio represents $8,058,000 in the principal
amount. As of such date, each repurchase agreement in the joint account and the
collateral therefor were as follows:
- --------------------------------------------------------------------------------
B-35
<PAGE>
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
Notes to Financial Statements INCOME PORTFOLIO
- --------------------------------------------------------------------------------
Credit Suisse First Boston Corp., 6.75%, in the principal amount of
$342,000,000, repurchase price $342,128,250, due 1/2/98. The value of the
collateral including accrued interest is $353,486,750.
Deutsche Morgan Grenfell, Inc., 6.80%, in the principal amount of $200,000,000,
repurchase price $200,075,555, due 1/2/98. The value of the collateral including
accrued interest is $204,000,314.
SBC Warburg Asia Ltd., 6.55%, in the principal amount of $142,000,000,
repurchase price $142,051,672, due 1/2/98. The value of the collateral including
accrued interest is $144,862,841.
Morgan Stanley, Dean Witter, Discover & Co., 5.95%, in the principal amount of
$151,553,000, repurchase price $151,603,097, due 1/2/98. The value of the
collateral including accrued interest is $154,584,932.
Salomon Smith Barney Inc, 6.75%, in the principal amount of $342,000,000,
repurchase price $342,128,250, due 1/2/98. The value of the collateral including
accrued interest is $350,295,372.
- --------------------------------------------------------------------------------
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:
Class A Shares Amount
- ------- ---------- ------------
Year ended December 31, 1997:
Shares sold....................................... 516,648 $ 5,870,704
Shares issued in reinvestment of dividends........ 285,589 3,247,978
Shares reacquired................................. (2,158,614) (24,539,475)
Net decrease in shares outstanding before
conversion........................................ (1,356,377) (15,420,793)
Shares issued upon conversion from Class B........ 340,959 3,874,591
---------- ------------
Net decrease in shares outstanding................ (1,015,418) $(11,546,202)
========== ============
Class A Shares Amount
- ------- ---------- ------------
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,S79,115)
========== ============
Class B
- -------
Year ended December 31, 1997:
Shares sold....................................... 503,206 $ 5,716,542
Shares issued in reinvestment of dividends........ 286,879 3,260,990
Shares reacquired................................. (2,508,326) (28,509,261)
---------- ------------
Net decrease in shares outstanding before
conversion....................................... (1,718,241) (19,531,729)
Shares reacquired upon conversion into
Class A........................................... (340,959) (3,874,591)
---------- ------------
Net decrease in shares outstanding................ (2,059,200) $(23,406,320)
========== ============
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)
========== ============
Class C
- -------
Year ended December 31, 1997:
Shares sold....................................... 34,321 $ 390,314
Shares issued in reinvestment of dividends........ 6,203 70,513
Shares reacquired................................. (47,631) (540,812)
---------- ------------
Net decrease in shares outstanding................ (7,107) $ (79,985)
========== ============
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
========== ============
Class Z
- -------
Year ended December 31, 1997:
Shares sold....................................... 105,897 $ 1,204,096
Shares issued in reinvestment of dividends........ 1,931 21,992
Shares reacquired................................. (38,782) (440,278)
---------- ------------
Net increase in shares outstanding................ 69,046 $ 785,810
========== ============
Year ended December 31, 1996:
Shares sold....................................... 18 $ 200
========== ============
B-36
<PAGE>
<TABLE>
<CAPTION>
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
Financial Highlights INCOME PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------
Class A
Year ended December 3 1,
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 11.36 $ 11.63 $ 10.97 $ 11.78 $ 11.79
------- ------- ------- -------- --------
Income from investment operations:
Net investment income .74 .73 .73 .65 .71
Net realized and unrealized gain (loss) on investment transactions .01 (.25) .66 (.80) .12
------- ------- ------- -------- --------
Total from investment operations .75 .48 1.39 (.15) .83
------- ------- ------- -------- --------
Less distributions:
Dividends from net investment income (.74) (.73) (.73) (.65) (.71)
Dividends in excess of net investment income (.02) (.02) -- (.01) --
Distributions from net realized gains -- -- -- -- (.13)
------- ------- ------- -------- --------
Total distributions (.76) (.75) (.73) (.66) (.84)
------- ------- ------- -------- --------
Net asset value, end of year $ 11.35 $ 11.36 $ 11.63 $ 10.97 $ 11.78
======= ======= ======= ======== ========
TOTAL RETURN(a): 6.81% 4.32 13.12% (1.16)% 7.19%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $65,431 $77,031 $88,982 $ 91,680 $119,449
Average net assets (000) $70,899 $81,745 $89,500 $ 106,737 $114,728
Ratios to average net assets:
Expenses, including distribution fees .94% .86% .82% .94% .80%
Expenses, excluding distribution fees .84% .76% .72% .84% .70%
Net investment income 6.51% 6.38% 6.57% 5.88% 5.92%
For Class A, B, C and Z shares:
Portfolio turnover 180% 170% 160% 123% 137%
</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.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-37
<PAGE>
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
Financial Highlights INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
--------------------------------------------------------
Year ended December 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................................. $ 11.36 $ 11.63 $ 10.97 $ 11.78 $ 11.79
------- -------- -------- -------- --------
Income from investment operations:
Net investment income............................................... .67 .65 .66 .58 .62
Net realized and unrealized gain (loss) on investment transactions.. .01 (.25) .66 (.80) .12
------- -------- -------- -------- --------
Total from investment operations................................. .68 .40 1.32 (.22) .74
------- -------- -------- -------- --------
Less distributions:
Dividends from net investment income................................ (.67) (.65) (.66) (.58) (.62)
Dividends in excess of net investment income........................ (.02) (.02) -- (.01) --
Distributions from net realized gains............................... -- -- -- -- (.13)
------- -------- -------- -------- --------
(.69) (.67) (.66) (.59) (.75)
Net asset value, end of year........................................ $ 11.35 $ 11.36 $ 11.63 $ 10.97 $ 11.78
======= ======== ======== ======== ========
TOTAL RETURN(a):................................................... 6.13% 3.64% 12.40% (1.83)% 6.38%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................................... $71,030 $ 94,490 $120,188 $130,258 $123,306
Average net assets (000) . . . . ................................... $81,673 $106,224 $125,230 $134,985 $ 69,314
Ratios to average net assets:
Expenses, including distribution fees............................ 1.59% 1.51% 1.47% 1.66% 1.55%
Expenses, excluding distribution fees............................ .84% .76% .72% .84% .70%
Net investment income............................................ 5.87% 5.73% 5.92% 5.17% 5.08%
</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.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-38
<PAGE>
<TABLE>
<CAPTION>
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
FINANCIAL HIGHLIGHTS INCOME PORTFOLIO
- -------------------------------------------------------------------------------
Class C
----------------------------------
August 1,
1994(d)
Through
Year ended December 31, December 31,
-----------------------
1997 1996 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......... $11.36 $11.63 $10.97 $11.30
------ ------ ------ ------
Income from investment operations:
Net investment income ....................... .67 .65 .66 .23
Net realized and unrealized gain (loss) on
investment transaction..................... .01 (.25) .66 (.32)
------ ------ ------ ------
Total from investment operations........... .68 .40 1.32 (.09)
------ ------ ------ ------
Less distributions:
Dividends from net investment income......... (.67) (.65) (.66) (.23)
Dividends in excess of net investment income (.02) (.02) - (.01)
------ ------ ------ ------
Total distributions....................... (.69) (.67) (.66) (.24)
------ ------ ------ ------
Net asset value end of period.............. $11.35 $11.36 $11.63 $10.97
====== ====== ====== ======
TOTAL RETURN(a):............................. 6.13% 3.64% 12.40% (0.68)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............. $1,314 $1,396 $1,050 $371
Average net assets (000)..................... $1,329 $1,270 $667 $192
Ratios to average net assets:
Expenses, including distribution fees...... 1.59% 1.51% 1.47% 1.90%(b)
Expenses, excluding distribution fees...... .84% .76% .72% 1.15%(b)
Net investment income...................... 5.87% 5.73% 5.92% 5.30%(b)
</TABLE>
Class Z
-------------------------------
December 16,
1996(e)
Year ended Through
December 31, December 31,
1997 1996
---- ----
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......... $11.37 $11.41
------ ------
Income from investment operations:
Net investment income ....................... .77 .09
Net realized and unrealized gain (loss) on
investment transaction..................... .02 (.02)
------ ------
Total from investment operations........... .79 .07
------ ------
Less distributions:
Dividends from net investment income......... (.77) (.09)
Dividends in excess of net investment income (.04) (.02)
------ ------
Total distributions....................... (.81) (.11)
------ ------
Net asset value end of period.............. $11.35 $11.37
====== ======
TOTAL RETURN(a):............................. 7.01% .59%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............. $784 $200(f)
Average net assets (000)..................... $313 $200(f)
Ratios to average net assets:
Expenses, including distribution fees...... .84% .76%(b)
Expenses, excluding distribution fees...... .84% .76%(b)
Net investment income...................... 6.71% 6.48%(b)
- ----------
(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.
(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-39
<PAGE>
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
Report of Independent Accountants INCOME PORTFOLIO
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of Prudential Structured Maturity
Fund, Inc., Income Portfolio:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Structured Maturity
Fund, Inc., Income Portfolio at December 31, 1997, and the results of its
operations, the changes in its net assets and the financial highlights for the
year then ended, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of securities at December
31, 1997 by correspondence with the custodian, provides a reasonable basis for
the opinion expressed above. The accompanying statement of changes in net assets
for the year ended December 31, 1996 and the financial highlights for each of
the four periods in the period ended December 31, 1996 were audited by other
independent accountants, whose opinion dated February 14, 1997 was unqualified.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
February 13, 1998
- --------------------------------------------------------------------------------
B-40
<PAGE>
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
Changes of Auditors INCOME PORTFOLIO
- --------------------------------------------------------------------------------
Effective March 1, 1997, Deloitte & Touche LLP was terminated as the Fund's
auditors. For the years ended December 31, 1989 through December 31, 1996,
Deloitte & Touche LLP expressed an unqualified opinion on the Portfolio's
financial statements. There were no disagreements between Fund management and
Deloitte & Touche LLP prior to their termination. The Board of Directors
approved the termination of Deloitte & Touche LLP and the appointment of Price
Waterhouse LLP as the Fund's independent accountants.
Federal Income Tax Information (Unaudited)
- --------------------------------------------------------------------------------
We are required by the Internal Revenue Code to advise you within 60 days of
the Portfolio's fiscal year end (December 31, 1997) as to the federal tax
status of dividends paid by the Portfolio during such fiscal year.
During 1997, dividends were paid from net investment income of $.74 per share
for Class A shares, $.67 per share for Class B and C shares and $.77 for Class
Z shares and are taxable as ordinary income. In addition, the Fund paid a
special taxable income distribution of $.02 per share for Class A, B and C
shares and $.04 per share for Class Z shares, which is taxable as such. We are
required by Massachusetts, Missouri and Oregon to inform you that dividends
which have been derived from interest on federal obligations are not taxable
to shareholders providing the Mutual Fund meets certain requirements mandated
by the respective state's taxing authorities. We are pleased to report that
6.95% of the dividends paid by Prudential Structured Maturity Fund, Inc.,
Income Portfolio qualifies for such deduction.
We wish to advise you that the corporate dividends received deduction for the
Fund is zero. Only funds that invest in U.S. equity securities are entitled to
pass-through a corporate dividends received deduction.
For the purpose of preparing your annual federal income tax return, however,
you should report the amounts as reflected on the appropriate Form 1099-DIV or
substitute Form 1099-DIV.
- --------------------------------------------------------------------------------
B-41
<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.
STANDARD DEVIATION
Standard deviation is an absolute (non-relative) measure of volatility
which, for a mutual fund, depicts how widely the returns varied over a certain
period of time. When a fund has a high standard deviation, its range of
performance has been very wide, implying greater volatility potential.
Standard deviation is only one of several measures of a fund's volatility.
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.
HISTORICAL PERFORMANCE DATA
[GRAPH APPEARS HERE]
Value of $1.00 invested on 1/1/26 through 12/31/97
Small Stocks $5,519.97
Common Stocks $1,828.33
Long-Term Bonds $ 39.07
Treasury Bills $ 14.25
Inflation $ 9.02
Source: Stocks, Bonds, Bills, and Inflation 1997 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 1997. 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>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Government
Treasury
Bonds/1/ 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% -3.4% 18.4% 2.7% 9.6%
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Government
Mortgage
Securities/2/ 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% -1.6% 16.8% 5.4% 9.5%
- -----------------------------------------------------------------------------------------------------------------------------------
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% 3.3% 10.2%
- -----------------------------------------------------------------------------------------------------------------------------------
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% 11.4% 12.8%
- -----------------------------------------------------------------------------------------------------------------------------------
World Government
Bonds/5/ 35.2% 2.3% -3.4% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3%)
- -----------------------------------------------------------------------------------------------------------------------------------
Difference between
highest and lowest 33.2% 10.2% 18.8% 24.9% 30.9% 11.0% 10.3% 9.9% 5.5% 8.7% 17.1
</TABLE>
/1/ LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over
150 public issues of the U.S. Treasury having maturities of at least one year.
/2/ LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
/3/ LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.
/4/ LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by S&P or Fitch Investors
Service). All bonds in this index have maturities of at least one year.
/5/ SALOMON BROTHERS WORLD GOVERNMENT INDEX (NON U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the U.S.,
but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
II-2
<PAGE>
This chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.
LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1997)
(GRAPH APPEARS HERE)
- -------
Source: Stocks, Bonds, Bills, and Inflation 1997 Yearbook, Ibbotson
Associates, Chicago (annually updates work by Roger G. Ibbotson and Rex A.
Sinquefeld). Used with permission. All rights reserved. The chart illustrates
the historical yield of the long-term U.S. Treasury Bond from 1926-1997.
Yields represent that of an annually renewed one-bond portfolio with a
remaining maturity of approximately 20 years. This chart is for illustrative
purposes and should not be construed to represent the yields of any Prudential
Mutual Fund.
II-3
<PAGE>
APPENDIX III--INFORMATION RELATING TO 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, 1996 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, 1996. Prudential (together with its subsidiaries) employs more than 92,000
persons worldwide, and maintains a sales force of approximately 11,500 agents
and 6,400 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 nearly 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
approximately 1.6 million cars and insures approximately 1.2 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. As of December 31, 1996, Prudential had more than $322 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. In Pensions & Investments,
MAY 12, 1996, PRUDENTIAL WAS RANKED THIRD IN TERMS OF TOTAL ASSETS UNDER
MANAGEMENT.
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 across the United States./2/
Healthcare. Over two decades ago, the Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.6
million Americans receive healthcare from a Prudential managed care
membership.
Financial Services. The Prudential Bank, a wholly-owned subsidiary of the
Prudential, has nearly $1 billion in assets and serves nearly 1.5 million
customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
As of October 31, 1997 Prudential Investments Fund Management was the 17th
largest mutual fund company 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 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 the subadviser to Nicholas-Applegate Fund, Inc., Jennison
Associates Capital Corp. as the subadviser to Prudential Jennison Series
Fund, Inc. and Mercator Asset Management LP as the Subadviser to
International Stock Series, a portfolio of Prudential World Fund, Inc. There
are multiple subadvisers for The Target Portfolio Trust.
/2/ As of December 31, 1996.
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
approximately 200 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 Prudential Securities./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
