<PAGE>
As filed with the Securities and Exchange Commission on May 1, 2000
Securities Act Registration No. 33-22363
Investment Company Act Registration No. 811-5594
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]
Pre-Effective Amendment No. [_]
[X]
Post-Effective Amendment No. 20
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [_]
[X]
Amendment No. 22
(Check appropriate box or boxes)
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PRUDENTIAL SHORT-TERM CORPORATE BOND FUND, INC.
(Exact name of registrant as specified in charter)
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (973) 367-7530
David F. Connor, Esq.
Gateway Center Three
100 Mulberry Street
Newark, New Jersey 07102-4077
(Name and Address of Agent for Service)
Approximate date of proposed public offering:
As soon as practicable after the effective
date of the Registration Statement.
It is proposed that this filing will become effective
(check appropriate box):
[X] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of rule 485.If
appropriate, check the following box:
[_] this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment
Title of Securities Being Registered ... Shares of Common Stock (Par Value $.01
per share)
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<PAGE>
PROSPECTUS MAY 1, 2000
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Prudential
Short-Term Corporate
Bond Fund, Inc.
Income Portfolio
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FUND TYPE Debt
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OBJECTIVE High current income consistent with the preservation of
principal
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[GRAPHIC]
BUILD
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ON THE ROCK
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As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the Fund's shares nor has the SEC determined that this
propectus is complete or accurate. It is a criminal offence to state otherwise.
[LOGO] PRUDENTIAL
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Table of Contents
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<TABLE>
<C> <S>
1 Risk/Return Summary
1 Investment Objective and Principal Strategies
1 Principal Risks
3 Evaluating Performance
4 Fees and Expenses
6 How the Fund Invests
6 Investment Objective and Policies
9 Other Investments and Strategies
13 Investment Risks
17 How the Fund is Managed
17 Board of Directors
17 Manager
17 Investment Adviser
19 Distributor
20 Fund Distributions and Tax Issues
20 Distributions
21 Tax Issues
22 If You Sell or Exchange Your Shares
24 How to Buy, Sell and Exchange Shares of the Fund
24 How to Buy Shares
32 How to Sell Your Shares
36 How to Exchange Your Shares
37 Telephone Redemptions or Exchanges
39 Financial Highlights
39 Class A Shares
40 Class B Shares
41 Class C Shares
42 Class Z Shares
44 The Prudential Mutual Fund Family
For More Information (Back Cover)
</TABLE>
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Prudential Short-Term Corporate Bond Fund, Inc.-- Income Portfolio
(800) 225-1852
[GRAPHIC]
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Risk/Return Summary
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This section highlights key information about the Prudential Short-Term
Corporate Bond Fund, Inc.--Income Portfolio, which we refer to as "the Fund."
Additional information follows this summary.
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is high current income consistent with the
preservation of principal. We invest primarily in investment-grade corporate
debt obligations and debt obligations issued by the U.S. Government and
government-related entities that mature in six years or less. These obligations
may include mortgage-related securities, asset-backed securities and dollar-
denominated obligations issued in the U.S. by foreign corporations and
governments (Yankee obligations). While we make every effort to achieve our
objective, we can't guarantee success.
We may invest up to 10% of the Fund's total assets in non-investment- grade
debt obligations, which are also known as high-yield or "junk" bonds. The Fund
also engages in active trading in order to take advantage of new investment
opportunities or yield differentials.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. The debt
obligations in which the Fund invests are generally subject to the risk that
the issuer may be unable to make principal and interest payments when they are
due. There is also the risk that the securities could lose value because
interest rates change or because there is a lack of confidence in the borrower.
Mortgage-related and asset-backed securities are subject to prepayment risk,
which means that if they are prepaid, the Fund may have to replace them with
lower-yielding securities. Securities in the lowest rating category for
investment grade securities have speculative characteristics, including a
higher risk of default than higher rated securities. Non-investment-grade
securities are subject to a higher risk of default and tend to be less liquid
than higher rated securities. The Fund's investments in Yankee obligations
involve additional risks. Foreign markets, especially those in developing
countries, are often more volatile than U.S. markets, and foreign issuers are
generally not subject to regulatory requirements comparable to U.S. issuers.
The Fund may actively and frequently trade its portfolio securities. High
portfolio turnover results in higher transaction costs and can affect the
Fund's performance and have adverse tax consequences.
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1
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Risk/Return Summary
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Like any mutual fund, an investment in the Fund could lose value, and you
could lose money. For more detailed information about the risks associated with
the Fund, see "How the Fund Invests--Investment Risks."
An investment in the Fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
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Prudential Short-Term Corporate Bond Fund, Inc.--(800) 225-1852
Income Portfolio
[LOGO OF PHONE]
2
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Risk/Return Summary
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EVALUATING PERFORMANCE
A number of factors--including risk--can affect how the Fund performs. The
following bar chart shows the Fund's performance for each full calendar year of
operation for the last 10 years. The bar chart and table below demonstrate the
risk of investing in the Fund by showing how returns can change from year to
year and by showing how the Fund's average annual total returns compare with
those of a broad measure of market performance and a group of similar mutual
funds. Past performance does not mean that the Fund will achieve similar
results in the future.
[GRAPH]
1990 9.40%
1991 13.31%
1992 6.67%
1993 7.18%
1994 -1.16%
1995 13.12%
1996 4.32%
1997 6.81%
1998 6.81%
1999 --
* These annual returns do not include sales charges. If the sales charges were
included, the annual returns would be lower than those shown. Without the
management fee waiver and the distribution and service (12b-1) fee waiver,
the annual returns would have been lower, too.
Average Annual Returns/1/ (as of 12-31-99)
<TABLE>
<CAPTION>
1 YR 5 YRS 10 YRS SINCE INCEPTION
<S> <C> <C> <C> <C>
Class A shares -1.58% 5.79% 6.38% 6.51% (since 9-1-89)
Class B shares -1.79% 5.82% N/A 4.78% (since 12-9-92)
Class C shares -0.80% 5.60% N/A 5.03% (since 8-1-94)
Class Z shares 2.07% N/A N/A 5.44% (since 12-16-96)
Gov't/Corporate Bond Index/2/ 0.39% 7.10% 7.26% N/A
Lipper Average/3/ 0.89% 6.23% 6.58% N/A
</TABLE>
1 The Fund's returns are after deduction of sales charges and expenses. Without
the management fee waiver and the distribution and service (12b-1) fee waiver
for Class A, Class B and Class C shares, the returns would have been lower.
2 The Lehman Brothers Intermediate Government/Corporate Bond Index (Gov't/Corp
Bond Index)--an unmanaged index of investment-grade securities issued by the
U.S. Government and its agencies and by corporations with between one and ten
years remaining to maturity--gives a broad look at how short and
intermediate-term bonds have performed. These returns do not include the
effect of any sales charges or operating expenses of a mutual fund. These
returns would be lower if they included the effect of sales charges and
operating expenses. Gov't/Corp Bond Index returns since inception of each
class are 7.41% for Class A, 6.12% for Class B, 6.39% for Class C and 5.50%
for Class Z shares. Source: Lehman Brothers.
3 The Lipper Average is based on the average return of all mutual funds in the
Lipper Short-Intermediate Investment-Grade Debt Funds category. These returns
do not include the effect of any sales charges. These returns would be lower
if they included the effect of sales charges. Lipper returns since inception
of each class are 6.67% for Class A, 5.38% for Class B, 5.65% for Class C and
4.76% for Class Z shares. Source: Lipper Inc.
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3
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Risk/Return Summary
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FEES AND EXPENSES
These tables show the sales charges, fees and expenses that you may pay if you
buy and hold shares of each class of the Fund--Class A, B, C and Z. Each share
class has different sales charges--known as loads--and expenses, but represents
an investment in the same fund. Class Z shares are available only to a limited
group of investors. For more information about which share class may be right
for you, see "How to Buy, Sell and Exchange Shares of the Fund."
Shareholder Fees/1/ (paid directly from your investment)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Maximum sales charge (load) imposed on 3.25% None 1% None
purchases (as a percentage of offering
price)
Maximum deferred sales charge (load) None 3%/2/ 1%/3/ None
(as a percentage of the lower of original
purchase price or sale proceeds)
Maximum sales charge (load) imposed on None None None None
reinvested dividends and other
distributions
Redemption fees None None None None
Exchange fee None None None None
Annual Fund Operating Expenses (deducted from Fund assets)
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Management fees .40% .40% .40% .40%
+ Distribution and service (12b-1) fees/4/ .30% 1.00% 1.00% None
+ Other expenses .37% .37% .37% .37%
= Total annual Fund operating expenses 1.07% 1.77% 1.77% .77%
- Fee waiver or expense reimbursement/4/ .05% .25% .25% None
= Net annual Fund operating expenses 1.02% 1.52% 1.52% .77%
</TABLE>
1 Your broker may charge you a separate or additional fee for purchases and
sales of shares.
2 The Contingent Deferred Sales Charge (CDSC) for Class B shares decreases by
1% annually to 1% in the third and fourth years and 0% in the fifth year.
Class B shares convert to Class A shares approximately five years after
purchase.
3 The CDSC for Class C shares is 1% for shares redeemed within 18 months of
purchase.
4 For the fiscal year ending December 31, 2000, the Distributor of the Fund has
contractually agreed to reduce its distribution and service (12b-1) fees for
Class A, Class B and Class C shares to .25 of 1%, .75 of 1% and .75 of 1% of
the average daily net assets of Class A, Class B and Class C shares,
respectively.
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Prudential Short-Term Corporate Bond Fund, Inc.--(800) 225-1852
Income Portfolio
[LOGO OF PHONE]
4
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Risk/Return Summary
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Example
This example will help you compare the fees and expenses of the Fund's
different share classes and compare the cost of investing in the Fund with the
cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that
the Fund's operating expenses remain the same, except for the Distributor's
reduction of distribution and service (12b-1) fees for Class A, Class B and
Class C shares during the first year. Although your actual costs may be higher
or lower, based on these assumptions, your costs would be:
<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
<S> <C> <C> <C> <C>
Class A shares $426 $649 $ 891 $1,584
Class B shares $455 $633 $ 936 $1,792
Class C shares $353 $628 $1,027 $2,143
Class Z shares $ 79 $246 $ 428 $ 954
</TABLE>
You would pay the following expenses on the same investment if you did not sell
your shares:
<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
<S> <C> <C> <C> <C>
Class A shares $426 $649 $ 891 $1,584
Class B shares $155 $533 $ 936 $1,792
Class C shares $253 $628 $1,027 $2,143
Class Z shares $ 79 $246 $ 428 $ 954
</TABLE>
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5
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How the Fund Invests
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INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is high current income consistent with the
preservation of principal. This means that we seek investments that will pay
the Fund interest and other income. While we make every effort to achieve our
objective, we can't guarantee success.
In pursuing our objective, under normal market circumstances, we invest at
least 65% of the Fund's total assets in debt obligations of U.S. corporations
with maturities of six years or less. The Fund's dollar-weighted average
portfolio maturity will generally be between 2 1/2 and 3 1/2 years. We will buy
and sell securities to take advantage of investment opportunities based on our
analysis of market conditions, interest rates and general economic factors.
We generally buy debt obligations of U.S. corporations that are rated at
least BBB by Standard and Poor's Ratings Group (S&P) or Baa by Moody's
Investors Service (Moody's) or the equivalent by another major rating service.
A rating is an assessment of the likelihood of timely payment of debt and can
be useful when comparing different debt obligations. These ratings are not a
guarantee of quality. The opinions of the rating agencies do not reflect market
risk and they may at times lag behind the current financial condition of a
company.
Debt obligations rated BBB by S&P and Baa by Moody's are regarded as
investment-grade, but have speculative characteristics and are riskier than
higher rated securities. Adverse economic developments are more likely to
affect the payment of interest and principal on debt obligations rated BBB/Baa
than on higher rated debt obligations. We may also invest up to 10% of the
Fund's total assets in debt obligations rated BB by S&P or Ba by Moody's or the
equivalent by another major rating service. Obligations rated BB by S&P or Ba
by Moody's are considered to be speculative with respect to their capacity to
pay interest and principal and are commonly referred to as high-yield or "junk"
bonds. These securities tend to offer higher yields, but present higher credit
risks, than higher-rated securities. We may also invest in unrated debt
obligations that we determine are of comparable quality to the rated debt
obligations that are permissible investments. If the rating of a debt
obligation is downgraded after the Fund purchases it (or if the debt obligation
is no longer rated), we will not have to sell the security, but we will take
this into consideration in deciding whether the Fund should continue to hold
the security.
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Prudential Short-Term Corporate Bond Fund, Inc.--(800) 225-1852
Income Portfolio
[LOGO OF PHONE]
6
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How the Fund Invests
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The Fund may also invest in debt obligations issued by the U.S. Treasury.
Treasury securities have varying interest rates and maturities, but they are
all backed by the full faith and credit of the U.S. Government.
The Fund may also invest in other debt obligations issued or guaranteed by
the U.S. Government and government-related entities. Some of these debt
securities are backed by the full faith and credit of the U.S. Government,
which means that payment of interest and principal is guaranteed, but yield and
market value are not. These include obligations of the Government National
Mortgage Association (GNMA or "Ginnie Mae"). Debt securities issued by other
government entities, like obligations of the Federal National Mortgage
Association (FNMA or "Fannie Mae") and the Student Loan Marketing Association
(SLMA or "Sallie Mae"), are not backed by the full faith and credit of the U.S.
Government. However, these issuers have the right to borrow from the U.S.
Treasury to meet their obligations. In contrast, the debt securities of other
issuers, like the Farm Credit System, depend entirely upon their own resources
to repay their debt obligations.
The Fund may also invest in Yankee obligations, which are dollar-denominated
debt obligations issued in the U.S. by foreign corporations and governments.
During the year ended December 31, 1999, the monthly dollar weighted average
ratings of the debt obligations held by the Fund, expressed as a percentage of
the Fund's total investments, were as follows:
<TABLE>
<CAPTION>
RATINGS PERCENTAGE OF TOTAL INVESTMENTS
<S> <C>
AAA/Aaa 21.1%
AA/Aa 3.5%
A/A 30.8%
BBB/Baa 42.0%
BB/Ba 2.3%
B/B 0%
Unrated 0.3%
</TABLE>
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7
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How the Fund Invests
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The Fund invests in mortgage-related securities issued or guaranteed by U.S.
governmental entities or private issuers. These securities are usually pass-
through instruments that pay investors a share of all interest and principal
payments from an underlying pool of fixed or adjustable rate mortgages.
Mortgage-related securities issued by the U.S. Government or its agencies
include FNMAs, GNMAs and debt securities issued by the Federal Home Loan
Mortgage Corporation (FHLMC or "Freddie Mac"). The U.S. Government or the
issuing agency directly or indirectly guarantees the payment of interest and
principal on these securities. Private mortgage-related securities that are not
guaranteed by U.S. governmental entities generally have one or more types of
credit enhancement to ensure timely receipt of payments and to protect against
default.
Mortgage pass-through securities include collateralized mortgage
obligations, multi-class pass-through securities and stripped mortgage-backed
securities. A collateralized mortgage obligation (CMO) is a security backed by
an underlying portfolio of mortgages or mortgage-backed securities that may be
issued or guaranteed by a bank or by U.S. governmental entities. We may invest
up to 30% of the Fund's net assets in CMOs. A multi-class pass-through security
is an equity interest in a trust composed of underlying mortgage assets.
Payments of principal of and interest on the mortgage assets and any
reinvestment income thereon provide funds to pay debt service on the CMO or to
make scheduled distributions on the multi-class pass-through security. A
stripped mortgage-backed security (MBS strip) may be issued by U.S.
governmental entities or by private institutions. MBS strips take the pieces of
a debt security (principal and interest) and break them apart. The resulting
securities may be sold separately and may perform differently.
The values of mortgage-related securities vary with changes in market
interest rates generally and changes in yields among various kinds of mortgage-
related securities. Such values are particularly sensitive to changes in
prepayments of the underlying mortgages. For example, during periods of falling
interest rates, prepayments tend to accelerate as homeowners and others
refinance their higher rate mortgages; these prepayments reduce the anticipated
duration of the mortgage-related securities. Conversely, during periods of
rising interest rates, prepayments can be expected to decelerate, which has the
effect of extending the anticipated duration at the same time that the value of
the securities
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Prudential Short-Term Corporate Bond Fund, Inc.--(800) 225-1852
Income Portfolio
[LOGO OF PHONE]
8
<PAGE>
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How the Fund Invests
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declines. MBS strips tend to be even more highly sensitive to changes in
prepayment and interest rates than mortgage-related securities and CMOs
generally.
The Fund may invest up to 25% of the Fund's net assets in asset-backed debt
securities. An asset-backed security is another type of pass-through instrument
that pays interest based upon the cash flow of an underlying pool of assets,
such as automobile loans and credit card receivables.
The Fund also engages in active trading--that is, frequent trading of its
securities--in order to take advantage of new investment opportunities or yield
differentials. There may be tax consequences, such as a possible increase in
short-term capital gains or losses, when the Fund sells a security without
regard to how long it has held the security. In addition, active trading may
result in greater transaction costs, which will reduce the Fund's return.
For more information, see "Investment Risks" below and the Statement of
Additional Information, "Description of the Fund, Its Investments and Risks."
The Statement of Additional Information--which we refer to as the SAI--contains
additional information about the Fund. To obtain a copy, see the back cover
page of this prospectus.
The Fund's investment objective is a fundamental policy that cannot be
changed without shareholder approval. The Board of the Fund can change
investment policies of the Fund that are not fundamental.
OTHER INVESTMENTS AND STRATEGIES
In addition to the principal strategies, we also may use the following
investment strategies to increase the Fund's returns or protect its assets if
market conditions warrant.
U.S. Treasury Strips
The U.S. Treasury sometimes "strips" Treasury debt obligations into their
component parts: the Treasury's obligation to make periodic interest payments
and its obligation to repay the amount borrowed. These stripped securities are
sold to investors separately. Stripped securities do not make periodic interest
payments. They are usually sold at a discount and then redeemed for their face
value on their maturity dates. These securities increase in value when interest
rates fall and lose value when interest rates rise. However, the value of
stripped securities generally fluctuates more in
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9
<PAGE>
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How the Fund Invests
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response to interest rate movements than the value of traditional bonds. The
Fund may try to increase returns by buying stripped securities at a discount
and either selling them after they increase in value or holding them until they
mature.
Money Market Instruments
The Fund may invest in money market instruments, including the commercial paper
of U.S. corporations, short-term obligations of U.S. banks, certificates of
deposit and short-term obligations issued or guaranteed by the U.S. Government
or its agencies. The Fund will only purchase money market instruments in one of
the two highest short-term quality ratings of a major rating service.
Temporary Defensive Investments
In response to adverse market, economic or political conditions, we may
temporarily invest up to 100% of the Fund's assets in high quality money market
instruments and repurchase agreements. Investing heavily in these securities
limits our ability to achieve high current income, but can help to preserve the
Fund's assets.
Repurchase Agreements
The Fund may use repurchase agreements, where a party agrees to sell a security
to the Fund and then repurchases it at an agreed-upon price at a stated time. A
repurchase agreement is like a loan by the Fund to the other party which
creates a fixed return for the Fund. Repurchase agreements are used for cash
management purposes.
Derivative Strategies
We may use various derivative strategies to try to improve the Fund's returns.
We may use hedging techniques to try to protect the Fund's assets. We cannot
guarantee that these strategies and techniques will work, that the instruments
necessary to implement these strategies and techniques will be available, or
that the Fund will not lose money. Derivatives--such as futures contracts,
including interest rate futures contracts, options on futures and interest rate
swaps--involve costs and can be volatile. With derivatives, the investment
adviser tries to predict if the underlying investment, whether a security,
market index, interest rate, or some other
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Prudential Short-Term Corporate Bond Fund, Inc.--(800) 225-1852
Income Portfolio
[LOGO OF PHONE]
10
<PAGE>
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How the Fund Invests
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investment, will go up or down at some future date. We may use derivatives to
try to reduce risk or to increase return consistent with the Fund's overall
investment objective. The investment adviser will consider other factors (such
as cost) in deciding whether to employ any particular strategy or use any
particular instrument. Any derivatives we may use may not match the Fund's
underlying holdings.
Futures Contracts and Related Options
The Fund may purchase and sell financial futures contracts and related options
on financial futures. A futures contract is an agreement to buy or sell a set
quantity of an underlying product at a future date, or to make or receive a
cash payment based on the value of a securities index. An option is the right
to buy or sell a security, or in the case of an option on a futures contract,
the right to buy or sell a futures contract, in exchange for a premium.
Interest Rate Swap Transactions
The Fund may enter into interest rate swap transactions. In a swap transaction
the Fund and another party "trade" income streams. The swap is done to preserve
a return or spread on a particular investment or portion of a portfolio or to
protect against any increase in the price of securities the Fund anticipates
purchasing at a later date. The risk of loss with respect to interest rate
swaps is limited to the net amount of interest payments that the Fund is
contractually obligated to make and will not exceed 5% of the Fund's net
assets.
When-Issued and Delayed-Delivery Securities
The Fund may purchase securities on a when-issued or delayed-delivery basis.
When the Fund makes this type of purchase, the price and interest rate are
fixed at the time of purchase, but delivery and payment for the obligations
take place at a later time. The Fund does not earn interest income until the
date the obligations are delivered.
For more information about these strategies, see the SAI, "Description of
the Fund, Its Investments and Risks."
Additional Strategies
The Fund also follows certain policies when it borrows money (the Fund can
borrow up to 20% of the value of its total assets); lends its securities to
others (the Fund can lend up to 30% of the value of its total assets), and
holds illiquid securities (the Fund may hold up to 15% of its net assets in
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11
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How the Fund Invests
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illiquid securities, including securities with legal or contractual
restrictions on resale, those without a readily available market and repurchase
agreements with maturities longer than seven days). The Fund is subject to
certain investment restrictions that are fundamental policies, which means they
cannot be changed without shareholder approval. For more information about
these restrictions, see the SAI.
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Prudential Short-Term Corporate Bond Fund, Inc.--(800) 225-1852
Income Portfolio
[LOGO OF PHONE]
12
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How the Fund Invests
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INVESTMENT RISKS
As noted, all investments involve risk, and investing in the Fund is no
exception. Since the Fund's holdings can vary significantly from broad market
indexes, performance of the Fund can deviate from performance of the indexes.
This chart outlines the key risks and potential rewards of the Fund's principal
investments and certain other non-principal investments the Fund may make. See,
too, "Description of the Fund, Its Investments and Risks" in the SAI.
Investment Type
% of Fund's Total Risks Potential Rewards
Assets
Debt obligations . Regular interest
. Credit risk--the income
At least 80% risk that the
borrower can't . Higher quality
pay back the debt obligations
money borrowed or are generally
make interest more secure than
payments. The lower quality
lower a bond's debt obligations
quality, the and equity
higher its poten- securities
tial volatility
(relatively low . The U.S. Govern-
for U.S. Govern- ment guarantees
ment securities) interest and
principal pay-
ments on certain
U.S. Government
. Market risk--the securities
risk that obliga-
tions will lose
value in the mar-
ket because in-
terest rates rise
or there is a
lack of confi-
dence in the bor-
rower
. Not all U.S.
Government
securities are
insured or
guaranteed by the
U.S. Government--
some are backed
by the issuing
agency
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13
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How the Fund Invests
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Investment Type
(cont'd)
% of Fund's Total Risks Potential Rewards
Assets
Mortgage-related . Regular interest
securities . Prepayment risk-- income
the risk that the . The U.S. Govern-
underlying ment guarantees
mortgages may be interest and
prepaid, principal pay-
partially or ments on certain
completely, securities
generally during
periods of
falling interest
rates, which
could adversely
affect yield to
maturity and
could require the
Fund to reinvest
in lower-yielding
securities
Percentage var-
ies; usually less
than 25% . May benefit from
security interest
in real estate
collateral
. Pass-through in-
struments provide
greater diversi-
fication than di-
rect ownership of
loans
. Credit risk--the
risk that the un-
derlying mort-
gages will not be
paid by debtors
or by credit in-
surers or guaran-
tors of such in-
struments. Some
private mortgage
securities are
unsecured or se-
cured by lower-
rated insurers or
guarantors and
thus may involve
greater risk
. See market risk
- --------------------------------------------------------------------------------
. Regular interest
Asset-backed income
securities
Up to 25% of net . The security in- . Prepayment risk
assets terest in the un- is generally
derlying collat- lower than with
eral may not be mortgage-related
as great as with securities
mortgage-related . Pass-through in-
securities struments provide
greater diversi-
fication than di-
. Credit risk--the rect ownership of
risk that the un- loans
derlying receiv-
ables will not be
paid by debtors
or by credit in-
surers or guaran-
tors of such in-
struments. Some
asset-backed se-
curities are
unsecured or se-
cured by lower-
rated insurers or
guarantors and
thus may involve
greater risk
. See market risk
and prepayment
risk
- --------------------------------------------------------------------------------
Prudential Short-Term Corporate Bond Fund, Inc.--(800) 225-1852
Income Portfolio
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14
<PAGE>
- --------------------------------------------------------------------------------
How the Fund Invests
- --------------------------------------------------------------------------------
Investment Type (cont'd)
% of Fund's Total Risks Potential Rewards
Assets
Yankee
obligations
. Opportunities for
. Foreign markets, diversification
Percentage var- economies and po-
ies; usually less litical systems . Investors can
than 25% may not be as participate in
stable as those the growth of
in the U.S., par- foreign markets
ticularly those and companies
in developing operating in
countries those markets
. May be less liq-
uid than U.S.
debt obligations
. Differences in
foreign laws, ac-
counting stan-
dards and public
information pro-
vide less reli-
able information
on foreign in-
vestments and in-
volve more risks
- --------------------------------------------------------------------------------
High-yield debt
securities (junk . Higher credit . May offer higher
bonds) risk than higher- interest income
grade debt and higher poten-
securities tial gains than
Up to 10% higher-grade debt
. Higher market securities
risk than higher-
grade debt . Most bonds rise
securities in value when in-
terest rates fall
. More volatile
than higher-
grade debt
securities
. Illiquidity
risk--the risk
that bonds may be
difficult to
value precisely
and sell at time
or price desired,
in which case
valuation would
depend more on
investment advis-
er's judgment
than is generally
the case with
higher-rated se-
curities
- --------------------------------------------------------------------------------
When-issued and . May magnify un- . May magnify
delayed-delivery derlying invest- underlying
securities ment losses investment gains
. Investment costs
may exceed poten-
tial underlying
investment gains
Percentage var-
ies; usually less
than 10%
- --------------------------------------------------------------------------------
15
<PAGE>
- --------------------------------------------------------------------------------
How the Fund Invests
- --------------------------------------------------------------------------------
Investment Type (cont'd)
% of Fund's Total Risks Potential Rewards
Assets
Derivatives
. The Fund could
. Derivatives such make money and
Percentage var- as futures, op- protect against
ies; usually less tions on futures losses if the in-
than 10% and interest rate vestment analysis
swaps that are proves correct
used for hedging
purposes may not
fully offset the . One way to manage
underlying posi- the Fund's
tions and this risk/return bal-
could result in ance is to lock
losses to the in the value of
Fund that would an investment
not have other- ahead of time
wise occurred
. Derivatives used . Derivatives used
for risk manage- for return en-
ment may not have hancement pur-
the intended ef- poses involve a
fects and may re- type of leverage
sult in losses or and could gener-
missed opportuni- ate substantial
ties gains at low cost
. The other party
to a derivatives
contract could
default
. Derivatives used
for return en-
hancement pur-
poses involve
leverage (borrow-
ing for invest-
ment) and could
magnify losses
. Certain types of
derivatives in-
volve costs to
the Fund that can
reduce returns
- --------------------------------------------------------------------------------
Illiquid
securities
. May offer a more
Up to 15% of net . See illiquidity attractive yield
assets risk or potential for
growth than more
widely traded se-
curities
- --------------------------------------------------------------------------------
Money market . Limits potential . May preserve the
instruments for capital ap- Fund's assets
preciation
Up to 100% on a
temporary basis . See credit risk
and market risk
(which are less
of a concern for
money market in-
struments)
- --------------------------------------------------------------------------------
Prudential Short-Term Corporate Bond Fund, Inc.--(800) 225-185
Income Portfolio
[LOGO OF PHONE]
16
<PAGE>
- --------------------------------------------------------------------------------
How the Fund is Managed
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
The Fund's Board of Directors oversees the actions of the Manager, investment
adviser and Distributor and decides on general policies. The Board also
oversees the Fund's officers, who conduct and supervise the daily business
operations of the Fund.
MANAGER
Prudential Investments Fund Management LLC (PIFM)
Gateway Center Three, 100 Mulberry Street
Newark, NJ 07102-4077
Under a management agreement with the Fund, PIFM manages the Fund's
investment operations and administers its business affairs. PIFM also is
responsible for supervising the Fund's investment adviser. For the fiscal year
ended December 31, 1999, the Fund paid PIFM management fees of .40% of the
Fund's average daily net assets.
PIFM and its predecessors have served as manager or administrator to
investment companies since 1987. As of January 31, 2000, PIFM served as the
manager to all 43 of the Prudential mutual funds, and as manager or
administrator to 22 closed-end investment companies, with aggregate assets of
approximately $74.9 billion.
INVESTMENT ADVISER
The Prudential Investment Corporation, called Prudential Investments, is the
Fund's investment adviser and has served as an investment adviser to investment
companies since 1984. Its address is Prudential Plaza, 751 Broad Street,
Newark, NJ 07102. PIFM has responsibility for all investment advisory services,
supervises Prudential Investments and pays Prudential Investments for its
services.
Prudential Investments' Fixed Income Group manages more than $135 billion
for Prudential's retail investors, institutional investors, and policyholders.
Senior Managing Directors James J. Sullivan and Jack W. Gaston head the Group,
which is organized into teams specializing in different market sectors. Top-
down, broad investment decisions are made by the Fixed Income Policy Committee,
whereas bottom-up security selection is made by the sector teams.
Mr. Sullivan has overall responsibility for overseeing portfolio management
and credit research. Prior to joining Prudential Investments in
- --------------------------------------------------------------------------------
17
<PAGE>
- --------------------------------------------------------------------------------
How the Fund is Managed
- --------------------------------------------------------------------------------
1998, he was a managing director in Prudential's Capital Management Group,
where he oversaw portfolio management and credit research for Prudential's
General Account and subsidiary fixed-income portfolios. He has more than 16
years of experience in risk management, arbitrage trading, and corporate bond
investing.
Mr. Gaston has overall responsibility for overseeing quantitative research
and risk management. Prior to this appointment in 1999, he was senior managing
director of the Capital Management Group where he was responsible for the
investment performance and risk management for Prudential's General Account and
subsidiary fixed-income portfolios. He has more than 20 years of experience in
investment management, including extensive experience applying quantitative
techniques to portfolio management.
The Fixed Income Investment Policy Committee is comprised of key senior
investment managers. Members include seven sector team leaders, the chief
investment strategist, and the head of risk management. The Committee uses a
top-down approach to investment strategy, asset allocation, and general risk
management, identifying sectors in which to invest.
The Corporate Team, headed by Steven Kellner, is primarily responsible for
overseeing the day-to-day management of the Fund. This Team uses a bottom-up
approach, which focuses on individual securities, while staying within the
guidelines of the Investment Policy Committee and the Fund's investment
restrictions and policies. In addition, the Credit Research team of analysts
supports the sector teams using bottom-up fundamentals, as well as economic and
industry trends. Other sector teams may contribute to securities selection when
appropriate.
Corporate
Assets Under Management: $47.3 billion (as of December 31, 1999).
Team Leader: Steven Kellner. General Investment Experience: 13 years.
Portfolio Managers: 8. Average General Investment Experience: 13 years, which
includes team members with significant mutual fund experience.
Sector: U.S. investment-grade corporate securities.
Investment Strategy: Focus is on identifying spread, credit quality and
liquidity trends to capitalize on changing opportunities in the market.
Ultimately, they seek the highest expected return with the least risk.
- --------------------------------------------------------------------------------
Prudential Short-Term Corporate Bond Fund, Inc.--(800) 225-1852
Income Portfolio
[LOGO OF PHONE]
18
<PAGE>
- --------------------------------------------------------------------------------
How the Fund is Managed
- --------------------------------------------------------------------------------
DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS) distributes the Fund's
shares under a Distribution Agreement with the Fund. The Fund has Distribution
and Service Plans under Rule 12b-1 of the Investment Company Act. Under the
Plans and the Distribution Agreement, PIMS pays the expenses of distributing
the Fund's Class A, B, C and Z shares and provides certain shareholder support
services. The Fund pays distribution and other fees to PIMS as compensation for
its services for each class of shares other than Class Z. These fees--known as
12b-1 fees--are shown in the "Fees and Expenses" table.
- --------------------------------------------------------------------------------
19
<PAGE>
- --------------------------------------------------------------------------------
Fund Distributions and Tax Issues
- --------------------------------------------------------------------------------
Investors who buy shares of the Fund should be aware of some important tax
issues. For example, the Fund distributes dividends of ordinary income and
realized net capital gains, if any, to shareholders. These distributions are
subject to federal income taxes, unless you hold your shares in a 401(k) plan,
an Individual Retirement Account (IRA) or some other qualified or tax-deferred
plan or account. Dividends and distributions from the Fund also may be subject
to state and local income tax in the state where you live.
Also, if you sell shares of the Fund for a profit, you may have to pay
capital gains taxes on the amount of your profit, again unless you hold your
shares in a qualified or tax-deferred plan or account.
The following briefly discusses some of the important tax issues you should
be aware of, but is not meant to be tax advice. For tax advice, please speak
with your tax adviser.
DISTRIBUTIONS
The Fund distributes dividends out of any net investment income, plus short-
term capital gains, to shareholders typically every month. For example, if the
Fund owns an ACME Corp. bond and the bond pays interest, the Fund will pay out
a portion of this interest as a dividend to its shareholders, assuming the
Fund's income is more than its costs and expenses. The dividends you receive
from the Fund will be taxed as ordinary income, whether or not they are
reinvested in the Fund.
The Fund also distributes long-term capital gains to shareholders--
typically once a year. Long-term capital gains are generated when the Fund
sells assets that it held for more than 12 months for a profit. For an
individual, the maximum long-term capital gains rate is 20%.
For your convenience, Fund distributions of dividends and capital gains are
automatically reinvested in the Fund without any sales charge. If you ask us to
pay the distributions in cash, we will send you a check if your account is with
the Transfer Agent. Otherwise, if your account is with a broker, you will
receive a credit to your account. Either way, the distributions may be subject
to taxes, unless your shares are held in a qualified or tax-deferred plan or
account. For more information about automatic reinvestment and other
shareholder services, see "Step 4: Additional Shareholder Services" in the next
section.
- --------------------------------------------------------------------------------
Prudential Short-Term Corporate Bond Fund, Inc.--(800) 225-1852
Income Portfolio
[LOGO OF PHONE]
20
<PAGE>
- --------------------------------------------------------------------------------
Fund Distributions and Tax Issues
- --------------------------------------------------------------------------------
TAX ISSUES
Form 1099
Every year, you will receive a Form 1099, which reports the amount of dividends
and long-term capital gains we distributed to you during the prior year. If you
own shares of the Fund as part of a qualified or tax-deferred plan or account,
your taxes are deferred, so you will not receive a Form 1099. However, you will
receive a Form 1099 when you take any distributions from your qualified or tax-
deferred plan or account.
Fund distributions are generally taxable to you in the calendar year they
are received, except when we declare certain dividends in the fourth quarter,
and actually pay them in January of the following year. In such cases, the
dividends are treated as if they were paid on December 31 of the prior year.
Withholding Taxes
If federal law requires you to provide the Fund with your taxpayer
identification number and certifications as to your tax status, and you fail to
do this, or if you are otherwise subject to backup withholding, we will
withhold and pay to the U.S. Treasury 31% of your taxable distributions and
gross sale proceeds. Dividends of net investment income and short-term capital
gains paid to a nonresident foreign shareholder generally will be subject to a
U.S. withholding tax of 30%. This rate may be lower, depending on any tax
treaty the U.S. may have with the shareholder's country.
If You Purchase Just Before Record Date
If you buy shares of the Fund just before the record date for a distribution
(the date that determines who receives the distribution), that distribution
will be paid to you. As explained above, the distribution may be subject to
income or capital gains taxes. You may think you've done well, since you bought
shares one day and soon thereafter received a distribution. That is not so
because when dividends are paid out, the value of each share of the Fund
decreases by the amount of the dividend to reflect the payout although this may
not be apparent because the value of each share of the Fund also will be
affected by market changes, if any. The distribution you receive makes up for
the decrease in share value. However, the timing of your purchase does mean
that part of your investment came back to you as taxable income.
- --------------------------------------------------------------------------------
21
<PAGE>
- --------------------------------------------------------------------------------
Fund Distributions and Tax Issues
- --------------------------------------------------------------------------------
Qualified or Tax-Deferred Retirement Plans
Retirement plans and accounts allow you to defer paying taxes on investment
income and capital gains. Contributions to these plans may also be tax
deductible, although distributions from these plans generally are taxable. In
the case of Roth IRA accounts, contributions are not tax deductible, but
distributions from the plan may be tax-free. Please contact your financial
adviser for information on a variety of Prudential mutual funds that are
suitable for retirement plans offered by Prudential.
IF YOU SELL OR EXCHANGE YOUR SHARES
If you sell any shares of the Fund for a profit, you have realized a capital
gain, which is subject to tax, unless the shares are held in a qualified or
tax-deferred plan or account. For individuals, the maximum capital gains tax
rate is 20% for shares held for more than twelve months. If you sell shares of
the Fund for a loss, you may have a capital loss, which you may use to offset
certain capital gains you have.
If you sell shares and realize a loss, you will not be permitted to use the
loss to the extent you replace the shares (including pursuant to the
reinvestment of a dividend) within a 61-day period (beginning 30 days before
the sale of the shares). Under certain circumstances, if you acquire shares of
the Fund and sell or exchange your shares within 90 days, you may not be
allowed to include certain charges incurred in acquiring the shares for
purposes of calculating gain or loss realized upon the sale of the shares.
Exchanging your shares of the Fund for the shares of another Prudential
mutual fund is considered a sale for tax purposes. In other words, it's a
"taxable event." Therefore, if the shares you exchanged have increased in value
since you purchased them, you have capital gains, which are subject to the
taxes described above.
Any gain or loss you may have from selling or exchanging Fund shares will
not be reported on Form 1099; however, proceeds from the sale or exchange will
be reported on Form 1099-B. Therefore, unless you hold your shares in a
qualified or tax-deferred plan or account, you or your
- ----------------------------------------
CAPITAL GAIN
(taxes owed)
RECEIPTS FROM SALE OR
CAPITAL LOSS
(offset against gain)
- ----------------------------------------
- --------------------------------------------------------------------------------
Prudential Short-Term Corporate Bond Fund, Inc.--(800) 225-1852
Income Portfolio
[LOGO OF PHONE]
22
<PAGE>
- --------------------------------------------------------------------------------
Fund Distributions and Tax Issues
- --------------------------------------------------------------------------------
financial adviser should keep track of the dates on which you buy and sell--or
exchange--Fund shares, as well as the amount of any gain or loss on each
transaction. For tax advice, please see your tax adviser.
Automatic Conversion of Class B Shares
We have obtained a legal opinion that the conversion of Class B shares into
Class A shares--which happens automatically approximately five years after
purchase--is not a "taxable event." This opinion, however, is not binding on
the Internal Revenue Service. For more information about the automatic
conversion of Class B shares, see "Class B Shares Convert to Class A Shares
After Approximately Five Years" in the next section.
- --------------------------------------------------------------------------------
23
<PAGE>
How to Buy, Sell and
- --------------------------------------------------------------------------------
Exchange Shares of the Fund
- --------------------------------------------------------------------------------
HOW TO BUY SHARES
Step 1: Open an Account
If you don't have an account with us or a securities firm that is permitted to
buy or sell shares of the Fund for you, call Prudential Mutual Fund Services
LLC (PMFS) at (800) 225-1852 or contact:
Prudential Mutual Fund Services LLC
Attn: Investment Services
P.O. Box 15020
New Brunswick, NJ 08906-5020
To purchase by wire, call the number above to obtain an application. After
PMFS receives your completed application, you will receive an account number.
For additional information about purchasing shares of the Fund, see the back
cover page of this prospectus. We have the right to reject any purchase order
(including an exchange into the Fund) or suspend or modify the Fund's sale of
its shares.
Step 2: Choose a Share Class
Individual investors can choose among Class A, Class B, Class C and Class Z
shares of the Fund, although Class Z shares are available only to a limited
group of investors.
Multiple share classes let you choose a cost structure that better meets
your needs. With Class A shares, you pay the sales charge at the time of
purchase, but the operating expenses each year are lower than the expenses of
Class B and Class C shares. With Class B shares, you only pay a sales charge if
you sell your shares within four years (that is why it is called a Contingent
Deferred Sales Charge, or CDSC) but the operating expenses each year are higher
than Class A share expenses. With Class C shares, you pay a 1% front-end sales
charge and a 1% CDSC if you sell within 18 months of purchase, but the
operating expenses are also higher than the expenses for Class A shares.
When choosing a share class, you should consider the following:
. The amount of your investment
. The length of time you expect to hold the shares and the impact of the
varying distribution fees
- --------------------------------------------------------------------------------
Prudential Short-Term Corporate Bond Fund, Inc.--(800) 225-1852
Income Portfolio
[LOGO OF PHONE]
24
<PAGE>
How to Buy, Sell and
- --------------------------------------------------------------------------------
Exchange Shares of the Fund
- --------------------------------------------------------------------------------
. The different sales charges that apply to each share class--Class A's
front-end sales charge vs. Class B's CDSC vs. Class C's low front-end
sales charge and low CDSC
. Whether you qualify for any reduction or waiver of sales charges
. The fact that Class B shares automatically convert to Class A shares
approximately five years after purchase
. Whether you qualify to purchase Class Z shares.
See "How to Sell Your Shares" for a description of the impact of CDSCs.
Share Class Comparison. Use this chart to help you compare the Fund's different
share classes. The discussion following this chart will tell you whether you
are entitled to a reduction or waiver of any sales charges.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Minimum purchase $1,000 $1,000 $2,500 None
amount/1/
Minimum amount for $100 $100 $100 None
subsequent purchases/1/
Maximum initial 3.25% of the public None 1% of the public None
sales charge offering price offering price
Contingent Deferred None If sold during: 1% on sales None
Sales Charge Year 1 3% made within
(CDSC)/2/ Year 2 2% 18 months of
Year 3 1% purchase/2/
Year 4 1%
Year 5 0%
Annual distribution .30 of 1% 1% 1% None
and service (12b-1) (.25 of 1% (.75 of 1% (.75 of 1%
fees (shown as a currently) currently) currently)
percentage of
average net assets)/3/
</TABLE>
1 The minimum investment requirements do not apply to certain retirement and
employee savings plans and custodial accounts for minors. The minimum initial
and subsequent investment for purchases made through the Automatic Investment
Plan is $50. For more information, see "Additional Shareholder Services-
Automatic Investment Plan."
2 For more information about the CDSC and how it is calculated, see "How to
Sell Your Shares--Contingent Deferred Sales Charge (CDSC)." Class C shares
bought before November 2, 1998 have a 1% CDSC if sold within one year.
3 These distribution and service (12b-1) fees are paid from the Fund's assets
on a continuous basis. Over time, the fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
Class A shares may pay a service fee of up to .25 of 1%. Class B and Class C
shares will pay a service fee of .25 of 1%. The distribution fee for Class A
shares is limited to .30 of 1% (including up to .25 of 1% as a service fee),
and is .75 of 1% for Class B and Class C shares. For the fiscal year ending
December 31, 2000, the Distributor of the Fund has contractually agreed to
reduce its distribution and service (12b-1) fees for Class A, Class B and
Class C shares to .25 of 1%, .75 of 1% and .75 of 1% of the average daily net
assets of Class A, Class B and Class C shares, respectively.
- --------------------------------------------------------------------------------
25
<PAGE>
How to Buy, Sell and
- --------------------------------------------------------------------------------
Exchange Shares of the Fund
- --------------------------------------------------------------------------------
Reducing or Waiving Class A's Initial Sales Charge
The following describes the different ways investors can reduce or avoid paying
Class A's initial sales charge.
Increase the Amount of Your Investment. You can reduce Class A's sales charge
by increasing the amount of your investment. This table shows how the sales
charge decreases as the amount of your investment increases.
<TABLE>
<CAPTION>
SALES CHARGE AS % SALES CHARGE AS % DEALER
AMOUNT OF PURCHASE OF OFFERING PRICE OF AMOUNT INVESTED REALLOWANCE
<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 million and above/1/ None None None
</TABLE>
/1/If you invest $1 million or more, you can buy only Class A shares, unless
you qualify to buy Class Z shares.
To satisfy the purchase amounts above, you can:
. Invest with an eligible group of related investors
. Buy Class A shares of two or more Prudential mutual funds at the same
time
. Use your Rights of Accumulation, which allow you to combine the current
value of Prudential mutual fund shares you already own with the value of
the shares you are purchasing for purposes of determining the applicable
sales charge (note: you must notify the Transfer Agent if you qualify
for Rights of Accumulation)
. Sign a Letter of Intent, stating in writing that you or an eligible
group of related investors will purchase a certain amount of shares in
the Fund and other Prudential mutual funds within 13 months.
The Distributor may reallow Class A's sales charge to dealers.
Benefit Plans. Certain group retirement and savings plans may purchase Class A
shares without the initial sales charge if they meet the required minimum for
amount of assets, average account balance or number of eligible employees. For
more information about these requirements, call Prudential at (800) 353-2847.
- --------------------------------------------------------------------------------
Prudential Short-Term Corporate Bond Fund, Inc.--(800) 225-1852
Income Portfolio
[LOGO OF PHONE]
26
<PAGE>
How to Buy, Sell and
- --------------------------------------------------------------------------------
Exchange Shares of the Fund
- --------------------------------------------------------------------------------
Mutual Fund Programs. The initial sales charge will be waived for investors in
certain programs sponsored by broker-dealers, investment advisers and financial
planners who have agreements with Prudential Investments Advisory Group
relating to:
. Mutual fund "wrap" or asset allocation programs, where the sponsor
places Fund trades and charges its clients a management, consulting or
other fee for its services
. Mutual fund "supermarket" programs, where the sponsor links its clients'
accounts to a master account in the sponsor's name and the sponsor
charges a fee for its services.
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.
Other Types of Investors. Other investors may pay no sales charges, including
certain officers, employees or agents of Prudential and its affiliates, the
Prudential mutual funds, the subadvisers of the Prudential mutual funds and
registered representatives and employees of brokers that have entered into a
selected dealer agreement with the Distributor. To qualify for a reduction or
waiver of the sales charge, you must notify the Transfer Agent or your broker
at the time of purchase. For more information about reducing or eliminating
Class A's sales charge, see the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Reduction and Waiver of Initial Sales Charge--Class A Shares."
Waiving Class C's Initial Sales Charge
Benefit Plans. Certain group retirement plans may purchase Class C shares
without the initial sales charge. For more information, call Prudential at
(800) 353-2847.
Investment of Redemption Proceeds from Other Investment Companies. The initial
sales charge will be waived for purchases of Class C shares if the purchase is
made with money from the redemption of shares of any
- --------------------------------------------------------------------------------
27
<PAGE>
How to Buy, Sell and
- --------------------------------------------------------------------------------
Exchange Shares of the Fund
- --------------------------------------------------------------------------------
unaffiliated investment company, as long as the shares were not held in an
account at Prudential Securities Incorporated (Prudential Securities) or one of
its affiliates. These purchases must be made within 60 days of the redemption.
To qualify for this waiver, you must do one of the following:
. Purchase your shares through an account at Prudential Securities
. Purchase your shares through an ADVANTAGE Account or an Investor Account
with Pruco Securities Corporation
. Purchase your shares through another broker.
This waiver is not available to investors who purchase shares directly from
the Transfer Agent. If you are entitled to the waiver, you must notify either
the Transfer Agent or your broker. The Transfer Agent may require any
supporting documents it considers to be appropriate.
Qualifying for Class Z Shares
Benefit Plans. Certain group retirement plans may purchase Class Z shares if
they meet the required minimum for amount of assets, average account balance or
number of eligible employees. For more information about these requirements,
call Prudential at (800) 353-2847.
Mutual Fund Programs. Class Z shares also can be purchased by participants in
any fee-based program or trust program sponsored by Prudential or an affiliate
that includes the Fund as an available option. Class Z shares also can be
purchased by investors in certain programs sponsored by broker-dealers,
investment advisers and financial planners who have agreements with Prudential
Investments Advisory Group relating to:
. Mutual fund "wrap" or asset allocation programs, where the sponsor
places Fund trades, links its clients' accounts to a master account in
the sponsor's name and charges its clients a management, consulting or
other fee for its services
. Mutual fund "supermarket" programs, where the sponsor links its clients'
accounts to a master account in the sponsor's name and the sponsor
charges a fee for its services.
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their
- --------------------------------------------------------------------------------
Prudential Short-Term Corporate Bond Fund, Inc.--(800) 225-1852
Income Portfolio
[LOGO OF PHONE]
28
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How to Buy, Sell and
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Exchange Shares of the Fund
- --------------------------------------------------------------------------------
programs. Investors should consider carefully any separate transaction and
other fees charged by these programs in connection with investing in each
available share class before selecting a share class.
Other Types of Investors. Class Z shares also can be purchased by any of the
following:
. Certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential mutual funds are an available option
. Current and former Directors/Trustees of the Prudential mutual funds
(including the Fund)
. Prudential, with an investment of $10 million or more.
In connection with the sale of shares, the Manager, the Distributor or one
of their affiliates may pay brokers, financial advisers and other persons a
commission of up to 4% of the purchase price for Class B shares, up to 2% of
the purchase price for Class C shares and a finder's fee for Class A or Class Z
shares from their own resources based on a percentage of the net asset value of
shares sold or otherwise.
Class B Shares Convert to Class A Shares After Approximately Five Years
If you buy Class B shares and hold them for approximately five years, we will
automatically convert them into Class A shares without charge. At that time, we
will also convert any Class B shares that you received with reinvested
dividends and other distributions. Since the 12b-1 fees for Class A shares are
lower than for Class B shares, converting to Class A shares lowers your Fund
expenses.
When we do the conversion, you will get fewer Class A shares than the number
of Class B shares converted if the price of the Class A shares is higher than
the price of Class B shares. The total dollar value will be the same, so you
will not have lost any money by getting fewer Class A shares. We do the
conversions quarterly, not on the anniversary date of your purchase. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund Shares--
Conversion Feature--Class B Shares."
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Mutual Fund Shares
The NAV of mutual fund shares changes every day because the value of a fund's
portfolio changes constantly. For example, if Fund XYZ holds ACME Corp. bonds
in its portfolio and the price of ACME bonds goes up, while the value of the
fund's other holdings remains the same and expenses don't change, the NAV of
Fund XYZ will increase.
- --------------------------------------------------------------------------------
Step 3: Understanding the Price You'll Pay
The price you pay for each share of the Fund is based on the share value. The
share value of a mutual fund--known as the net asset value or NAV--is
determined by a simple calculation--it's the total value of the Fund (assets
minus liabilities) divided by the total number of shares outstanding. For
example, if the value of the investments held by Fund XYZ (minus its expenses)
is $1,000 and there are 100 shares of Fund XYZ owned by shareholders, the price
of one share of the fund--or the NAV--is $10 ($1,000 divided by 100). Portfolio
securities are valued based upon market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Fund's Board. Most national newspapers report the NAVs of
most mutual funds, which allows investors to check the price of mutual funds
daily.
We determine the NAV of our shares once each business day at 4:15 p.m., New
York time, on days that the New York Stock Exchange (NYSE) is open for trading.
The NYSE is closed on most national holidays and Good Friday. We do not
determine the NAV on days when we have not received any orders to purchase,
sell or exchange Fund shares, or when changes in the value of the Fund's
portfolio do not materially affect the NAV.
What Price Will You Pay for Shares of the Fund?
For Class A and Class C shares, you'll pay the public offering price, which is
the NAV next determined after we receive your order to purchase, plus an
initial sales charge (unless you're entitled to a waiver). For Class B and
Class Z shares, you will pay the NAV next determined after we receive your
order to purchase (remember, there are no up-front sales charges for these
share classes). Your broker may charge you a separate or additional fee for
purchases of shares.
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Prudential Short-Term Corporate Bond Fund, Inc.--(800) 225-1852
[LOGO OF PHONE]
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Exchange Shares of the Fund
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Step 4: Additional Shareholder Services
As a Fund shareholder, you can take advantage of the following services and
privileges:
Automatic Reinvestment. As we explained in the "Fund Distributions and Tax
Issues" section, the Fund pays out--or distributes--its net investment income
and capital gains to all shareholders. For your convenience, we will
automatically reinvest your distributions in the Fund at NAV, without any sales
charge. If you want your distributions paid in cash, you can indicate this
preference on your application, notify your broker or notify the Transfer Agent
in writing (at the address below) at least five business days before the date
we determine who receives dividends.
Prudential Mutual Fund Services LLC
Attn: Account Maintenance
P.O. Box 15015
New Brunswick, NJ 08906-5015
Automatic Investment Plan. You can make regular purchases of the Fund for as
little as $50 by having the funds automatically withdrawn from your bank or
brokerage account at specified intervals.
Retirement Plan Services. Prudential offers a wide variety of retirement plans
for individuals and institutions, including large and small businesses. For
information on IRAs, including Roth IRAs or SEP-IRAs for a one-person business,
please contact your financial adviser. If you are interested in opening a
401(k) or other company-sponsored retirement plan (SIMPLEs, SEP plans, Keoghs,
403(b) plans, pension and profit-sharing plans), your financial adviser will
help you determine which retirement plan best meets your needs. Complete
instructions about how to establish and maintain your plan and how to open
accounts for you and your employees will be included in the retirement plan kit
you receive in the mail.
The PruTector Program. Optional group term life insurance--which protects the
value of your Prudential mutual fund investment for your beneficiaries against
market declines--is available to investors who purchase their shares through
Prudential. Eligible investors who apply for
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PruTector coverage after the initial 6-month enrollment period will need to
provide satisfactory evidence of insurability. This insurance is subject to
other restrictions and is not available in all states.
Systematic Withdrawal Plan. A systematic withdrawal plan is available that will
provide you with monthly, quarterly, semi-annual or annual redemption checks.
Remember, the sale of Class B and Class C shares may be subject to a CDSC.
Reports to Shareholders. Every year we will send you an annual report (along
with an updated prospectus) and a semi-annual report, which contain important
financial information about the Fund. To reduce Fund expenses, we will send one
annual shareholder report, one semi-annual shareholder report and one annual
prospectus per household, unless you instruct us or your broker otherwise.
HOW TO SELL YOUR SHARES
You can sell your shares of the Fund for cash (in the form of a check) at any
time, subject to certain restrictions.
When you sell shares of the Fund--also known as redeeming your shares--the
price you will receive will be the NAV next determined after the Transfer
Agent, the Distributor or your broker receives your order to sell (less any
applicable CDSC). If your broker holds your shares, your broker must receive
your order to sell by 4:15 p.m., New York time, to process the sale on that
day. Otherwise, contact:
Prudential Mutual Fund Services LLC
Attn: Redemption Services
P.O. Box 15010
New Brunswick, NJ 08906-5010
Generally, we will pay you for the shares that you sell within seven days
after the Transfer Agent, the Distributor or your broker receives your sell
order. If you hold shares through a broker, payment will be credited to your
account. If you are selling shares you recently purchased with a check, we may
delay sending you the proceeds until your check clears, which can take up to 10
days from the purchase date. You can avoid delay if you
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Prudential Short-Term Corporate Bond Fund, Inc.--(800) 225-1852
Income Portfolio
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purchase shares by wire, certified check or cashier's check. Your broker may
charge you a separate or additional fee for sales of shares.
Restrictions on Sales
There are certain times when you may not be able to sell shares of the Fund, or
when we may delay paying you the proceeds from a sale. As permitted by the
Securities and Exchange Commission, this may happen only during unusual market
conditions or emergencies when the Fund can't determine the value of its assets
or sell its holdings. For more information, see the SAI, "Purchase, Redemption
and Pricing of Fund Shares--Sale of Shares."
If you are selling more than $100,000 of shares, if you want the check
payable or sent to someone or some place that is not in our records, or you are
a business or a trust and if you hold your shares directly with the Transfer
Agent, you will need to have the signature on your sell order signature
guaranteed by an "eligible guarantor institution." An "eligible guarantor
institution" includes any bank, broker-dealer or credit union. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund Shares--
Sale of Shares--Signature Guarantee."
Contingent Deferred Sales Charge (CDSC)
If you sell Class B shares within four years of purchase or Class C shares
within 18 months of purchase (one year for Class C shares purchased before
November 2, 1998), you will have to pay a CDSC. To keep the CDSC as low as
possible, we will sell amounts representing shares in the following order:
. Amounts representing shares you purchased with reinvested dividends and
distributions
. Amounts representing the increase in NAV above the total amount of
payments for shares made during the past four years for Class B shares
and 18 months for Class C shares (one year for Class C shares purchased
before November 2, 1998)
. Amounts representing the cost of shares held beyond the CDSC period (four
years for Class B shares and 18 months for Class C shares).
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Since shares that fall into any of the categories listed above are not
subject to the CDSC, selling them first helps you to avoid--or at least
minimize--the CDSC.
Having sold the exempt shares first, if there are any remaining shares that
are subject to the CDSC, we will apply the CDSC to amounts representing the
cost of shares held for the longest period of time within the applicable CDSC
period.
As we noted before in the "Share Class Comparison" chart, the CDSC for Class
B shares is 3% in the first year, 2% in the second and 1% in the third and
fourth years. The rate decreases on the first day of the month following the
anniversary date of your purchase, not on the anniversary date itself. The CDSC
is 1% for Class C shares--which is applied to shares sold within 18 months of
purchase (one year for Class C shares purchased before November 2, 1998). For
both Class B and Class C shares, the CDSC is calculated based on the lesser of
the original purchase price or the redemption proceeds. For purposes of
determining how long you've held your shares, all purchases during the month
are grouped together and considered to have been made on the last day of the
month.
The holding period for purposes of determining the applicable CDSC will be
calculated from the first day of the month after purchase, excluding any time
shares were held in a money market fund.
Waiver of the CDSC--Class B Shares
The CDSC will be waived if the Class B shares are sold:
. After a shareholder is deceased or disabled (or, in the case of a trust
account, the death or disability of the grantor). This waiver applies to
individual shareholders, as well as shares owned in joint tenancy,
provided the shares were purchased before the death or disability
. To provide for certain distributions--made without IRS penalty--from a
qualified or tax-deferred retirement plan, IRA or Section 403(b)
custodial account
. On certain sales from a Systematic Withdrawal Plan.
For more information on the above and other waivers, see the SAI, "Purchase,
Redemption and Pricing of Fund Shares--Contingent Deferred Sales Charge--Waiver
of Contingent Deferred Sales Charge--Class B Shares."
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Prudential Short-Term Corporate Bond Fund, Inc.--(800) 225-1852
Income Portfolio
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Waiver of the CDSC--Class C Shares
Benefit Plans. The CDSC will be waived for redemptions by certain group
retirement plans for which Prudential or brokers not affiliated with Prudential
provide administrative or recordkeeping services. The CDSC also will be waived
for certain redemptions by benefit plans sponsored by Prudential and its
affiliates. For more information, call Prudential at (800) 353-2847.
Redemption in Kind
If the sales of Fund shares you make during any 90-day period reach the lesser
of $250,000 or 1% of the value of the Fund's net assets, we can then give you
securities from the Fund's portfolio instead of cash. If you want to sell the
securities for cash, you would have to pay the costs charged by a broker.
Small Accounts
If you make a sale that reduces your account value to less than $500, we may
sell the rest of your shares (without charging any CDSC) and close your
account. We would do this to minimize the Fund's expenses paid by other
shareholders. We will give you 60 days' notice, during which time you can
purchase additional shares to avoid this action. This involuntary sale does not
apply to shareholders who own their shares as part of a 401(k) plan, an IRA or
some other qualified or tax-deferred plan or account.
90-Day Repurchase Privilege
After you redeem your shares, you have a 90-day period during which you may
reinvest back into your account any of the redemption proceeds in shares of the
same Fund without paying an initial sales charge. Also, if you paid a CDSC when
you redeemed your shares, we will credit your account with the appropriate
number of shares to reflect the amount of the CDSC you paid on that reinvested
portion of your redemption proceeds. In order to take advantage of this one-
time privilege, you must notify the Transfer Agent or your broker at the time
of the repurchase. See the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Sale of Shares."
Retirement Plans
To sell shares and receive a distribution from a retirement account, call your
broker or the Transfer Agent for a distribution request form. There are
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special distribution and income tax withholding requirements for distributions
from retirement plans and you must submit a withholding form with your request
to avoid delay. If your retirement plan account is held for you by your
employer or plan trustee, you must arrange for the distribution request to be
signed and sent by the plan administrator or trustee. For additional
information, see the SAI.
HOW TO EXCHANGE YOUR SHARES
You can exchange your shares of the Fund for shares of the same class in
certain other Prudential mutual funds--including certain money market funds--if
you satisfy the minimum investment requirements. For example, you can exchange
Class A shares of the Fund for Class A shares of another Prudential mutual
fund, but you can't exchange Class A shares for Class B, Class C or Class Z
shares. Class B and Class C shares may not be exchanged into money market funds
other than Prudential Special Money Market Fund, Inc. After an exchange, at
redemption, the CDSC will be calculated from the first day of the month after
initial purchase, excluding any time shares were held in a money market fund.
We may change the terms of the exchange privilege after giving you 60 days'
notice.
If you hold shares through a broker, you must exchange shares through your
broker. Otherwise contact:
Prudential Mutual Fund Services LLC
Attn: Exchange Processing
P.O. Box 15010
New Brunswick, NJ 08906-5010
There is no sales charge for exchanges. If, however, you exchange--and then
sell--Class B shares within approximately four years of your original purchase
or Class C shares within 18 months of your original purchase, you must still
pay the applicable CDSC. If you have exchanged Class B or Class C shares into a
money market fund, the time you hold the shares in the money market account
will not be counted in calculating the required holding period for CDSC
liability.
Remember, as we explained in the section entitled "Fund Distributions and
Tax Issues--If You Sell or Exchange Your Shares," exchanging shares is
considered a sale for tax purposes. Therefore, if the shares you exchange
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Prudential Short-Term Corporate Bond Fund, Inc.--(800) 225-1852
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are worth more than you paid for them, you may have to pay capital gains tax.
For additional information about exchanging shares, see the SAI, "Shareholder
Investment Account--Exchange Privilege."
If you own Class B or Class C shares and qualify to purchase Class A shares
without paying an initial sales charge, we will automatically exchange your
Class B or Class C shares which are not subject to a CDSC for Class A shares.
We make such exchanges on a quarterly basis if you qualify for this exchange
privilege. We have obtained a legal opinion that this exchange is not a
"taxable event" for federal income tax purposes. This opinion is not binding on
the IRS.
Frequent Trading
Frequent trading of Fund shares in response to short-term fluctuations in the
market--also known as "market timing"--may make it very difficult to manage the
Fund's investments. When market timing occurs, the Fund may have to sell
portfolio securities to have the cash necessary to redeem the market timer's
shares. This can happen at a time when it is not advantageous to sell any
securities, so the Fund's performance may be hurt. When large dollar amounts
are involved, market timing can also make it difficult to use long-term
investment strategies because we cannot predict how much cash the Fund will
have to invest. When, in our opinion, such activity would have a disruptive
effect on portfolio management, the Fund reserves the right to refuse purchase
orders and exchanges into the Fund by any person, group or commonly controlled
account. The decision may be based upon dollar amount, volume and frequency of
trading. The Fund may notify a market timer of rejection of an exchange or
purchase order after the day the order is placed. If the Fund allows a market
timer to trade Fund shares, it may require the market timer to enter into a
written agreement to follow certain procedures and limitations.
TELEPHONE REDEMPTIONS OR EXCHANGES
You may redeem or exchange your shares in any amount by calling the Fund at
(800) 225-1852 before 4:15 p.m., New York time. You will receive a redemption
amount based on that day's NAV.
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The Fund's Transfer Agent will record your telephone instructions and
request specific account information before redeeming or exchanging shares. The
Fund will not be liable if it follows instructions that it reasonably believes
are made by the shareholder. If the Fund does not follow reasonable procedures,
it may be liable for losses due to unauthorized or fraudulent telephone
instructions.
In the event of drastic economic or market changes, you may have difficulty
in redeeming or exchanging your shares by telephone. If this occurs, you should
consider redeeming or exchanging your shares by mail.
The telephone redemption and exchange privileges may be modified or
terminated at any time. If this occurs, you will receive a written notice from
the Fund.
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Prudential Short-Term Corporate Bond Fund, Inc.--
(800) 225-1852
Income Portfolio
[LOGO OF PHONE]
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Financial Highlights
- --------------------------------------------------------------------------------
The financial highlights will help you evaluate the Fund's financial
performance. The total return in each chart represents the rate that a
shareholder earned on an investment in that share class of the Fund, assuming
reinvestment of all dividends and other distributions. The information is for
each share class for the periods indicated.
Review each chart with the financial statements and report of independent
accountants, which appear in the annual report and the SAI and are available
upon request. Additional performance information for each share class is
contained in the annual report, which you can receive at no charge.
CLASS A SHARES
The financial highlights for the three years ended December 31, 1999, were
audited by PricewaterhouseCoopers LLP, independent accountants, and the
financial highlights for the two years ended December 31, 1996, were audited by
other independent auditors, whose reports were unqualified.
<TABLE>
<CAPTION>
Class A Shares (fiscal years ended 12-31)
- -------------------------------------------------------------------------------
Per Share Operating Performance 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year: $11.42 $11.35 $11.36 $11.63 $10.97
Income from investment operations:
Net investment income/2/ .62 .68 .74 .73 .73
Net realized and unrealized gain
(loss) on investment transactions (.43) .07 .01 (.25) .66
Total from investment operations .19 .75 .75 .48 1.39
- -------------------------------------------------------------------------------
Less distributions:
Dividends from net investment
income (.62) (.68) (.74) (.73) (.73)
Distributions in excess of net
investment income -- -- (.02) (.02) --
Total distributions (.62) (.68) (.76) (.75) (.73)
Net asset value, end of year $10.99 $11.42 $11.35 $11.36 $11.63
Total return/1/ 1.72% 6.81% 6.81% 4.32% 13.12%
- -------------------------------------------------------------------------------
<CAPTION>
Ratios/Supplemental Data 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net assets, end of year (000) $85,360 $85,213 $65,431 $77,031 $88,982
Average net assets (000) $86,025 $73,382 $70,899 $81,745 $89,500
Ratios to average net assets:/2/
Expenses, including distribution
and service (12b-1) fees 1.02% .81% .94% .86% .82%
Expenses, excluding distribution
and service (12b-1) fees .77% .71% .84% .76% .72%
Net investment income 5.56% 5.98% 6.51% 6.38% 6.57%
Portfolio turnover 168% 301% 180% 170% 160%
</TABLE>
1 Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each year
reported.
2 Net of expense subsidy and/or fee waiver.
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39
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Financial Highlights
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CLASS B SHARES
The financial highlights for the three years ended December 31, 1999, were
audited by PricewaterhouseCoopers LLP, independent accountants, and the
financial highlights for the two years ended December 31, 1996, were audited by
other independent auditors, whose reports were unqualified.
<TABLE>
<CAPTION>
Class B Shares (fiscal years ended 12-31)
- -------------------------------------------------------------------------------
Per Share Operating Performance 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $11.41 $11.35 $11.36 $11.63 $10.97
Income from investment operations
Net investment income/2/ .56 .61 .67 .65 .66
Net realized and unrealized gain
(loss) on investment transactions (.43) .06 .01 (.25) .66
Total from investment operations .13 .67 .68 .40 1.32
- -------------------------------------------------------------------------------
Less distributions:
Dividends from net investment
income (.56) (.61) (.67) (.65) (.66)
Distributions in excess of net
investment income -- -- (.02) (.02) --
Total distributions (.56) (.61) (.69) (.67) (.66)
Net asset value, end of year $10.98 $11.41 $11.35 $11.36 $11.63
Total return/1/ 1.21% 6.03% 6.13% 3.64% 12.40%
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<CAPTION>
Ratios/Supplemental Data 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net assets, end of year (000) $22,281 $39,694 $71,030 $ 94,490 $120,188
Average net assets (000) $29,870 $56,913 $81,673 $106,224 $125,230
Ratios to average net assets:/2/
Expenses, including distribution
and service (12b-1) fees 1.52% 1.46% 1.59% 1.51% 1.47%
Expenses, excluding distribution
and service (12b-1) fees .77% .71% .84% .76% .72%
Net investment income 5.03% 5.36% 5.87% 5.73% 5.92%
Portfolio turnover 168% 301% 180% 170% 160%
</TABLE>
1 Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each year
reported.
2 Net of expense subsidy and/or fee waiver.
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Prudential Short-Term Corporate Bond Fund, Inc.--(800) 225-1852
Income Portfolio
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Financial Highlights
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CLASS C SHARES
The financial highlights for the three years ended December 31, 1999, were
audited by PricewaterhouseCoopers LLP, independent accountants, and the
financial highlights for the two years ended December 31, 1996, were audited by
other independent auditors, whose reports were unqualified.
<TABLE>
<CAPTION>
Class C Shares (fiscal years ended 12-31)
- --------------------------------------------------------------------------
Per Share Operating Performance 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $11.41 $11.35 $11.36 $11.63 $10.97
Income from investment operations
Net investment income/2/ .57 .61 .67 .65 .66
Net realized and unrealized gain
(loss) on investment transactions (.43) .06 .01 (.25) .66
Total from investment operations .14 .67 .68 .40 1.32
- --------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (.57) (.61) (.67) (.65) (.66)
Distributions in excess of net
investment income -- -- (.02) (.02) --
Total distributions (.57) (.61) (.69) (.67) (.66)
Net asset value, end of year $10.98 $11.41 $11.35 $11.36 $11.63
Total return/1/ 1.21% 6.03% 6.13% 3.64% 12.40%
- --------------------------------------------------------------------------
<CAPTION>
Ratios/Supplemental Data 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net assets, end of year (000) $2,185 $1,507 $1,314 $1,396 $1,050
Average net assets (000) $1,767 $1,351 $1,329 $1,270 $667
Ratios to average net assets:/2/
Expenses, including distribution and
service (12b-1) fees 1.52% 1.46% 1.59% 1.51% 1.47%
Expenses, excluding distribution and
service (12b-1) fees .77% .71% .84% .76% .72%
Net investment income 5.10% 5.36% 5.87% 5.73% 5.92%
Portfolio turnover 168% 301% 180% 170% 160%
</TABLE>
1 Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each year
reported.
2 Net of expense subsidy and/or fee waiver.
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41
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Financial Highlights
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CLASS Z SHARES
The financial highlights for the three years ended December 31, 1999, were
audited by PricewaterhouseCoopers LLP, independent accountants, and the
financial highlights for the period from December 16, 1996, through December
31, 1996, were audited by other independent auditors, whose reports were
unqualified.
<TABLE>
<CAPTION>
Class Z Shares (fiscal years ended 12-31)
- --------------------------------------------------------------------------
Per Share Operating Performance 1999 1998 1997 1996/1/
<S> <C> <C> <C> <C>
Net asset value, beginning of year $11.42 $11.35 $11.37 $11.41
Income from investment operations:
Net investment income .65 .69 .77 .09
Net realized and unrealized gain (loss)
on investment transactions (.42) .07 .02 (.02)
Total from investment operations .23 (.76) .79 .07
- --------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (.65) (.69) (.77) (.09)
Distributions in excess of net investment
income -- -- (.04) (.02)
Total distributions (.65) (.69) (.81) (.11)
Net asset value, end of year $11.00 $11.42 $11.35 $11.37
Total return/2/ 2.07% 6.92% 7.01% .59%
- --------------------------------------------------------------------------
<CAPTION>
Ratios/Supplemental Data 1999 1998 1997 1996
<S> <C> <C> <C> <C>
Net assets, end of year (000) $4,029 $4,614 $784 $200/4/
Average net assets (000) $2,833 $1,748 $313 $200/4/
Ratios to average net assets:
Expenses, including distribution and
service (12b-1) fees .77% .71% .84% .76%/3/
Expenses, excluding distribution and
service (12b-1) fees .77% .71% .84% .76%/3/
Net investment income 5.84% 6.03% 6.71% 6.48%/3/
Portfolio turnover 168% 301% 180% 170%
</TABLE>
1 Information shown is for the period 12-16-96 (when Class Z shares were first
offered) through 12-31-96.
2 Total return assumes reinvestment of dividends and any other distributions.
It is calculated assuming shares are purchased on the first day and sold on
the last day of each year reported. Total returns for periods of less than a
full year are not annualized.
3 Annualized.
4 Figures are actual and not rounded to the nearest thousand.
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Prudential Short-Term Corporate Bond Fund, Inc.--
(800) 225-1852
Income Portfolio
[LOGO OF PHONE]
42
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Notes
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43
<PAGE>
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The Prudential Mutual Fund Family
- --------------------------------------------------------------------------------
Prudential offers a broad range of mutual funds designed to meet your
individual needs. For information about these funds, contact your financial
adviser or call us at (800) 225-1852. Please read the prospectus carefully
before you invest or send money.
STOCK FUNDS
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Index Series Fund
Prudential Small-Cap Index Fund
Prudential Stock Index Fund
The Prudential Investment Portfolios, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Mid-Cap Value Fund
Prudential Real Estate Securities Fund
Prudential Sector Funds, Inc.
Prudential Financial Services Fund
Prudential Health Sciences Fund
Prudential Technology Fund
Prudential Utility Fund
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Tax-Managed Funds
Prudential Tax-Managed Equity Fund
Prudential 20/20 Focus Fund
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
Target Funds
Large Capitalization Growth Fund
Large Capitalization Value Fund
Small Capitalization Growth Fund
Small Capitalization Value Fund
Asset Allocation/Balanced Funds
Prudential Balanced Fund
Prudential Diversified Funds
Conservative Growth Fund
Moderate Growth Fund
High Growth Fund
The Prudential Investment Portfolios, Inc.
Prudential Active Balanced Fund
GLOBAL FUNDS
Global Stock Funds
Prudential Developing Markets Fund
Prudential Developing Markets Equity Fund
Prudential Latin America Equity Fund
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Index Series Fund
Prudential Europe Index Fund
Prudential Pacific Index Fund
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Prudential Global Growth Fund
Prudential International Value Fund
Prudential Jennison International Growth Fund
Global Utility Fund, Inc.
Target Funds
International Equity Fund
Global Bond Funds
Prudential Global Total Return Fund, Inc.
Prudential International Bond Fund, Inc.
- --------------------------------------------------------------------------------
Prudential Short-Term Corporate Bond Fund, Inc.--
(800) 225-1852
Income Portfolio
[LOGO OF PHONE]
44
<PAGE>
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BOND FUNDS
Taxable Bond Funds
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential High Yield Total Return Fund, Inc.
Prudential Index Series Fund
Prudential Bond Market Index Fund
Prudential Short-Term Corporate Bond Fund, Inc.
Income Portfolio
Target Funds
Total Return Bond Fund
Tax-Exempt Bond Funds
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Income Series
Insured Series
Prudential Municipal Series Fund
Florida Series
Massachusetts Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
MONEY MARKET FUNDS
Taxable Money Market Funds
Cash Accumulation Trust
Liquid Assets Fund
National Money Market Fund
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, 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
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45
<PAGE>
FOR MORE INFORMATION
________________________________________________________________
Please read this prospectus before you invest in the Fund and keep it for
future reference. For information or shareholder questions contact
Prudential Mutual Fund Services LLC
P.O. Box 15005
New Brunswick, NJ 08906-5005
(800) 225-1852
(732) 482-7555
(Calling from outside the U.S.)
- --------------------------------------------------------------------------------
Outside Brokers should contact
Prudential Investment Management Services LLC
P.O. Box 15035
New Brunswick, NJ 08906-5035
(800) 778-8769
- --------------------------------------------------------------------------------
Visit Prudential's website at
http://www.prudential.com
- --------------------------------------------------------------------------------
Additional information about the Fund can be obtained without charge and can be
found in the following documents
Statement of Additional Information (SAI)
(incorporated by reference into this prospectus)
Annual Report
(contains a discussion of the market conditions and investment strategies
that significantly affected the Fund's performance)
Semi-Annual Report
You can also obtain copies of Fund documents from the Securities and Exchange
Commission as follows
BY MAIL
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-0102
BY ELECTRONIC REQUEST
[email protected]
(The SEC charges a fee to copy documents.)
IN PERSON
Public Reference Room in Washington, DC
(For hours of operation, call
1-202-942-8090)
VIA THE INTERNET
on the EDGAR Database at
http://www.sec.gov
- --------------------------------------------------------------------------------
CUSIP Numbers: NASDAQ Symbols
Class A Shares 74437L-10-1 PBSMX
Class B Shares 74437L-20-0 PSMBX
Class C Shares 74437L-30-9 --
Class Z Shares 74437L-40-8 --
Investment Company Act File No. 811-5594
Printed on Recycled Paper
[RECYCLE LOGO]
MF140A
<PAGE>
PRUDENTIAL SHORT-TERM CORPORATE BOND FUND, INC.
Statement of Additional Information
dated May 1, 2000
Prudential Short-Term Corporate Bond Fund, Inc. (the Company), is an open-
end, management investment company comprised of two Portfolios--the Income
Portfolio and the Municipal Income Portfolio. Only the Income Portfolio (the
Fund) is offered at this time. The investment objective of the Fund is high
current income consistent with the preservation of principal. The Fund 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 Fund 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. There can be no assurance that the Fund's
investment objective will be achieved. See "Description of the Fund, Its
Investments and Risks."
The Company'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 Fund, dated May 1, 2000, a copy
of which may be obtained from the Company upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Fund History.............................................................. B-2
Description of the Fund, Its Investments and Risks........................ B-2
Investment Restrictions................................................... B-18
Management of the Company................................................. B-20
Control Persons and Principal Holders of Securities....................... B-24
Investment Advisory and Other Services.................................... B-24
Brokerage Allocation and Other Practices.................................. B-30
Capital Shares, Other Securities and Organization......................... B-30
Purchase, Redemption and Pricing of Fund Shares........................... B-31
Shareholder Investment Account............................................ B-40
Net Asset Value........................................................... B-45
Taxes, Dividends and Distributions........................................ B-46
Performance Information................................................... B-48
Financial Statements...................................................... B-51
Report of Independent Accountants......................................... B-63
Appendix I--Description of Security Ratings............................... I-1
Appendix II--General Investment Information............................... II-1
Appendix III--Historical Performance Data................................. III-1
</TABLE>
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MF140B
<PAGE>
FUND HISTORY
The Company was incorporated in Maryland on June 8, 1988. The Company
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 Company as shares of the Income Portfolio. At a special meeting held on
July 19, 1994, shareholders approved an amendment to the Company's Articles of
Incorporation to change the Company name from Prudential-Bache Structured
Maturity Fund, Inc. to Prudential Structured Maturity Fund, Inc. At a meeting
of the Board of Directors of the Fund, held on February 7, 2000, the Board of
Directors approved an amendment to the Company's Articles of Incorporation to
change the Company name from Prudential Structured Maturity Fund, Inc. to
Prudential Short-Term Corporate Bond Fund, Inc.
DESCRIPTION OF THE FUND, ITS INVESTMENTS AND RISKS
(a) Classification. The Fund is a diversified, open-end management
investment company.
(b) and (c) Investment Strategies, Policies and Risks. The investment
objective of the Fund is high current income consistent with the preservation
of principal. In pursuing our objective, under normal market circumstances, we
invest at least 65% of the Fund's total assets in debt obligations of U.S.
corporations with maturities of six years or less. This section provides
additional information on the principal investment policies and strategies of
the Fund, as well as information on certain non-principal investment policies
and strategies. The Fund may not be successful in achieving its objective and
you could lose money.
U.S. Government Securities
U.S. Treasury Securities. The Fund will invest in U.S. Treasury securities,
including bills, notes and bonds. These instruments are direct obligations of
the U.S. Government and, as such, are backed by the full faith and credit of
the United States. They differ primarily in their interest rates, the lengths
of their maturities and the dates of their issuances. U.S. Government
guarantees do not extend to the yield or value of the securities or the Fund's
shares.
Securities Issued or Guaranteed by U.S. Government Agencies and
Instrumentalities. The Fund will invest in obligations issued or guaranteed by
agencies of the U.S. Government or instrumentalities established or sponsored
by the U.S. Government. These obligations, including those which are
guaranteed by federal agencies or instrumentalities, may or may not be backed
by the full faith and credit of the United States. Obligations of the
Government National Mortgage Association (GNMA), the Farmers Home
Administration and the Export-Import Bank are backed by the full faith and
credit of the United States. In the case of securities not backed by the full
faith and credit of the United States, the Fund must look principally to the
agency issuing or guaranteeing the obligation for ultimate repayment and may
not be able to assert a claim against the United States if the agency or
instrumentality does not meet its commitments. Securities of this type in
which the Fund may invest that are not backed by the full faith and credit of
the United States include obligations which generally may be satisfied only by
the individual credit of the issuing agency, such as obligations of the
Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage
Corporation (FHLMC), the Student Loan Marketing Association (SLMA) and the
Resolution Funding Corporation, each of which has the right to borrow from the
U.S. Treasury to meet its obligations, and obligations of the Farm Credit
System, the obligations of which may be satisfied only by the individual
credit of the issuing agency. GNMA, FNMA and FHLMC investments may include
collateralized mortgage obligations.
Mortgage-Related Securities Issued by U.S. Government Agencies and
Instrumentalities. The U.S. Government or the issuing agency or
instrumentality guarantees the payment of interest on and principal of these
securities; however, the guarantees do not extend to the yield or value of the
securities nor do the guarantees extend to the yield or value of the Fund's
shares. Mortgages backing the securities purchased by the Fund 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-
B-2
<PAGE>
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 Fund, for purposes of determining the Fund'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 Company's Board of Directors. In selecting
investments for the Fund 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.
During periods of declining interest rates, prepayment of mortgages
underlying mortgage-backed securities can be expected to accelerate. When
mortgage obligations are prepaid, the Fund reinvests the prepaid amounts in
securities, the yields of which reflect interest rates prevailing at that
time. Therefore, the Fund's ability to maintain a portfolio of high-yielding
mortgage-backed securities will be adversely affected to the extent that
prepayments of mortgages must be reinvested in securities which have lower
yields than the prepaid mortgages. Moreover, prepayments of mortgages which
underlie securities purchased at a premium generally will result in capital
losses.
GNMA Certificates. Certificates of the Government National Mortgage
Association (GNMA Certificates) are mortgage-backed securities which evidence
an undivided interest in a pool of mortgage loans. GNMA Certificates differ
from bonds in that principal is paid back monthly by the borrower over the
term of the loan rather than returned in a lump sum at maturity. GNMA
Certificates that the Fund 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.
Legislative changes may be proposed from time to time in relation to the
Department of Housing and Urban Development which, if adopted, could alter the
viability of investing in GNMAs. The Fund's investment adviser may re-evaluate
the Fund's investment objectives and policies if any such legislative
proposals are adopted.
Life of GNMA Certificates. The average life of a GNMA Certificate is likely
to be substantially shorter than the original maturity of the mortgages
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will usually result in the return of the greater part of
principal investment long before the maturity of the mortgages in the pool.
Foreclosures impose no risk to principal investment because of the GNMA
guarantee, except to the extent that the Fund has purchased the certificates
above par in the secondary market.
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 of 1934, as amended (the Housing Act), authorizes GNMA to
guarantee the timely payment of principal of and interest on certificates that
are based on and backed by a pool of mortgage loans issued by the Federal
Housing Administration (FHA) under the Housing Act, or Title V of the Housing
Act of 1949 (FHA loans), or guaranteed by the Veterans' Administration (VA)
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.
B-3
<PAGE>
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 is a corporate
instrumentality of the United States created in 1970 through enactment of
Title III of the Emergency Home Finance Act of 1970 as amended (FHLMC Act).
Its purpose is to promote development of a nationwide secondary market in
conventional residential mortgages.
The FHLMC issues two types of mortgage pass-through securities, mortgage
participation certificates (PCs) and guaranteed mortgage certificates (GMCS).
The Fund 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 ultimate
payment of principal.
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 Fund expects this characteristic to contribute to its
objective of preservation of principal.
The interest rates paid on the ARMs in which the Fund 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 indexes:
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 indexes 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 indexes, such as the one-year
constant maturity Treasury Note rate, closely mirror changes in market
interest rate levels. Others, such as the 11th District Home Loan Bank Cost of
Funds index (often related to ARMs issued by FNMA), tend to lag behind changes
in market rate levels and tend to be somewhat less volatile.
The underlying mortgages which collateralize the ARMs in which the Fund
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.
Fixed-Rate Mortgage Securities. The Fund 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.
Strips. The Fund 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
B-4
<PAGE>
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.
The Fund may also invest in mortgage pass-through securities where all
interest payments go to one class of holders (Interest Only Securities or IOs)
and all principal payments go to a second class of holders (Principal Only
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 assets, and a rapid
rate of principal payments may have a material adverse effect on the yield to
maturity. If the underlying assets experience greater than anticipated
prepayments of principal, the Fund may not fully recoup its initial investment
in these securities. Conversely, if the underlying assets experience less than
anticipated prepayments of principal, the yield on POs could be materially
adversely affected. Derivative mortgage-backed securities such as MBS strips
are highly sensitive to changes in prepayment and interest rates.
Corporate and Other Debt Obligations
The Fund may invest in debt securities of U.S. issuers that have securities
outstanding that are rated at the time of purchase at least BBB by Standard &
Poor's 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). Securities rated Baa by Moody's or BBB by
S&P, although considered to be investment grade, lack outstanding investment
characteristics and, in fact, have speculative characteristics. Changes in
economic conditions or other circumstances are more likely to lead to a
weakened capacity of issuers whose securities are rated BBB or lower or Baa or
lower 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. See the "Description of
Security Ratings" in the Appendix.
The corporate obligations in which the Fund may invest include mortgage-
backed securities, including collateralized mortgage obligations and real
estate mortgage investment conduits, and asset-backed securities. The Fund may
invest up to 30% of its net assets in collateralized mortgage obligations and
real estate mortgage investment conduits and up to 25% of its net assets in
asset-backed securities.
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.
Fluctuations in the prices of portfolio securities subsequent to their
acquisition will not affect cash income from such securities, but will be
reflected in the Fund's net asset value. The investment adviser considers both
credit risk and market risk in making investment decisions for the Fund.
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.
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 to the risk of default, there
are the related costs of recovery on defaulted issues. 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 and, from time to time, it may be more difficult
to value high-yield securities than more highly rated securities. Under
adverse
B-5
<PAGE>
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
Fund's value (NAV). The responsibility of the Company'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 Fund 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 Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Fund 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 Fund's portfolio and
increasing the exposure of the Fund 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. Since investors generally perceive
that there are greater risks associated with the medium to lower rated
securities of the type in which the Fund may invest, the yields and prices of
such securities may tend to fluctuate more than those for higher rated
securities. In the lower quality segments of the fixed-income securities
market, changes in perceptions of issuers' creditworthiness tend to occur more
frequently and in a more pronounced manner than do changes in higher quality
segments of the fixed-income securities which fluctuate in response to the
general level of interest rates.
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 Fund'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.
Mortgage-Backed and Asset-Backed Securities
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 Fund 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 (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
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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 and
multiclass pass-through securities.
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.
Certain issuers of CMOs, including certain CMOs that have elected to be
treated as REMICs, are not considered investment companies pursuant to a rule
adopted by the Securities and Exchange Commission (Commission), and the Fund
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 Fund in other investment companies. In addition, in
reliance on an earlier Commission interpretation, the Fund'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 Fund selects CMOs or REMICs that cannot rely
on the rule or do not meet the above requirements, the Fund 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.
The underlying mortgages which collateralize the CMOs and REMICs in which
the Fund 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.
Stripped Mortgage-Backed Securities (Privately Issued). In addition to MBS
strips issued by agencies or instrumentalities of the U.S. Government, the
Fund may purchase MBS strips issued by private originators of, or investors
in, mortgage loans, including depository institutions, mortgage banks,
investment banks and special purpose subsidiaries of the foregoing. Privately
issued MBS strips are subject to similar risks as MBS strips issued by
agencies or instrumentalities of the U.S. Government. See "Strips" above.
Asset-Backed Securities. The Fund may invest in asset-backed securities.
Through the use of trusts and special purpose corporations, various types of
assets, primarily home equity loans and automobile and credit card
receivables, are being securitized in pass-through structures similar to the
mortgage pass-through structures described above or in a pay-through structure
similar to the collateralized mortgage structure. The Fund may invest in these
and other types of privately-issued 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.
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Risk Factors Relating to Investing in Mortgage-Backed and Asset-Backed
Securities. Mortgage-backed securities, including those issued or guaranteed
privately or by the U.S. Government or one of its agencies or
instrumentalities, and asset-backed securities differ from traditional debt
securities. Among the major differences are that interest and principal
payments are made more frequently, usually monthly, and principal may be
prepaid at any time because the underlying mortgage loans or other assets
generally may be prepaid at any time. As a result, if the Fund purchases such
a security at a premium, a prepayment rate that is faster than expected will
reduce yield to maturity, while a prepayment rate that is slower than expected
will have the opposite effect of increasing yield to maturity. Alternatively,
if the Fund purchases these securities at a discount, faster than expected
prepayments will increase, while slower than expected prepayments will reduce,
yield to maturity. The Fund may invest a portion of its assets in derivative
mortgage-backed securities such as MBS strips which are highly sensitive to
changes in prepayment and interest rates. The investment adviser will seek to
manage these risks (and potential benefits) by diversifying its investments in
such securities and through hedging techniques.
In addition, mortgage-backed securities which are secured by manufactured
(mobile) homes and multi-family residential properties, such as GNMA and FNMA
certificates, are subject to a higher risk of default than are other types of
mortgage-backed securities. See "U.S. Government Securities" above. 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.
Although the extent of prepayments on a pool of mortgage loans depends on
various economic and other factors, as a general rule prepayments on fixed
rate mortgage loans will increase during a period of falling interest rates
and decrease during a period of rising interest rates. Accordingly, amounts
available for reinvestment by the Fund are likely to be greater during a
period of declining interest rates and, as a result, likely to be reinvested
at lower interest rates than during a period of rising interest rates. Asset-
backed securities, although less likely to experience the same prepayment rate
as mortgage-backed securities, may respond to certain of the same factors
influencing prepayments, while at other times different factors may
predominate. Mortgage-backed securities and asset-backed securities generally
decrease in value as a result of increases in interest rates and usually have
less potential for capital appreciation during periods of declining interest
rates than other fixed-income securities with comparable maturities because of
the risk of prepayment. 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.
During periods of rising interest rates, the rate of prepayment of mortgages
underlying mortgage-backed securities can be expected to decline, extending
the projected average maturity of the mortgage-backed securities. The maturity
extension risk may effectively change a security which was considered short-
or intermediate-term at the time of purchase into a long-term security. Long-
term securities generally fluctuate more widely in response to changes in
interest rates than short- or intermediate-term securities.
Asset-backed securities involve certain risks that are not posed by
mortgage-backed securities, resulting mainly from the fact that asset-backed
securities do not usually contain the complete benefit of a security interest
in the related collateral. For example, credit card receivables generally are
unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit card 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.
When-Issued and Delayed-Delivery Securities
From time to time, in the ordinary course of business, the Fund may purchase
or sell securities on a when-issued or delayed-delivery basis. When-issued or
delayed-delivery transactions arise when securities are purchased or sold by
the Fund with payment and delivery taking place a month or more in the future
in order to secure what is considered to be an advantageous price and yield to
the Fund at the time of entering into the transaction. The purchase price and
the interest rate payable on the securities are fixed on the transaction date.
The Fund will maintain in a segregated account cash or other liquid assets,
marked-to-market daily, having a value equal to or greater than the Fund's
purchase commitments. If the Fund chooses to dispose of the right to acquire a
when-issued security prior to this acquisition, it could, as with the
disposition of any other portfolio security, incur a gain or loss due to
market fluctuations. The securities so purchased are subject to market
fluctuations, and no interest accrues to the Fund until delivery and payment
take place. At the time the Fund makes the
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<PAGE>
commitment to purchase securities on a when-issued or delayed-delivery basis,
it will record the transaction and thereafter reflect the value of such
securities in determining its NAV each day. The Fund will make commitments for
such when-issued transactions only with the intention of actually acquiring
the securities. 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
Fund's assets committed to the purchase of securities on a when-issued or
delayed-delivery basis may increase the volatility of the Fund's NAV.
Repurchase Agreements
The Fund may on occasion enter into repurchase agreements whereby the seller
of a security agrees to repurchase that security from the Fund 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 Fund's money
is invested in the repurchase agreement. The Fund'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 Fund will require additional collateral. If the
seller defaults and the value of the collateral securing the repurchase
agreement declines, the Fund may incur a loss.
The Fund's repurchase agreements will be collateralized by U.S. Government
obligations. The Fund will enter into repurchase transactions only with
parties meeting creditworthiness standards approved by the Fund's investment
adviser. 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 Fund 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 Fund 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 Fund 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 Fund 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 Fund of such obligations, total assets of not less than $1 billion or its
equivalent. The Fund 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 Company'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 Fund do not exceed 10% of the Fund's total assets.
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<PAGE>
Yankee Obligations
The Fund may invest in U.S. dollar-denominated debt securities of foreign
corporations issued in the United States and U.S. dollar-denominated debt
securities issued or guaranteed as to payment of principal and interest by
governments, quasi-governmental entities, government agencies, supranational
entities and other governmental entities of foreign countries, which
securities are issued in the United States (Yankee obligations). A
supranational entity is an entity constituted by the national governments of
several countries to promote economic development, such as the World Bank
(International Bank for Reconstruction and Development), the European
Investment Bank and the Asian Development Bank. Debt securities of quasi-
governmental entities are issued by entities owned by either a national, state
or equivalent government or are obligations of a political unit that is not
backed by the national government's full faith and credit and general taxing
powers. These include, among others, the Province of Ontario and the City of
Tokyo.
The Fund believes that in many instances such foreign fixed-income
securities may provide higher yields than securities of domestic issuers which
have similar maturities and quality. Many of these investments currently enjoy
increased liquidity, although, under certain market conditions, such
securities may be less liquid than the securities of United States
corporations, and are certainly less liquid than securities issued or
guaranteed by the United States Government, its instrumentalities or agencies.
Investments in obligations of foreign issuers may be subject to certain
risks, including future political and economic developments, the difficulty of
predicting international trade patterns, the possible imposition of
withholding taxes on interest income, the seizure or nationalization of
foreign deposits and foreign exchange controls or other restrictions. Such
securities may also be subject to greater fluctuations in price than
securities issued by United States corporations or issued or guaranteed by the
United States Government, its instrumentalities or agencies. 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.
Lending of Securities
Consistent with applicable regulatory requirements, the Fund 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
Fund's total assets and that the loans are callable at any time by the Fund.
As a matter of fundamental policy, the Fund will not lend more than 30% of the
value of its total assets. The loans must at all times be secured by cash or
other liquid assets or secured by an irrevocable letter of credit in favor of
the Fund in an amount equal to at least 100%, determined daily, of the market
value of the loaned securities. The collateral is segregated pursuant to
applicable regulations. During the time portfolio securities are on loan, the
borrower will pay the Fund an amount equivalent to any dividend or interest
paid on such securities and the Fund may invest the cash collateral and earn
additional income, or it may receive an agreed-upon amount of interest income
from the borrower. The advantage of such loans is that the Fund continues to
receive payments in lieu of the interest and dividends on 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 Fund at any time. If the borrower fails to maintain the requisite amount
of collateral, the loan automatically terminates, and the Fund 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 Company. On termination of the loan, the borrower is required to return
the securities to the Fund, and any gain or loss in the market price during
the loan would inure to the Fund.
Since voting or consent rights, if any, which accompany loaned securities
pass to the borrower, the Fund 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 Fund's investment
in the securities which are the subject of the loan. The Fund
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<PAGE>
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.
Covered Dollar Rolls
The Fund may enter into covered dollar rolls. In a dollar roll, the Fund
sells securities for delivery in the current month and simultaneously
contracts to repurchase substantially similar (same type and coupon)
securities on a specified future date from the same party. During the roll
period, the Fund foregoes principal and interest paid on the securities. The
Fund 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 Fund 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 Fund may decline below the price of
the securities the Fund has sold but is obligated to repurchase under the
agreement. In the event the buyer of securities under a covered dollar roll
files for bankruptcy or becomes insolvent, the Fund's use of the proceeds of
the agreement may be restricted pending a determination by the other party, or
its trustee or receiver, whether to enforce the Fund's obligation to
repurchase the securities.
The Fund may invest up to 5% of its total assets in covered dollar rolls.
World Bank Obligations
The Fund 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 Fund 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 Fund pays for instruments
with puts may be higher than the price which otherwise would be paid for the
instruments. Consistent with the Fund'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 Fund 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 Fund, 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 Fund. When the put is at the option of the Fund,
the Fund 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 Fund'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 Fund 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.
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Illiquid Securities
The Fund may hold up to 15% of its net assets in illiquid securities. If the
Fund were to exceed this limit, the investment adviser would take prompt
action to reduce the Fund's holdings in illiquid securities to no more than
15% of its net assets as required by applicable law. Illiquid securities
include repurchase agreements which have a maturity of longer than seven days,
certain securities with legal or contractual restrictions on resale
(restricted securities) and securities that are not readily marketable.
Repurchase agreements subject to demand are deemed to have a maturity equal to
the applicable notice period.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (Securities Act),
securities which are otherwise not readily marketable and repurchase
agreements having a maturity of longer than seven days. Securities that have
not been registered under the Securities Act are referred to as private
placements or restricted securities and are purchased directly from the issuer
or in the secondary market (Direct Placement Securities). Mutual funds do not
typically hold a significant amount of these restricted or other illiquid
securities because of the potential for delays on resale and uncertainty in
valuation. Limitations on resale may have an adverse effect on the
marketability of portfolio securities and a mutual fund might be unable to
dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemptions within
seven days. A mutual fund might also have to register such restricted
securities in order to dispose of them resulting in additional expense and
delay. Adverse market conditions could impede such a public offering of
securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes.
Institutional investors depend on an efficient institutional market in which
the unregistered security can be readily resold or on an issuer's ability to
honor a demand for repayment. The fact that there are contractual or legal
restrictions on resale to the general public or to certain institutions may
not be indicative of the liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to
the general public. Rule 144A establishes a safe harbor from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The investment adviser anticipates that the
market for certain restricted securities such as institutional commercial
paper and foreign securities will expand further as a result of this
regulation and the development of automated systems for the trading, clearance
and settlement of unregistered securities of domestic and foreign issuers,
such as PORTAL System sponsored by the National Association of Securities
Dealers, Inc. (NASD). The Fund's investment in Rule 144A securities could have
the effect of increasing illiquidity to the extent that qualified
institutional buyers become, for a time, uninterested in purchasing Rule 144A
securities.
Restricted securities, including securities eligible for resale pursuant to
Rule 144A under the Securities Act, and commercial paper that have a readily
available market are treated as liquid only when deemed liquid under
procedures established by the Board of Directors. The investment adviser will
monitor the liquidity of such restricted securities subject to the supervision
of the Board of Directors. In reaching liquidity decisions, the investment
adviser will consider, inter alia, the following factors: (1) the frequency of
trades and quotes for the security; (2) the number of dealers wishing to
purchase or sell the security and the number of other potential purchasers;
(3) dealer undertakings to make a market in the security and (4) the nature of
the security and the nature of the marketplace trades (for example, the time
needed to dispose of the security, the method of soliciting offers and the
mechanics of the transfer). In addition, in order for commercial paper that is
issued in reliance on Section 4(2) of the Securities Act to be considered
liquid, (i) it must be rated in one of the two highest rating categories by at
least two nationally recognized statistical rating organizations (NRSRO), or
if only one NRSRO rates the securities, by that NRSRO, or, if unrated, be a
comparable quality in the view of the investment adviser; and (ii) it must not
be traded flat (that is, without accrued interest) or in default as to
principal or interest. Repurchase agreements subject to demand are deemed to
have a maturity equal to the notice period.
When the Fund enters into interest rate swaps on other than a net basis, the
entire amount of the Fund's obligations, if any, with respect to such interest
rate swaps will be treated as illiquid. To the extent that the Fund enters
into interest rate swaps on a net basis, the net amount of the excess, if any,
of the Fund'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, which the Fund will
follow, that purchased over-the-counter options and the assets used as "cover"
for written over-the-counter options are illiquid securities unless the Fund
and the
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counterparty have provided for the Fund, at the Fund's election, to unwind the
over-the-counter option. The exercise of such an option ordinarily would
involve the payment by the Fund of an amount designed to reflect the
counterparty's economic loss from an early termination, but does allow the
Fund to treat the assets used as cover as liquid.
Borrowing
The Fund 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 or for the clearance of transactions. The
Fund may pledge up to 20% of its total assets to secure these borrowings. If
the Fund's asset coverage for borrowings falls below 300%, the Fund will take
prompt action to reduce its borrowings as required by law. If the 300% asset
coverage should decline as a result of market fluctuations or other reasons,
the Fund may be required to sell portfolio securities to reduce the debt and
restore the 300% asset coverage, even though it may be disadvantageous from an
investment standpoint to sell securities at that time. The Fund will not
purchase portfolio securities if its borrowings exceed 5% of its net assets.
Hedging and Return Enhancement Strategies
The Fund may engage in various portfolio strategies, including using
derivatives to seek to reduce certain risks of its investments and to attempt
to enhance return. The Fund, and thus its investors, may lose money through
any unsuccessful use of these strategies. These strategies include the use of
options, interest rate swap transactions and futures contracts, including
interest rate futures contracts, and options thereon. The Fund's ability to
use these strategies may be limited by various factors, such as market
conditions, regulatory limits and tax considerations, and there can be no
assurance that any of these strategies will succeed. If new financial products
and risk management techniques are developed, the Fund may use them to the
extent consistent with its investment objective and policies.
Options Transactions. The Fund reserves the right to enter into options
transactions but has no intention of doing so in the foreseeable future.
Interest Rate Swap Transactions. The Fund may enter into interest rate
swaps. Interest rate swaps involve the exchange by the Fund with another party
of their respective commitments to pay or receive interest, e.g., an exchange
of floating rate payments for fixed rate payments. The Fund expects to enter
into these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio or to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date. The Fund intends to use these transactions as a hedge and not as a
speculative investment.
The Fund may enter into interest rate swaps traded on an exchange or in the
over-the-counter market. Interest rate swaps do not involve the delivery of
securities or other underlying assets or principal. Accordingly, the risk of
loss with respect to interest rate swaps is limited to the net amount of
interest payments that the Fund is contractually obligated to make and will
not exceed 5% of the Fund's net assets. If the other party to an interest rate
swap defaults, the Fund's risk of loss consists of the net amount of interest
payments that the Fund is contractually entitled to receive. The use of
interest rate swaps is highly speculative activity which involves investment
techniques and risks different from those associated with ordinary portfolio
transactions. If the investment adviser is incorrect in its forecast of market
values, interest rates and other applicable factors, the investment
performance of the Fund would diminish compared to what it would have been if
this investment technique was never used.
If the Fund purchases an interest rate swap to hedge against a change in an
interest rate of a security the Fund anticipates buying, and such interest
rate changes unfavorably for the Fund, then the Fund may determine not to
invest in the securities as planned and will realize a loss on the interest
rate swap that is not offset by a change in the interest rates or the price of
the securities.
The Fund 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 Fund will enter into
interest rate swaps on a net basis, that is, the two payment streams are
netted out, with the Fund 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
Fund'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 by a custodian that satisfies the
requirements of the Investment Company Act. To the extent that the Fund enters
into interest rate swaps on other than a
B-13
<PAGE>
net basis, the amount maintained in a segregated account will be the full
amount of the Fund'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
Fund believe such obligations do not constitute senior securities and,
accordingly, will not treat them as being subject to its borrowing
restrictions. If there is a default by the other party to such a transaction,
the Fund 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 acting both as principals
and as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Since interest rate swaps are
individually negotiated, the Fund 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 Fund will enter into interest rate swaps only with
parties meeting creditworthiness standards approved by the Company's Board of
Directors. The investment adviser will monitor the creditworthiness of such
parties under the supervision of the Board of Directors.
Futures Contracts (Including Interest Rate Futures Contracts). The Fund may
purchase and sell futures contracts and options thereon for certain hedging
and risk management purposes and to attempt to enhance return in accordance
with regulations of the Commodity Futures Trading Commission. The Fund, and
thus its investors, may lose money through any unsuccessful use of these
strategies. As a purchaser of an interest rate futures contract (futures
contract), the Fund 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
Fund incurs an obligation to deliver the specified amount of the underlying
obligation at a specified time in return for an agreed upon price.
The Fund 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 Fund may sell a futures contract. If declining interest
rates are anticipated, the Fund may purchase a futures contract to protect
against a potential increase in the price of U.S. Government or other debt
securities the Fund intends to purchase. Subsequently, appropriate U.S.
Government or other debt securities may be purchased by the Fund 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 Fund will be able to enter into a closing
transaction.
When the Fund 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 Fund upon the proper
termination of the futures contract. The margin deposits made are marked to
market daily and the Fund 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 Fund 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.
B-14
<PAGE>
They enable purchasers to obtain a fixed-rate for the lending of funds and
sellers to obtain a fixed-rate for borrowings. The Fund would use Eurodollar
futures contracts and options thereon to hedge against changes in LIBOR, to
which many interest rates swaps are linked.
Options on Futures Contracts. The Fund 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 Fund 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 Fund's purchasing and selling futures contracts and
options thereon for bona fide hedging transactions, except that the Fund 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 Fund's total assets. The Fund will
use futures contracts and options thereon in a manner consistent with these
requirements.
Risks of Hedging and Return Enhancement Strategies. Participation in the
options or futures markets involves investment risks and transaction costs to
which the Fund would not be subject absent the use of these strategies. The
Fund, and thus its investors, may lose money through the unsuccessful use of
these strategies. If the investment adviser's predictions of movements in the
direction of the securities and interest rate markets are inaccurate, the
adverse consequences to the Fund may leave the Fund in a worse position than
if such strategies were not used. Risks inherent in the use of interest rate
swaps, options, 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 options and futures contracts and options
thereon and movements in the prices of the securities or currencies 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 Fund to purchase or sell a portfolio security at
a time that otherwise would be favorable for it to do so, or the possible need
for the Fund to sell a portfolio security at a disadvantageous time, due to
the need for the Fund to maintain cover or to segregate securities in
connection with hedging transactions.
The Fund may sell a futures contract to protect against the decline in the
value of securities held by the Fund. However, it is possible that the futures
market may advance and the value of securities held in the Fund's portfolio
may decline. If this were to occur, the Fund would lose money on the futures
contracts and also experience a decline in value in its portfolio securities.
However, while this could occur for a very brief period or to a very small
degree, over time the market prices of the securities of a diversified
portfolio will tend to move in the same direction as the prices of futures
contracts.
If the Fund purchases a futures contract to hedge against the increase in
value of securities it intends to buy, and the value of such securities
decreases, then the Fund 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.
There is a risk 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 Fund's portfolio securities. Another such
risk is that prices
B-15
<PAGE>
of futures contracts may not move in tandem with the changes in prevailing
interest rates against which the Fund 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 Fund and the movements in the prices of the
securities (or currencies) 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 (or currencies) and futures
market could result. Price distortions could also result if investors in
futures contracts elect to make or take delivery of underlying securities (or
currencies) 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 markets 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 securities (or currencies) 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.
The risk of imperfect correlation increases as the composition of the Fund's
securities portfolio diverges from the securities that are the subject of the
futures contract, for example, those included in the municipal index. Because
the change in the price of the futures contract may be more or less than the
change in prices of the underlying securities, even a correct forecast of
interest rate changes may not result in a successful hedging transaction.
Pursuant to the requirements of the Commodity Exchange Act, all futures
contracts and options thereon must be traded on an exchange. The Fund intends
to purchase and sell futures contracts only on exchanges where there appears
to be a market in such futures sufficiently active to accommodate the volume
of its trading activity. The Fund's ability to establish and close out
positions in futures contracts and options on futures contracts would be
impacted by the liquidity of these exchanges. Although the Fund generally
would purchase or sell only those futures contracts and options thereon for
which there appeared to be a liquid market, there is no assurance that a
liquid market on an exchange will exist for any particular futures contract or
option at any particular time. In the event no liquid market exists for a
particular futures contract or option thereon in which the Fund maintains a
position, it would not be possible to effect a closing transaction in that
contract or to do so at a satisfactory price and the Fund would have to either
make or take delivery under the futures contract or, in the case of a written
call option, wait to sell the underlying securities until the option expired
or was exercised, or, in the case of a purchased option, exercise the option
and comply with the margin requirements for the underlying futures contract to
realize any profit. In the case of a futures contract or an option on a
futures contract which the Fund had written and which the Fund was unable to
close, the Fund would be required to maintain margin deposits on the futures
contract or option and to make variation margin payments until the contract
was closed. In the event futures contracts have been sold to hedge portfolio
securities, such securities will not be sold until the offsetting futures
contracts can be executed. Similarly, in the event futures have been bought to
hedge anticipated securities purchases, such purchases will not be executed
until the offsetting futures contracts can be sold.
Exchanges on which futures and related options trade may impose limits on
the positions that the Fund may take in certain circumstances. In addition,
the hours of trading of financial futures contracts and options thereon may
not conform to the hours during which the Fund may trade the underlying
securities. To the extent the futures markets close before the securities
markets, significant price and rate movements can take place in the securities
markets that cannot be reflected in the futures markets.
As described above, 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 Fund may enter into futures or related options
contracts for return enhancement purposes if the aggregate initial margin and
option premiums do not exceed 5% of the liquidation value of the Fund's total
assets, after taking into account unrealized profits and unrealized losses on
any such contracts, provided, however, that in the case of an option that is
in-the-money, the in-the-money amount may be excluded in computing such 5%.
The above restriction does not apply to the purchase and sale of futures and
related options contracts for bone fide hedging purchases within the meaning
of the regulations of the CFTC.
B-16
<PAGE>
In order to determine that the Fund is entering into transactions in futures
contracts for hedging purposes as such term is defined by the CFTC, either:
(1) a substantial majority (that is, approximately 75%) of all anticipatory
hedge transactions (transactions in which the Fund does not own at the time of
the transaction, but expects to acquire, the securities underlying the
relevant futures contract) involving the purchase of futures contracts will be
completed by the purchase of securities which are the subject of the hedge, or
(2) the underlying value of all long positions in futures contracts will not
exceed the total value of (a) all short-term debt obligations held by the
Fund; (b) cash held by the Fund; (c) cash proceeds due to the Fund on
investments within thirty days; (d) the margin deposited on the contracts; and
(e) any unrealized appreciation in the value of the contracts.
If the Fund maintains a short position in a futures contract, it will cover
this position by holding, in a segregated account, cash or 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 Fund to purchase the same
contract at a price no higher than the price at which the short position was
established.
In addition, if the Fund holds a long position in a futures contract, it
will hold cash or 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 Fund 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 Fund.
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 Fund would
continue to be required to make daily cash payments of variation margin on
open futures positions. In such situations, if the Fund has insufficient cash,
it may be disadvantageous to do so. In addition, the Fund may be required to
take or make delivery of the instruments underlying 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 Fund's
ability to hedge effectively its portfolio.
In the event of the bankruptcy of a broker through which the Fund engages in
transactions in futures or options thereon, the Fund could experience delays
and/or losses in liquidating open positions purchased or sold through the
broker and/or incur a loss of all or paret of its margin deposits with the
broker. Transactions are entered into by the Fund only with brokers or
financial institutions deemed creditworthy by the investment adviser.
Risks of Transactions in Options on Financial Futures. Compared to the
purchase or sale of futures contracts, the purchase and sale of call or put
options on futures contracts involves less potential risk to the Fund 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 Fund
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 securities.
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. As described above,
although the Fund generally will purchase only those options for which there
appears to be an active secondary market, there is no assurance that a liquid
secondary market on an exchange will exist for any particular option, or at
any particular time, and for some options, no secondary market on an exchange
may exist. In such event, it might not be possible to effect closing
transactions in particular options, with the result that the Fund would have
to exercise its options in order to realize any profit and would incur
transaction costs upon the sale of underlying securities pursuant to the
exercise of put options.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (1) there may be insufficient trading interest in certain
options; (2) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (3) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options or underlying securities; (4) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (5) the
facilities of an exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or (6) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which
B-17
<PAGE>
event the secondary market on that exchange (or in that class or series of
options) would cease to exist, although outstanding options on that exchange
that had been issued by the Options Clearing Corporation as a result of trades
on that exchange could continue to be exercisable in accordance with their
terms.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain of the facilities of the
Options Clearing Corporation inadequate, and thereby result in the institution
by an exchange of special procedures which may interfere with the timely
execution of customers' orders.
The Fund will limit its use of futures contracts and options thereon to the
purchase of Eurodollar futures contracts and options thereon linked to LIBOR.
Segregated Assets
When the Fund is required to segregate assets in connection with certain
hedging transactions, it will segregate cash or liquid assets. "Liquid assets"
means cash, U.S. Government securities, equity securities (including foreign
securities), debt obligations or other liquid, unencumbered assets, marked-to-
market daily. Such hedging transactions may involve when-issued and delayed
delivery securities, futures contracts, written options and options on future
contracts (unless otherwise covered). If collateralized or otherwise covered,
in accordance with Commission guidelines, these will not be deemed to be
senior securities.
Securities of Other Investment Companies
The Fund may invest up to 10% of its total assets in securities of other
investment companies. To the extent that the Fund does invest in securities of
other investment companies, shareholders of the Fund may be subject to
duplicate management and advisory fees. See "Investment Restrictions" below.
(d) Temporary Defensive Strategy and Short-Term Investments
In response to adverse market, economic or political conditions, the Fund
may temporarily invest up to 100% of its assets in high quality money market
instruments and repurchase agreements. The Fund may also invest in high
quality money market instruments and repurchase agreements to provide
liquidity. The Fund will also apply the proceeds of new investments in the
Fund to purchase money market instruments and repurchase agreements until
these amounts can be used to purchase corporate and other debt obligations and
U.S. Government securities with laddered maturities of from one year or less
to six years. The yield on money market instruments and repurchase agreements
is generally lower than the yield on corporate and other debt obligations and
U.S. Government securities. Accordingly, the Fund's yield and total return
will generally be lower during these periods. Investing heavily in these
securities limits the Fund's ability to achieve a high current income, but can
help to preserve the Fund's assets when the markets are unstable.
(e) Portfolio Turnover
The Fund 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. The Fund's turnover
rates in 1999 and 1998 were 168% and 301%, respectively. The "laddered"
portfolio structure previously utilized by the Fund required frequent
rebalancing of its investment portfolio which resulted in a relatively high
portfolio turnover rate for the Fund since its inception.
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 Fund. A "majority of the
outstanding voting securities" of the Fund, 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.
B-18
<PAGE>
The Fund may not:
1. Purchase securities on margin (but the Fund 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 Fund may borrow up to 20% of the value of its total assets (calculated
when the loan is made) from banks for temporary, extraordinary or emergency
purposes or for the clearance of transactions and may pledge up to 20% of the
value of its total assets to secure such borrowings. The purchase or sale of
securities on a "when-issued" or delayed delivery basis, and the purchase and
sale of financial futures contracts and collateral arrangements with respect
thereto and with respect to interest rate swap transactions, covered dollar
rolls and reverse repurchase agreements, are not deemed to be a pledge of
assets and such arrangements are not deemed to be the issuance of a senior
security. The Fund will not purchase portfolio securities if its borrowings
exceed 5% of its net assets.
4. Purchase any security (other than obligations of the U.S. Government, its
agencies and instrumentalities including municipal obligations and obligations
guaranteed as to principal and interest) if as a result: (i) with respect to
75% of its net assets, more than 5% of the Fund'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 Fund'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 Fund's total assets
would be invested in such securities.
6. Buy or sell real estate or interests in real estate, except that the Fund
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 Fund 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 Fund may invest in the securities of
companies which invest in or sponsor such programs.
11. Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities (limited to 30% of the value of the Fund's total assets).
12. Purchase common stock or other voting securities, preferred stock,
warrants or other equity securities, except as may be permitted by restriction
number 9.
13. Buy or sell commodities or commodity contracts, except that the Fund may
purchase and sell financial futures contracts and options thereon.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the Fund'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
Fund's asset coverage for borrowing falls below 300%, the Fund will take
prompt action to reduce its borrowings, as required by applicable law.
As a matter of non-fundamental operating policy, the Fund will not purchase
more than 10% of the outstanding voting securities of any one issuer.
B-19
<PAGE>
MANAGEMENT OF THE COMPANY
<TABLE>
<CAPTION>
Position with Principal Occupations
Name, Address** and Age the Fund During Past 5 Years
- ----------------------- ------------- ---------------------
<S> <C> <C>
Eugene C. Dorsey (72) 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
(national coalition of philanthropic
organizations); former Chairman of the American
Council for the Arts; former Director of the
Advisory Board of Chase Manhattan Bank of
Rochester.
Delayne Dedrick Gold (61) Director Marketing and Management Consultant.
*Robert F. Gunia (53) Vice President Executive Vice President and Chief
and Director Administrative Officer (since June 1999) of
Prudential Investments; Corporate Vice
President (September 1997-March 1999) of The
Prudential Insurance Company of America
(Prudential); Executive Vice President and
Treasurer (since December 1996) of Prudential
Investments Fund Management LLC (PIFM);
President (since April 1999) of Prudential
Investment Management Services LLC (PIMS);
former Senior Vice President (March 1987-May
1999) and former Chief Administrative Officer
(July 1990-September 1996) of Prudential
Securities Incorporated (Prudential
Securities); Director (January 1989-September
1996), Executive Vice President, Treasurer and
Chief Financial Officer (June 1987-December
1996) of Prudential Mutual Fund Management,
Inc. (PMF); Vice President and Director (since
May 1989) of The Asia Pacific Fund, Inc.
Thomas T. Mooney (58) Director President of the Greater Rochester Metro Chamber
of Commerce; former Rochester City Manager;
former Deputy Monroe County Executive, Trustee
of Center for Governmental Research, Inc.;
Director of Blue Cross of Rochester, Monroe
County Water Authority, Executive Service Corps
of Rochester.
Stephen P. Munn (57) Director Chairman (since January 1994), Director and
President (since 1988) and Chief Executive
Officer (since 1988) of Carlisle Companies
Incorporated (manufacturer of industrial
products).
*David R. Odenath, Vice President Officer in Charge, President, Chief Executive
Jr. (42) and Director Officer and Chief Operating Officer (since June
1999) of PIFM; Senior Vice President (since
June 1999) of Prudential; Senior Vice President
(August 1993-May 1999) of PaineWebber Group,
Inc.
</TABLE>
B-20
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupations
Name, Address** and Age the Fund During Past 5 Years
- ----------------------- ------------- ---------------------
<S> <C> <C>
Richard A. Redeker (56) Director Former employee of Prudential Investments
(October 1996-December 1998); prior thereto,
President, Chief Executive Officer and Director
(October 1993-September 1996) of Prudential
Mutual Fund Management, Inc.; Executive Vice
President, Director and Member of the Operating
Committee (October 1993-September 1996) of
Prudential Securities; Director (October 1993-
September 1996) of Prudential Securities Group,
Inc.; Executive Vice President of 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.; former Senior Executive Vice
President and Director of Kemper Financial
Services, Inc. (September 1978-September 1993).
*John R. Strangfeld, President Chief Executive Officer, Chairman, President and
Jr. (45) and Director Director (since January 1990) of The Prudential
Investment Corporation, Executive Vice
President (since February 1998) of Prudential
Global Asset Management Group of Prudential,
and Chairman (since August 1989) of Pricoa
Capital Group; formerly various positions to
Chief Executive Officer (November 1994-December
1998) of Private Asset Management Group of
Prudential and Senior Vice President (January
1986-August 1989) of Prudential Capital Group,
a unit of Prudential.
Nancy H. Teeters (69) Director Economist; former Vice President and Chief
Economist (July 1984-July 1990) of
International Business Machines Corporation;
former Governor of Federal Reserve System
(1978-1984); former Director of Inland Steel
Industries (July 1991-1999).
Louis A. Weil, III (59) Director Chairman (since January 1999), President 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.; former Publisher of Time
Magazine (May 1989-March 1991); former
President, Publisher and Chief Executive
Officer of The Detroit News (February 1986-
August 1989); member of the Advisory Board,
Chase Manhattan Bank-Westchester.
Grace C. Torres (40) Treasurer and First Vice President (since December 1996) of
Principal PIFM; former First Vice President (March 1993-
Financial and May 1999) of Prudential Securities; First Vice
Accounting President (March 1994-September 1996) of
Officer Prudential Mutual Fund Management, Inc.
Stephen M. Ungerman (46) Assistant Tax Director (since March 1996) of Prudential
Treasurer Investments and the Private Asset Group of The
Prudential Insurance Company of America
(Prudential); former First Vice President
(February 1993-September 1996) of Prudential
Mutual Fund Management, Inc.
</TABLE>
B-21
<PAGE>
<TABLE>
<CAPTION>
Name, Address** and Position with Principal Occupations
Age the Fund During Past 5 Years
- ------------------- ------------- ---------------------
<S> <C> <C>
Deborah A. Docs (42) Secretary Vice President (since December 1996) of PIFM;
former Vice President and Associate General
Counsel (June 1991-May 1996) of Prudential
Securities; Vice President and Associate
General Counsel (June 1991-September 1996) of
PMF.
David F. Connor (36) Assistant Assistant General Counsel (since March 1998) of
Secretary PIFM; Associate Attorney, Drinker Biddle &
Reath LLP prior thereto.
William V. Healey (46) Assistant Vice President and Associate General Counsel
Secretary (since 1998) of Prudential; Chief Legal Officer
(since August 1998) of Prudential Investments;
Director (since June 1999) of ICI Mutual
Insurance Company; prior to August 1998,
Associate General Counsel of The Dreyfus
Corporation ("Dreyfus"), a subsidiary of Mellon
Bank, N.A. ("Mellon Bank"), and an officer
and/or director of various affiliates of Mellon
Bank and Dreyfus.
</TABLE>
- ----------
*"Interested" Director, as defined in the Investment Company Act, by reason
of his affiliation with Prudential, Prudential Securities, or PIFM.
**The address of the Directors and officers is c/o Prudential Investments Fund
Management LLC, Gateway Center Three, 100 Mulberry Street, 9th Floor, Newark,
New Jersey 07102-4077.
The Company has Directors, who, in addition to overseeing the actions of the
Company's Manager, Subadviser and Distributor, decide upon matters of general
policy. The Directors also review the actions of the Company's officers, who
conduct and supervise the daily business operations of the Fund.
Directors and officers of the Company are also trustees, directors and
officers of some or all of the other investment companies distributed by
Prudential Investment Management Services LLC.
The officers conduct and supervise the daily business operations of the
Company, while the Directors, in addition to their functions set forth under
"Management of the Company" and "Investment Advisory and Other Services,"
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 75.
Pursuant to the terms of the Management Agreement with the Company, the
Manager pays all compensation of officers and employees of the Company as well
as the fees and expenses of all Directors of the Company who are affiliated
persons of the Manager. The Company pays each of its Directors who is not an
affiliated person of PIFM or the investment adviser annual compensation of
$1,400, 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 on whose Boards the Directors may be asked to serve.
Directors may receive their Director's fee pursuant to a deferred fee
agreement with the Company. 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 any Prudential mutual fund. Payment of
the interest so accrued is also deferred and accruals become payable at the
option of the Director. The Fund's obligation to make payments of deferred
Directors' fees, together with interest thereon, is a general obligation of
the Fund.
The following table sets forth the aggregate compensation paid by the
Company to the Directors who are not affiliated with the Manager for the
fiscal year ended December 31, 1999 and the aggregate compensation paid to
such Directors for
B-22
<PAGE>
service on the Company's Board and the boards of all other investment
companies managed by PIFM (Fund Complex) for the calendar year ended December
31, 1999.
Compensation Table
<TABLE>
<CAPTION>
Total 1999
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(a)............ $2,400 None N/A $142,500 (43/70)*
Eugene C. Dorsey--
Director**............. $2,400 None N/A $ 81,000 (17/48)
Delayne Dedrick Gold--
Director............... $2,425 None N/A $144,500 (43/70)*
Robert F. Gunia--
Director and Vice
President(1)........... -- -- -- --
Thomas T. Mooney--
Director**............. $2,400 None N/A $129,500 (35/75)*
Stephen P. Munn--
Director............... $ 150 None N/A $ 62,250 (29/53)
Thomas H. O'Brien--
Director(a)............ $2,400 None N/A $ 47,500 (11/26)*
David R. Odenath, Jr.--
Director and Vice
President(1)........... -- None N/A --
Richard A. Redeker--
Director............... $2,400 None N/A $ 95,000 (29/53)
John R. Strangfeld,
Jr.--Director and
President.............. -- -- -- --
Nancy H. Teeters--
Director............... $2,400 None N/A $ 97,000 (25/43)*
Louis A. Weil, III--
Director............... $2,400 None N/A $ 96,000 (29/53)*
</TABLE>
- ----------
(a) Former Director, retired on December 31, 1999.
* 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, 1999 includes amounts deferred at the
election of Directors under the fund's deferred compensation plans.
Including accrued interest, total compensation amounted to $103,574, and
$135,102 for Messrs. Dorsey and Mooney respectively.
(1) Directors who are "interested" do not receive compensation from the
Company or any fund in the Fund Complex.
B-23
<PAGE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Directors of the Company are eligible to purchase Class Z shares of the
Fund, which are sold without either an initial sales charge or CDSC to a
limited group of investors.
As of April 7, 2000, the Directors and officers of the Company, as a group,
beneficially owned less than one percent of the outstanding shares of common
stock of the Fund.
As of April 7, 2000, Prudential Securities was record holder for other
beneficial owners of 4,176,769 Class A shares (57.9% of the outstanding Class
A shares), 879,170 Class B shares (51.3% of the outstanding Class B shares),
93,278 Class C shares (or 51.1% of the outstanding Class C shares) and 175,612
Class Z shares (46.3% of the outstanding Class Z shares) of the Fund. In the
event of any meetings of shareholders, Prudential Securities will forward, or
cause the forwarding of, proxy material to the beneficial owners for which it
is the record owner.
As of April 7, 2000, the following shareholders owned beneficially, directly
or indirectly, 5% or more of the outstanding shares of the Fund.
As of February 4, 2000, the beneficial owners, directly or indirectly, of
more than 5% of the outstanding shares of any class of beneficial interest
were: Trudies Camponovo, 7251 E Cortez Rd, Scottsdale, AZ 85260-5459, who held
13,816 Class C Shares (7.6% of the outstanding Class C Shares); Ferguson
Farms, 102 E 2nd St., Safford, AZ 85546-2065, who held 9,182 Class C Shares
(5.07% of the outstanding Class C Shares); The Prina Family LLC, 102 E 2nd
St., Safford, AZ 85546-2065, who held 18,868 Class C Shares (10.3% of the
outstanding Class C Shares); Pru Defined Contributions SVCS, FBO Pru-Non-Trust
Accounts, Attn: John Surdy, 30 Scranton Office Park, Mossic, PA 18507, who
held 19,533 Class Z Shares of the Fund (5.2% of the outstanding Class Z
Shares); and Prudential Trust Company, FBO Pru-DC Trust Accounts, Attn: John
Surdy, 30 Scranton Office Park, Mossic, PA 18507, who held 184,005 Class Z
Shares of the Fund (48.5% of the outstanding Class Z Shares).
INVESTMENT ADVISORY AND OTHER SERVICES
(a) Manager and Investment Adviser
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 January 31, 2000, PIFM
managed and/or administered open-end and closed-end management investment
companies with assets of approximately $74.9 billion. According to the
Investment Company Institute, as of September 30, 1999, the Prudential mutual
funds were the 20th largest family of mutual funds in the United States.
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 and dividend distribution 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 Company (the Management
Agreement), PIFM, subject to the supervision of the Company'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 Company. PIFM has hired The Prudential Investment
Corporation, doing business as Prudential Investments (PI, the investment
adviser or the Subadviser), to provide subadvisory services to the Fund. PIFM
also administers the Company's corporate affairs and, in connection therewith,
furnishes the Company with office facilities, together with those ordinary
clerical and bookkeeping services which are not being furnished by State
Street Bank and Trust Company, the Company's custodian, and PMFS, the
Company's transfer and dividend disbursing agent. The management services of
PIFM for the Company 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 Fund.
The fee is computed daily and payable monthly. The Management Agreement also
provides that, in the event the expenses of the Fund (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
B-24
<PAGE>
the ordinary course of the Company'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 Fund's shares
are qualified for offer and sale, the compensation due to PIFM will be reduced
by the amount of such excess. The Fund believes that no jurisdiction currently
limits the Fund's expenses.
In connection with its management of the corporate affairs of the Company,
PIFM bears the following expenses:
(a) the salaries and expenses of all of its and the Company's personnel
except the fees and expenses of Directors who are not affiliated persons of
PIFM or the Company's Subadviser;
(b) all expenses incurred by PIFM or by the Company in connection with
managing the ordinary course of the Company's business, other than those
assumed by the Company as described below; and
(c) the costs and expenses payable to the Subadviser pursuant to the
Subadvisory Agreement between PIFM and PI (the Subadvisory Agreement).
Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses: (a) the fees payable to the Manager; (b)
the fees and expenses of Directors who are not affiliated persons of the
Manager or of the Company's Subadviser; (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 Fund and of pricing the Fund's shares; (d)
the charges and expenses of legal counsel and independent accountants for the
Company; (e) brokerage commissions and any issue or transfer taxes chargeable
to the Fund in connection with its securities transactions; (f) all taxes and
corporate fees payable by the Fund to governmental agencies; (g) the fees of
any trade associations of which the Company may be a member; (h) the cost of
stock certificates representing shares of the Fund; (i) the cost of fidelity
and liability insurance; (j) certain organization expenses of the Fund and the
fees and expenses involved in registering and maintaining registration of the
Fund and of its shares with the Commission, including the preparation and
printing of the Company'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
Company's business and (m) distribution fees (except for Class Z shares).
The Management Agreement provides that PIFM will not be liable for any error
of judgment or for any loss suffered by the Company 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.
For the fiscal years ended December 31, 1999, 1998 and 1997, PIFM received
management fees of $481,976, $533,582 and $616,855, respectively, from the
Fund.
PIFM has entered into the Subadvisory Agreement with PI, a wholly-owned
subsidiary of Prudential. The Subadvisory Agreement provides that the
Subadviser will furnish investment advisory services in connection with the
management of the Fund. In connection therewith, PI is obligated to keep
certain books and records of the Fund. In connection therewith, PI is
obligated to keep certain books and records of the Fund. Under the Subadvisory
Agreement, PI, subject to the supervision of PIFM, is responsible for managing
the assets of the Fund in accordance with its investment objectives,
investment program and policies. PI determines what securities and other
instruments are purchased and sold for the Fund and is responsible for
obtaining and evaluating financial data relevant to the Fund. PIFM continues
to have responsibility for all investment advisory services pursuant to the
Management Agreement. PI was reimbursed by PIFM for the reasonable costs and
expenses incurred by PI in furnishing those services. Effective January 1,
2000, PI is paid by PIFM at an annual rate of .20 of 1.00% of the Fund's
average daily net assets.
B-25
<PAGE>
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 Company, PIFM or PI upon not more than 60 days', nor less
than 30 days', written notice. The Subadvisory Agreement provides that it will
continue in effect for a period of more than two years from its execution only
so long as such continuance is specifically approved at least annually in
accordance with the requirements of the Investment Company Act.
Prudential Investment's Fixed Income Group includes the following sector
teams which may contribute towards security selection in addition to the
sector team described in the prospectus (assets under management are as of
December 31, 1999).
U.S. Liquidity
Assets Under Management: $22.6 billion.
Team Leader: Michael Lillard. General Investment Experience: 12 years.
Portfolio Managers: 9. Average General Investment Experience: 10 years, which
includes team members with significant mutual fund experience.
Sector: U.S. Treasuries, agencies and mortgages.
Investment Strategy: Focus is on high quality, liquidity and controlled risk.
High Yield
Assets Under Management: $9.4 billion.
Team Leader: Casey Walsh. General Investment Experience: 17 years.
Portfolio Managers: 7. Average General Investment Experience: 17 years, which
includes team members with significant mutual fund experience.
Sector: Below-investment-grade corporate securities.
Investment Strategy: Focus is generally on bonds with high total return
potential, given existing risk parameters. They also seek securities with high
current income, as appropriate. The team uses a relative value approach.
Global Bond
Assets Under Management: $2.0 billion.
Team Leaders: Steven Koomar and David Bessey. General Investment Experience:
13 years and 10 years, respectively.
Portfolio Managers: 5. Average General Investment Experience: 11 years, which
includes team members with significant mutual fund experience.
Sector: Corporate and government securities of foreign issuers.
Investment Strategy: Focus is on a top-down, geographic-allocation process.
They seek to add value by exploiting yield variances between different
countries and credit qualities.
Emerging Markets
Assets Under Management: $1.9 billion.
Team Leader: David Bessey. General Investment Experience: 10 years.
Portfolio Managers: 3. Average General Investment Experience: 9 years, which
includes team members with significant mutual fund experience.
Sector: Government and corporate securities issued by developing markets and
countries.
Investment Strategy: Focus is on a fundamental investment approach that uses a
strong technical and value overlay to make country selections.
Money Markets
Assets Under Management: $36.0 billion.
Team Leader: Joseph Tully. General Investment Experience: 16 years.
Portfolio Managers: 9. Average General Investment Experience: 10 years, which
includes team members with significant mutual fund experience.
Sector: High-quality short-term securities, including both taxable and tax-
exempt instruments.
Investment Strategy: Focus is on safety of principal, liquidity and controlled
risk.
B-26
<PAGE>
Code of Ethics
The Board of Directors of the Company has adopted a Code of Ethics. In
addition, the Manager, Subadviser and Distributor have each adopted a Code of
Ethics (the "Codes"). The Codes permit personnel subject to the Codes to
invest in securities, including securities that may be purchased or held by
the Fund. However, the protective provisions of the Codes prohibit certain
investments and limit such personnel from making investments during periods
when the Fund is making such investments. The Codes are on public file with,
and are available from, the Commission.
(b) Principal Underwriter, Distributor and Rule 12b-1 Plans
Prudential Investment Management Services LLC (PIMS or the Distributor),
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, acts
as the distributor of the shares of the Company. The Distributor is a
subsidiary of Prudential.
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
Company under Rule 12b-1 under the Investment Company Act and a distribution
agreement (the Distribution Agreement), the Distributor incurs the expenses of
distributing the Fund's Class A, Class B and Class C shares. The Distributor
also incurs the expenses of distributing the Fund's Class Z shares under the
Distribution Agreement, none of which are reimbursed by or paid for by the
Fund.
The expenses incurred under the Plans include commissions and account
servicing fees paid to, or on account of, brokers or financial institutions
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 the Distributor associated with the sale of
Fund shares, including lease, utility, communications and sales promotion
expenses.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
The distribution and/or service fees may also be used by the Distributor to
compensate on a continuing basis brokers in consideration for the
distribution, marketing, administrative and other services and activities
provided by brokers with respect to the promotion of the sale of the Fund's
shares and the maintenance of related shareholder accounts.
Class A Plan. Under the Class A Plan, the Fund 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 (1) 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 the maintenance of shareholder accounts (service fee) and (2) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30
of 1%. The Distributor has contractually agreed to limit its distribution-
related fees payable under the Class A Plan to .25 of 1% of the average daily
net assets of the Class A shares for the fiscal year ending December 31, 2000.
For the fiscal year ended December 31, 1999, the Distributor received
payments of $215,061 on behalf of the Fund under the Class A Plan and spent
approximately $215,061 in distributing the Fund's Class A shares. This amount
was primarily expended for payments of account servicing fees to financial
advisers and other persons who sell Class A shares. For the fiscal year ended
December 31, 1999, the Distributor also received approximately $44,400 on
behalf of the Fund in initial sales charges attributable to Class A shares.
Class B and Class C Plans. Under the Class B and Class C Plans, the Fund
pays 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 Plan
provides that (1) up to .25 of 1% of the average daily net assets of the Class
B shares may be paid as a service fee and (2) up to .75 of 1% (not including
the service fee) of the average daily net assets of the Class B shares (asset-
based sales charge) may be paid for distribution-related expenses with respect
to the Class B shares. The Class C Plan provides that (1) up to .25 of 1% of
the average daily net assets of the Class C shares may be paid as a service
fee and (2) up to .75 of 1% of the average daily net assets of the Class C
shares (asset-based sales charge) may be paid for distribution-related
expenses with respect to Class C shares. The service fee (.25 of 1% of average
daily net assets) is used to pay for personal service and/or the maintenance
of shareholder accounts. The Distributor also
B-27
<PAGE>
receives contingent deferred sales charges from certain redeeming shareholders
and, with respect to Class C shares, initial sales charges. The Distributor
has agreed to contractually limit its distribution-related fees with respect
to Class B and Class C shares of the Fund 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, 2000.
Class B Plan. For the fiscal year ended December 31, 1999, the Distributor
received $224,026 from the Fund under the Class B Plan and spent approximately
$167,300 in distributing the Class B shares of the Fund. It is estimated that
of the latter amount approximately 6.5% ($10,800) was spent on printing and
mailing of prospectuses to other than current shareholders; 21.5%; ($36,000)
was spent on compensation to Pruco Securities Corporation, an affiliated
broker-dealer (Prusec), 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
Fund's shares; and 72.0% ($120,500) on the aggregate of (i) payments of
commissions and account servicing fees to financial advisers (48.1% or
$80,500) and (ii) an allocation on account of overhead and other branch office
distribution-related expenses (23.9% or $40,000). The term "overhead and other
branch office distribution-related expenses" represents (a) the expenses of
operating Prudential Securities branch offices in connection with the sale of
shares of the Fund, 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 Fund, 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. For the
fiscal year ended December 31, 1999, the Distributor received approximately
$50,000 in contingent deferred sales charges attributable to Class B shares.
Class C Plan. For the fiscal year ended December 31, 1999, the Distributor
received $13,251 under the Class C Plan and spent approximately $18,200 in
distributing Class C shares. It is estimated that of the latter amount,
approximately 1.9% ($300) was spent on printing and mailing of prospectuses to
other than current shareholders; 3.9% ($700) on compensation to Pruco
Securities Corporation, an affiliated broker-dealer, 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 94.2% ($17,200) on the aggregate of (i)
payments of commissions and account servicing fees to financial advisers
(73.4% or $13,400), and (ii) an allocation of overhead and other branch office
distribution-related expenses (20.8% or $3,800).
The Distributor also receives an initial sales charge and the proceeds of
contingent deferred sales charges paid by investors upon certain redemptions
of Class C shares. For the fiscal year ended December 31, 1999, the
Distributor received approximately $200 in contingent deferred sales charges
attributable to Class C shares. For the fiscal year ended December 31, 1999,
the Distributor also received approximately $7,900 in initial sales charges
attributable to Class C shares.
* * *
Distribution expenses attributable to the sale of Class A, Class B and Class
C shares of the Fund are 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 Fund 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.
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 Directors who are not
interested persons of the Company and who have no direct or indirect financial
interest in the Class A, Class B or Class C Plan or in any agreement related
to the Plans (Rule 12b-1 Directors), cast in person at a meeting called for
the purpose of voting on such continuance. A Plan 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 of the Fund on not more than 60 days', nor less than 30
days', written notice to any other party to the Plan. 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
B-28
<PAGE>
above. Each Plan will automatically terminate in the event of assignment. The
Company will not be contractually obligated to pay expenses incurred under any
Plan if it is terminated or not continued.
Pursuant to each Plan, the Board of Directors will review at least quarterly
a written report of the distribution expenses incurred on behalf of each class
of shares of the Fund 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.
In addition to distribution and service fees paid by the Company 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 which distribute shares of the Fund (including
Class Z shares). Such payments may be calculated by reference to the net asset
value of shares sold by such persons or otherwise.
Fee Waivers/Subsidies
PFIM may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. In addition,
the Distributor has contractually agreed to waive a portion of its
distribution fees for the Class A, Class B and Class C shares as described
above. Fee waivers and subsidies will increase the Fund's total return.
NASD Maximum Sales Charge Rule
Pursuant to rules of the NASD, the Distributor is required to limit
aggregate initial sales charge, deferred sales charges and asset-based sales
charges to 6.25% of total gross sales of each class of shares. Interest
charges on unreimbursed distribution expenses equal to the prime rate plus one
percent per annum may be added to the 6.25% limitation. Sales from the
reinvestment of dividends and distributions are not included in the
calculation of the 6.25% limitation. The annual asset-based sales charge on
shares of the Fund may not exceed .75 of 1% per class. The 6.25% limitation
applies to each class of the Fund rather than on a per shareholder basis. If
aggregate sales charges were to exceed 6.25% of total gross sales of any
class, all sales charges on shares of that class would be suspended.
(c) Other Service Providers
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. Subcustodians
provide custodial services for the Fund's foreign assets held outside the
United States.
PMFS, 194 Wood Avenue South, Iselin, New Jersey 08830, serves as the
transfer and dividend disbursing agent of the Fund. PMFS 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, the
payment of dividends and distributions and related functions. For these
services, PMFS receives an annual fee per shareholder account of $12.00, 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 communication expenses and
other costs.
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036, serves as the Fund's independent accountants and in that capacity
audits the Fund's annual financial statements.
B-29
<PAGE>
BROKERAGE ALLOCATION AND OTHER PRACTICES
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
Company, will not significantly affect the Fund's ability to pursue its
present investment objective. However, in the future in other circumstances,
the Fund 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 best possible
combination of favorable price and efficient execution. This means that the
Manager will seek to execute each transaction at a price and commission, if
any, that 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 Company, the Manager or the Manager's other clients. Such
research and investment services are those that 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 Company,
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, 1999, 1998, and 1997, the Fund
paid no brokerage commissions.
The Fund is required to disclose its holdings of securities of its regular
brokers and dealers (as defined under Rule 10b-1 of the Investment Company
Act) and their parents at December 31, 1999. As of December 31, 1999, the Fund
held securities of: Goldman, Sachs & Co. in the aggregate amount of
$3,499,000; Morgan Stanley Dean Witter in the aggregate amount of $2,970,000;
Lehman Brothers Inc. in the aggregate amount of $1,496,000; Bear Stearns & Co.
in the aggregate amount of $92,000; J.P. Morgan Securities Inc. in the
aggregate amount of $87,000; and Salomon Smith Barney Inc. in the aggregate
amount of $48,000.
CAPITAL SHARES, OTHER SECURITIES AND ORGANIZATION
The Company was incorporated in Maryland on June 8, 1988. The Company is
authorized to issue 500 million shares of common stock, $.01 par value per
share, divided into four classes for each of the Income and Municipal
B-30
<PAGE>
Income Portfolios, 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 Fund and is identical in all
respects except that (1) 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, (2) 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, (3) each
class has a different exchange privilege, (4) only Class B shares have a
conversion feature. Class Z shares are offered exclusively for sale to a
limited group of investors. In accordance with the Company'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 Company, 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. Each share of each class of common stock of the
Fund 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 the Fund is
entitled to its portion of all of the Fund's assets after all debt and
expenses of the Fund have been paid. Since Class B and Class C shares
generally bear higher distribution expenses than Class A shares, the
liquidation proceeds to shareholders of those classes are likely to be lower
than to Class A shareholders and to Class Z shareholders, whose shares are not
subject to any distribution and/or service fees. The Fund's shares do not have
cumulative voting rights for the election of Directors.
The Company does not intend to hold annual meetings of shareholders unless
otherwise required by law. The Company 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 Company's outstanding shares for the purpose of voting on the removal
of one or more Directors or to transact any other business.
PURCHASE, REDEMPTION AND PRICING OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value (NAV) per share plus a sales charge which, at the election of
the investor, may be imposed either (1) at the time of purchase (Class A or
Class C shares) or (2) on a deferred basis (Class B or Class C shares). Class
Z shares of the Fund are offered to a limited group of investors at NAV
without any sales charges. See "How to Buy, Sell and Exchange Shares of the
Fund" in the Prospectus.
Purchase by Wire. For an initial purchase of shares of the Fund by wire, you
must complete an application and 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, fund and class election,
dividend distribution election, amount being wired and wiring bank.
Instructions should then be given by you to your bank to transfer funds by
wire to State Street Bank and Trust Company (State Street), Boston,
Massachusetts, Custody and Shareholder Services Division, Attention:
Prudential Short-Term Corporate Bond 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 investing (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 Fund as of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Short-Term
Corporate Bond 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.
Issuance of Fund Shares for Securities
Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to (1) reorganizations, (2) statutory mergers, or
(3) 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.
B-31
<PAGE>
Specimen Price Make-Up
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares of the Fund are sold at a maximum sales charge of
3.25%, Class C shares* are sold with a 1% sales charge, and Class B* and Class
Z shares are sold at NAV. Using the Fund's NAV at December 31, 1999, the
maximum offering price of the Fund's shares is as follows:
<TABLE>
<CAPTION>
Income
Portfolio
Class A ---------
<S> <C>
Net asset value and redemption price per Class A share......... $10.99
Maximum sales charge (3.25% of offering price)................. .37
------
Maximum offering price to public............................... $11.36
======
Class B
Net asset value, offering price and redemption price per Class
B share*...................................................... $10.98
======
Class C
Net asset value and redemption price per Class C share*........ $10.98
Sales Charge (1% of offering price)............................ .11
------
Offering price to public....................................... $11.09
======
Class Z
Net asset value, offering price and redemption price per Class
Z share....................................................... $11.00
======
</TABLE>
----------
* Class B and Class C shares are subject to a contingent deferred
sales charge on certain redemptions.
See "How to Buy, Sell and Exchange Shares of the Fund--How to Sell
Your Shares" in the Prospectus.
Selecting a Purchase Alternative
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:
If you intend to hold your investment in the Fund for less than 2 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 more than 2 years, but less than 3
years, you may consider purchasing Class B or Class C shares because: (1) the
contingent-deferred sales load plus the cumulative annual distribution-related
fee on Class B shares; and (2) the maximum 1% initial sales charge plus the
cumulative annual distribution-related fee on Class C shares would be lower
than the maximum 3.25% initial sales charge plus the cumulative annual
distribution-related fee on Class A shares. In addition, more of your money
would be invested initially in the case of Class C shares, because of the
relatively low initial sales charge, and all of your money would be invested
initially in the case of Class B shares, which are sold at NAV.
If you intend to hold your investment for more than 3 years, but less than 4
years, you may consider purchasing Class A shares because the maximum 3.25%
initial sales charge plus the cumulative annual distribution-related fee on
Class A shares would be lower than (1) the contingent-deferred sales charge
plus the cumulative annual distribution-related fee on Class B shares; and (2)
the maximum 1% initial sales charge plus the cumulative annual distribution-
related fee on Class C shares.
If you intend to hold your investment for more than 4 years, but less than 5
years, you may consider purchasing Class A or Class B shares because the
maximum 3.25% initial sales charge plus the cumulative annual distribution-
related fee on Class A shares and the cumulative annual distribution-related
fee on Class B shares would be less than the maximum 1% initial sales charge
plus the cumulative annual distribution-related fee on Class C shares.
If you intend to hold your investment for longer than 5 years, you should
consider purchasing Class A shares over either Class B or Class C shares. This
is because the maximum sales charge plus the cumulative annual distribution-
related
B-32
<PAGE>
fee on Class A shares would be less than the cumulative annual distribution-
related fee on Class B shares and less than the initial sales charge plus the
cumulative annual distribution-related fee on 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 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 C shares, you would have to hold your investment for more than
3 years for the higher cumulative annual distribution-related fee on the Class
C shares plus the 1% initial sales charge 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 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.
Reduction and Waiver of Initial Sales Charge--Class A Shares
Benefit Plans. Certain group retirement and savings plans may purchase Class
A shares without the initial sales charge, if they meet the required minimum
for amount of assets, average account balance or number of eligible employees.
For more information about these requirements, call Prudential at (800) 353-
2847.
Other Waivers. In addition, Class A shares may be purchased at NAV, through
the Distributor or the Transfer Agent, by:
. officers of the Prudential mutual funds (including the Company)
. employees of the Distributor, Prudential Securities, 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
. employees of subadvisers of the Prudential mutual funds provided that
purchases at NAV are permitted by such person's employer
. 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
. members of the Board of Directors of Prudential
. real estate brokers, agents and employees of real estate brokerage
companies affiliated with The Prudential Real Estate Affiliates who
maintain an account at Prudential Securities, Prusec or with the
Transfer Agent
. registered representatives and employees of brokers who have entered
into a selected dealer agreement with the Distributor provided that
purchases at NAV are permitted by such person's employer
. investors who have a business relationship with a financial adviser who
joined Prudential Securities from another investment firm, provided that
(1) 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, (2) 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 (3) the financial adviser served as the client's broker on the
previous purchase
. investors in Individual Retirement Accounts, provided the purchase is
made in a directed rollover to such Individual Retirement Account, or
with the proceeds of a tax-free rollover of assets from a Benefit Plan
for which Prudential provides administrative or recordkeeping services
and further provided that such purchase is made within 60 days of
receipt of the Benefit Plan distribution
. orders placed by broker-dealers, investment advisers or financial
planners who have entered into an agreement with the Distributor, who
place trades for their own accounts or the accounts of their clients and
who charge a management, consulting or other fee for their services (for
example, mutual fund "wrap" or asset allocation programs)
B-33
<PAGE>
. orders placed by clients of broker-dealers, investment advisers or
financial planners who place trades for customer accounts if the
accounts are linked to the master account of such broker-dealer,
investment adviser or financial planner and the broker-dealer,
investment adviser or financial planner charges its clients a separate
fee for its services (for example, mutual fund "supermarket programs").
Broker-dealers, investment advisers or financial planners sponsoring fee-
based programs (such as mutual fund "wrap" or asset allocation programs and
mutual fund "supermarket" programs) may offer their clients more than one
class of shares in the Fund in connection with different pricing options for
their programs. Investors should consider carefully any separate transaction
and other fees charged by these programs in connection with investing in each
available share class before selecting a share class.
For an investor to obtain any reduction or waiver of the initial sales
charges, at the time of the sale either the Transfer Agent must be notified
directly by the investor or the Distributor must be notified by the broker
facilitating the transaction that the sale qualifies for the reduced or waived
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.
Combined Purchase and Cumulative Purchase Privilege. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential mutual funds, the
purchases may be combined to take advantage of the reduced sales charges
applicable to larger purchases. See "How to Buy, Sell and Exchange Shares of
the Fund--How to Buy Shares--Step 2: Choose a Share Class--Reducing or Waiving
Class A's Initial Sales Charge" in the Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
. an individual
. the individual's spouse, their children and their parents
. the individual's and spouse's Individual Retirement Account (IRA)
. 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)
. a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children
. a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse
. one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that
employer).
The Transfer Agent, the Distributor or your broker 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.
Letters of Intent. Reduced sales charges are available to investors (or an
eligible group of related investors) who enter into a written Letter of Intent
providing for the purchase, within a thirteen-month period, of shares of the
Fund and shares of other Prudential mutual funds (Letter of Intent).
Retirement and group plans no longer qualify to purchase Class A shares at NAV
by entering into a Letter of Intent.
For purposes of the 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 or its
affiliates and through your broker will not be aggregated to determine the
value of the reduced sales charge.
B-34
<PAGE>
A Letter of Intent permits an investor to establish a total investment goal
to be achieved by any number of investments over a thirteen-month period. Each
investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. Escrowed Class A shares totaling 5% of the dollar amount of the
Letter of Intent will be held by the Transfer Agent in the name of the
investor. The effective date of a Letter of Intent may be back-dated up to 90
days, in order that any investments made during this 90-day period, valued at
the investor's cost, can be applied to the fulfillment of the Letter of Intent
goal.
The Letter of Intent does not obligate the investor to purchase, nor the
Company to sell, the indicated amount. In the event the Letter of Intent goal
is not achieved within the thirteen-month period, the investor 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 charge will be
granted subject to confirmation of the investor's holdings.
Class B Shares
The offering price of Class B shares for investors choosing one of the
deferred sales charge alternatives is the NAV next determined following
receipt of an order in proper form by the Transfer Agent, your broker or the
Distributor. Redemptions of Class B shares may be subject to a CDSC. See
"Contingent Deferred Sales Charge" below.
The Distributor will pay, from its own resources, sales commissions of up to
4% of the purchase price of Class B shares to brokers, financial advisers and
other persons who sell Class B shares at the time of sale. 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.
Class C Shares
The offering price of Class C shares is the next determined NAV plus a 1%
sales charge. Redemptions of Class C shares may be subject to a CDSC. See
"Contingent Deferred Sales Charge" below. In connection with the sale of
Class C shares, the Distributor will pay, from its own resources, brokers,
financial advisers and other persons which distribute Class C shares a sales
commission of up to 2% of the purchase price at the time of the sale.
Waiver of Initial Sales Charge--Class C Shares
Benefit Plans. Certain group retirement plans may purchase Class C shares
without the initial sales charge. For more information, call Prudential at
(800) 353-2847.
Investment of Redemption Proceeds from Other Investment Companies. Investors
may purchase Class C shares at NAV, without the initial sales charge, with the
proceeds from the redemption of shares of any unaffiliated registered
investment company which were not held through an account with any Prudential
affiliate. Such purchases must be made within 60 days of the redemption.
Investors eligible for this waiver include: (1) investors purchasing shares
through an account at Prudential Securities; (2) investors purchasing shares
through an ADVANTAGE Account or an Investor Account with Prusec; and (3)
investors purchasing shares through other brokers. This waiver is not
available to investors who purchase shares directly from the Transfer Agent.
You must notify the Transfer Agent directly or through your broker if you are
entitled to this waiver and provide the Transfer Agent with such supporting
documents as it may deem appropriate.
Class Z Shares
Benefit Plans. Certain group retirement plans may purchase Class Z shares if
they meet the required minimum for amount of assets, average account balance
or number of eligible employees. For more information about these
requirements, call Prudential at (800) 353-2847.
B-35
<PAGE>
Mutual Fund Programs. Class Z shares also can be purchased by participants
in any fee-based program or trust program sponsored by Prudential or an
affiliate that includes the Fund as an available option. Class Z shares also
can be purchased by investors in certain programs sponsored by broker-dealers,
investment advisers and financial planners who have agreements with Prudential
Investments Advisory Group relating to:
. Mutual fund "wrap" or asset allocation programs, where the sponsor
places Fund trades, links its clients' accounts to a master account in
the sponsor's name and charges its clients a management, consulting or
other fee for its services
. Mutual fund "supermarket" programs, where the sponsor links its clients'
accounts to a master account in the sponsor's name and the sponsor
charges a fee for its services.
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.
Other Types of Investors. Class Z shares also are available for purchase by
the following categories of investors:
. Certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential mutual funds are an available investment option
. Current and former Directors/Trustees of the Prudential mutual funds
(including the Fund)
. Prudential, with an investment of $10 million or more.
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 finder's fee, from its own resources based
on a percentage of the net asset value of shares sold by such persons.
Rights of Accumulation
Reduced sales charges are also available through rights of accumulation,
under which an investor or an eligible group of related investors, as
described above under "Combined Purchase and Cumulative Purchase Privilege,"
may aggregate the value of their existing holdings of 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. Rights of Accumulation may be applied across the classes
of the Prudential mutual funds. However, the value of shares held directly
with the Transfer Agent and through your broker will not be aggregated to
determine the reduced sales charge. The value of existing holdings for
purposes of determining the reduced sales charge is calculated using the
maximum offering price (net asset value plus maximum sales charge) as of the
previous business day.
The Distributor or the Transfer Agent must be notified at the time of
purchase that the shareholder 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.
Sale of 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 (in accordance with
procedures established by the Transfer Agent in connection with investors'
accounts) by the Transfer Agent, the Distributor or your broker. In certain
cases, however, redemption proceeds will be reduced by the amount of any
applicable CDSC, as described below. See "Contingent Deferred Sales Charge"
below. If you are redeeming your shares through a broker, your broker must
receive your sell order before the Fund computes its NAV for that day (that
is, 4:15 p.m., New York time) in order to receive that day's NAV. Your broker
will be responsible for furnishing all necessary documentation to the
Distributor and may charge you for its services in connection with redeeming
shares of the Fund.
If you hold shares of the Fund through Prudential Securities, you must
redeem your shares through Prudential Securities. Please contact your
Prudential Securities financial adviser.
B-36
<PAGE>
In order to redeem shares, a written request for redemption signed by you
exactly as the account is registered is required. If you hold certificates,
the certificates must be received by the Transfer Agent, the Distributor or
your broker 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, the Distributor, or to
your broker.
Signature Guarantee. If the proceeds of the redemption (1) exceed $100,000,
(2) are to be paid to a person other than the record owner, (3) are to be sent
to an address other than the address on the Transfer Agent's records, or (4)
are to be paid to a corporation, partnership, trust or fiduciary and your
shares are held directly with the Transfer Agent, the signature(s) on the
redemption request or stock power must be signature guaranteed by an "eligible
guarantor institution." An "eligible guarantor institution" includes any bank,
broker, dealer or credit union. The Transfer Agent reserves the right to
request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. In the case of redemptions from a PruArray
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 as
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, the Distributor or your broker
of the written request, and certificates, if issued, except as indicated
below. If you hold shares through a broker, payment for shares presented for
redemption will be credited to your account at your broker, unless you
indicate otherwise. Such payment may be postponed or the right of redemption
suspended at times (1) when the New York Stock Exchange is closed for other
than customary weekends and holidays, (2) when trading on such Exchange is
restricted, (3) 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 (4) during any other period when the Commission, by order, so
permits; provided that applicable rules and regulations of the Commission
shall govern as to whether the conditions prescribed in (2), (3) or (4) 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, which may take 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 payment wholly or partly in cash, the Fund may pay the redemption price
in whole or in part by a distribution in kind of securities from the
investment portfolio of the 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. 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 net asset value of less than $500 due to a redemption. The Fund
will give such shareholders 60 days' prior written notice in which to purchase
sufficient additional shares to avoid such redemption. No 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 back into your
account any portion or all of the proceeds of such redemption in shares of the
same fund 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 Transfer Agent, either directly or through the
Distributor or your broker, at the time the repurchase privilege is exercised,
to adjust your account for the CDSC you previously paid.
B-37
<PAGE>
Thereafter, any redemptions will be subject to the CDSC applicable at the time
of the redemption. See "Contingent Deferred Sales Charge" below. Exercise of
the repurchase privilege may not affect federal tax treatment of any gain
realized upon redemption. However, if the redemption was made within a 30-day
period of the repurchase and if the redemption resulted in a loss, some or all
of the loss, depending on the amount reinvested, will not be allowed for
federal income tax purposes.
Contingent Deferred Sales Charge
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 18 months of purchase (one year for Class C shares
purchased before November 2, 1998) 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 18 months, in the case of Class C shares (one
year for Class C shares purchased before November 2, 1998). 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.
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.
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 Fund shares made during the preceding four years for Class
B shares and 18 months for Class C shares (one year for Class C shares bought
before November 2, 1998); 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 Charge--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
B-38
<PAGE>
of the grantor. The waiver is available for total or partial redemptions of
shares owned by a person, either individually or in joint tenancy 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. For more information, call Prudential at (800) 353-2847.
Finally, the CDSC will be waived to the extent that the proceeds from shares
redeemed are invested in Prudential mutual funds, The Guaranteed Investment
Account, the Guaranteed Insulated Separate Account or units of The Stable
Value Fund.
Systematic Withdrawal Plan. The CDSC will be waived (or reduced) on certain
redemptions effected through the 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% is reached.
In addition, the CDSC will be waived on redemptions of shares held by
Directors of the Company.
You must notify the Transfer Agent either directly or through your broker,
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.
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 (a copy of the trust
substantial gainful agreement identifying the grantor will be required as
activity by reason of any well)) is permanently disabled. The letter must also
medically determinable indicate the date of disability.
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 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 Fund, 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 Fund if the investor qualified
for a quantity discount upon the initial purchase of shares exchanged into the
Fund.
B-39
<PAGE>
Waiver of Contingent Deferred Sales Charge--Class C Shares
Benefit Plans. The CDSC will be waived for redemptions by certain group
retirement plans for which Prudential or brokers not affiliated with
Prudential provide administrative or recordkeeping services. The CDSC also
will be waived for certain redemptions by benefit plans sponsored by
Prudential and its affiliates. For more information, call Prudential at (800)
353-2847.
Conversion Feature--Class B Shares
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately five years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales
charge.
Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will
be determined on each conversion date in accordance with the following
formula: (i) the ratio of (a) the amounts paid for Class B shares purchased at
least five years prior to the conversion date to (b) the total amount paid for
all Class B shares purchased and then held in your account (ii) multiplied by
the total number of Class B shares purchased and then held in your account.
Each time any Eligible Shares in your account convert to Class A shares, all
shares or amounts representing Class B shares then in your account that were
acquired through the automatic reinvestment of dividends and other
distributions will convert to Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible
Shares calculated as described above will generally be either more or less
than the number of shares actually purchased approximately five years before
such conversion date. For example, if 100 shares were initially purchased at
$10 per share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately five years from the initial purchase (that is, $1,000
divided by $2,100 (47.62%), multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to
shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share 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.
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 would 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 (1) 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 (2) that the conversion of shares does not constitute a
taxable event. The conversion of Class B shares into Class A shares may be
suspended if such opinions or rulings are no longer available. If conversions
are suspended, Class B shares of the Fund will continue to be subject,
possibly indefinitely, to their higher annual distribution and service fee.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of shares of the Fund, a Shareholder Investment
Account is established for each investor under which a record of the shares
held is maintained by the Transfer Agent. If a stock certificate is desired,
it must be requested in writing for each transaction. Certificates are issued
only for full shares and may be redeposited in the Account at any time.
B-40
<PAGE>
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 Fund at net
asset value per share. 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 by the record date, cash payment will be made directly
to the broker. Any shareholder who receives dividends or distributions in cash
may subsequently reinvest any such dividend or distribution at net asset value
by returning the check or the proceeds to the Transfer Agent within 30 days
after the payment date. Such reinvestment will be made at the net asset value
per share next determined after receipt of the check by the Transfer Agent.
Shares purchased with reinvested dividends and/or distributions will not be
subject to CDSC upon redemption.
Exchange Privilege
The Fund makes available to its shareholders the privilege of exchanging
their shares of the Fund for shares of certain other Prudential mutual funds,
including one or more specified money market funds, subject in each case to
the minimum investment requirements of such funds. Shares of such other
Prudential mutual funds may also be exchanged for shares of the Fund. 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.
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 noncertificate 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 8:00 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.
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 must be returned in order for the
shares to be exchanged.
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.
Class A. Shareholders of the Fund 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.
B-41
<PAGE>
The following money market funds participate in the Class A exchange
privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets, Inc. (Class A Shares)
Prudential Tax-Free Money Fund, Inc.
Class B and Class C. Shareholders of the Fund may exchange their Class B and
Class C shares of the Fund for Class B and Class C shares, respectively, of
certain other Prudential mutual funds and shares of Prudential Special Money
Market Fund, Inc. No CDSC will be payable upon such exchange, but a CDSC may
be payable upon the redemption of the 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 Fund may also be exchanged for shares of
an eligible money market fund without imposition of any CDSC at the time of
exchange. Upon subsequent redemption from such money market fund or after re-
exchange into the Company, such shares will be subject to the CDSC calculated
without regard to the time such shares were held in the money market fund. In
order to minimize the period of time in which shares are subject to a 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 Fund from a money market fund during
the month (and are held in the Fund 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 Fund, respectively, without subjecting such shares to any CDSC. Shares
of any fund participating in the Class B or Class C exchange privilege that
were acquired through reinvestment of dividends or distributions may be
exchanged for Class B or Class C shares of other funds, respectively, without
being subject to any CDSC.
Class Z. Class Z shares may be exchanged for Class Z shares of other
Prudential mutual funds.
Special Exchange Privileges. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV and for
shareholders who qualify to purchase Class Z shares. 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.
Shareholders who qualify to purchase Class Z shares will have their Class B
and Class C shares which are not subject to a CDSC and their Class A shares
exchanged for Class Z shares on a quarterly basis. Eligibility for this
exchange privilege will be calculated on the business day prior to the date of
the exchange. Amounts representing Class B or Class C shares which are not
subject to a CDSC include the following: (1) amounts representing Class B or
Class C shares acquired pursuant to the automatic reinvestment of dividends
and distributions, (2) amounts representing the increase in the net asset
value
B-42
<PAGE>
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 or
another broker that they are eligible for this special exchange privilege.
Participants in any fee-based program for which the Company is an available
option will have their Class A shares, if any, exchanged for Class Z shares
when they elect to have those assets become a part of the fee-based program.
Upon leaving the program (whether voluntarily or not), such Class Z shares
(and, to the extent provided for in the program, Class Z shares acquired
through participation in the program) will be exchanged for Class A shares at
net asset value.
Additional details about the exchange privilege and prospectuses for each of
the Prudential mutual funds are available from the Fund's Transfer Agent, the
Distributor or your broker. The exchange privilege may be modified, terminated
or suspended on 60 days' notice, and any fund, including the Fund, or the
Distributor, has the right to reject any exchange application relating to such
fund's shares.
Dollar Cost Averaging
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more
shares when the price is low and fewer shares when the price is high. The
average cost per share is lower than it would be if a constant number of
shares were bought at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2011, the cost of four years at a private
college could reach $210,000 and over $90,000 at a public university./1/
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals./2/
<TABLE>
<CAPTION>
Period of
Monthly Investments $100,000 $150,000 $200,000 $250,000
------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
25 Years............................ $ 105 $ 158 $ 210 $ 263
20 Years............................ 170 255 340 424
15 Years............................ 289 438 578 722
10 Years............................ 547 820 1,093 1,366
5 Years............................ 1,361 2,041 2,721 3,402
</TABLE>
See "Automatic Investment Plan" below.
- ----------
/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 effective 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 Investment Plan (AIP)
Under AIP, an investor may arrange to have a fixed amount automatically
invested in the shares of the Fund monthly by authorizing his or her bank
account or brokerage account (including a Prudential Securities COMMAND
Account) to be debited to invest specified dollar amounts for subsequent
investment into the Fund. The investor's bank must be a member of the
Automatic Clearing House System. Stock certificates are not issued to AIP
participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, the Distributor or your broker.
B-43
<PAGE>
Systematic Withdrawal Plan
A systematic withdrawal plan is available to shareholders through the
Transfer Agent, the Distributor or your broker. Such withdrawal plan provides
for monthly, quarterly, semi-annual or annual redemption checks in any amount,
except as provided below, up to the value of the shares in the shareholder's
account. Systematic withdrawals of Class B or Class C shares may be subject to
a CDSC.
In the case of shares held through the Transfer Agent (1) a $10,000 minimum
account value applies, (2) systematic withdrawals may not be for less than
$100 and (3) all dividends and/or distributions must be automatically
reinvested in additional full and fractional shares of the Fund in order for
the shareholder to participate in the plan. See "Automatic Reinvestment of
Dividends and/or Distributions" above.
The Transfer Agent, the Distributor or your broker acts as an agent for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the systematic 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.
Systematic withdrawal payments should not be considered as dividends, yield
or income. If systematic withdrawals continuously exceed reinvested dividends
and distributions, the shareholder's original investment will be
correspondingly reduced and ultimately exhausted.
Furthermore, each systematic withdrawal constitutes a redemption of shares,
and any gain or loss realized must be recognized for federal income tax
purposes. In addition, systematic withdrawals made concurrently with purchases
of additional shares are inadvisable because of the applicable sales charges
to (1) the purchase of Class A and Class C shares and (2) the redemption 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 401(k) plans, self-directed
individual retirement accounts and "tax-deferred 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, administration and custodial fees as well as other plan details
are available from the Distributor or the Transfer Agent.
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.
Tax-Deferred Retirement Accounts
Individual Retirement Accounts. An Individual Retirement Account (IRA)
permits the deferral of federal income tax on income earned in the account
until the earnings are withdrawn. The following chart represents a comparison
of the earnings in a personal savings account with those in an IRA, assuming a
$2,000 annual contribution, an 8% rate of return and a 39.6% federal income
tax bracket and shows how much more retirement income can accumulate within an
IRA as opposed to a taxable individual savings account.
Tax-Deferred Compounding/1/
<TABLE>
<CAPTION>
Contributions Personal
Made Over Savings IRA
-------------------------------------------------------- -------- --------
<S> <C> <C>
10 years................................................ $ 26,165 $ 31,291
15 years................................................ 44,675 58,649
20 years................................................ 68,109 98,846
25 years................................................ 97,780 157,909
30 years................................................ 135,346 244,692
</TABLE>
- ----------
/1/ The chart is for illustrative purposes only and does not represent the
performance of the 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.
B-44
<PAGE>
Mutual Fund Programs
From time to time, the Company 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, such as, pursuit of 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
Company 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 financial
advisor concerning the appropriate blend of portfolios for them. If investors
elect to purchase the individual mutual funds that constitute the program in
an investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
NET ASSET VALUE
The Fund's net asset value per share or NAV is determined by subtracting its
liabilities from the value of its assets and dividing the remainder by the
number of outstanding shares. NAV is calculated separately for each class. The
Directors have fixed the specific time of day for the computation of the
Fund's net asset value to be as of 4:15 p.m., New York time.
Under the Investment Company Act, the Board of Directors is responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Board of Directors, the value of
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 of such exchange system 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, or at the bid price on such day in the absence of an asked price.
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 by the Manager in
consultation with the Subadviser to be over-the-counter, are valued on the
basis of valuations provided by an independent pricing agent or principal
market maker 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 by the Manager in consultation with the Subadviser 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 or board of trade or, if there
was no sale on the applicable commodities exchange or board of trade on such
day, at the mean between the most recently quoted bid and asked prices on such
exchange or board of trade. 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 Subadviser (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 the
Subadviser, including its portfolio manager, traders, and its research and
credit analysts, on the basis of the following factors: cost of the security,
transactions in comparable securities, relationships among various securities
and such other factors as may be determined by the Manager, Subadviser, Board
of Directors or Valuation Committee to materially affect the value of the
security. 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
B-45
<PAGE>
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 Fund declares dividends daily, the net asset value of the
Class A, Class B, Class C and Class Z shares of the Fund 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 Fund declares dividends daily based on actual net investment income
determined in accordance with generally accepted accounting principles. Such
dividends will be payable monthly. The Fund's 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 Fund 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" above.
The Fund is qualified as, intends to remain qualified as and has elected to
be treated as a regulated investment company under Subchapter M of the
Internal Revenue Code. This relieves the Fund (but not its shareholders) from
paying federal income tax on income and capital gains that are distributed to
shareholders and permits net capital gains of the Fund (that is, the excess of
net long-term capital gains over net short-term capital losses) to be treated
as long-term capital gains of the shareholders, regardless of how long
shareholders have held their shares in the Fund.
Qualification as a regulated investment company will be determined at the
level of the Fund and not at the level of the Company. Accordingly, the
determination of whether the Fund qualifies as a regulated investment company
will be based on the activities of the Fund, including the purchases and sales
of securities and the income received and expenses incurred in the Fund. Net
capital gains of the Fund that are available for distribution to shareholders
will be computed by taking into account any capital loss carryforward of the
Fund.
Qualification as a regulated investment company under the Internal Revenue
Code requires, among other things, that (a) at least 90% of the Fund's annual
gross income, without reduction for losses from the sale or other disposition
of securities, be derived from payments with respect to securities loans,
interest, dividends, and gains from the sale or other disposition of stock,
securities 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 stock or securities or currencies; (b) the Fund
diversify its holdings so that, at the end of each quarter of the taxable
year, (i) at least 50% of the value of the Fund's assets is represented by
cash, U.S. Government securities and other stock or securities limited in
respect of any one issuer to an amount not greater than 5% of the value of the
assets of the Fund 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 Fund distribute to its shareholders at least 90% of its net investment
income and net short-term capital gains (that is, the excess of net short-term
capital gains over net long-term capital losses) in each year.
B-46
<PAGE>
The Fund 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 Fund and therefore is subject to the distribution requirements
of the Internal Revenue Code. Because the original issue discount income
earned by the Fund in a taxable year may not be represented by cash income,
the Fund 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 Fund may be subject to similar
treatment by reason of an election made by the Fund under the market discount
rules.
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 Fund 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 of net investment income and realized net short-term capital
gains of the Fund are taxable to shareholders of the Fund as ordinary income,
whether such distributions are taken in cash or reinvested in additional
shares. Distributions of net capital gains (that is, 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 Fund have been held. The maximum capital gains rate
for individuals is 20%. The maximum capital gains rate for corporate
shareholders currently is the same as the maximum tax rate for ordinary
income. Other gains or losses on the sale of securities will be short-term
capital gains or losses. Distributions and dividends paid by the Fund
generally will not be eligible for the dividends-received deduction for
corporate shareholders. Tax-exempt shareholders generally will not be required
to pay taxes on amounts distributed to them.
Certain futures contracts and certain listed options (referred to as Section
1256 Contracts) held by the Fund will be required to be "marked to market" for
federal income tax purposes at the end of the Fund's taxable year; that is,
treated as having been sold at their fair market value on the last day of the
Fund's taxable year. 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 Fund 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 Fund 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 Fund 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 Fund by
a shareholder who is not a dealer in securities will be treated as capital
gain or loss. Any such capital gain or loss will be treated as long-term
capital gain or loss if the shares were held for more than 12 months. In the
case of an individual, the maximum long-term capital gains rate is 20%.
However, any loss realized by a shareholder upon the sale of shares of the
Fund 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 on such shares.
Any loss realized on a sale, redemption or exchange of shares of the Fund 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. Under such circumstances, a shareholder who acquires
shares of the Fund and sells, exchanges 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 Fund.
Income received by the Fund 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 Fund will be subject, since the amount of the
Fund's assets to be invested in various countries will vary.
B-47
<PAGE>
Any capital gains 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 capital gains
distributions. Furthermore, such capital gains distributions, although in
effect a return of capital, are subject to federal income taxes. Therefore,
prior to purchasing shares of the Fund, the investor should carefully consider
the impact of dividends or capital gains distributions which are expected to
be or have been announced.
Dividends and capital gains distributions and gains on the sales of Fund
shares also may be subject to additional state and local taxes. See "Fund
Distributions and Tax Issues" in the Prospectus.
If any net capital gains are retained by the Fund for investment, requiring
federal income taxes to be paid thereon by the Fund, the Fund 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 Fund 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 Fund by the difference between their
pro rata share of such gains and their tax credit.
Under federal income tax law, the Fund 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
Fund, 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 Company 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.
Dividends of net investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a
nominee or fiduciary) who is a nonresident alien individual, a foreign
corporation or a foreign partnership (foreign shareholder) are subject to a
30% (or lower treaty rate) withholding tax upon the gross amount of the
dividends or distributions unless the dividends or distributions are
effectively connected with a U.S. trade or business conducted by the foreign
shareholder. Capital gain distributions paid to a foreign shareholder are
generally not subject to withholding tax. A foreign shareholder will, however,
be required to pay U.S. income tax on any dividends and capital gain
distributions which are effectively connected with a U.S. trade or business of
the foreign shareholder.
PERFORMANCE INFORMATION
Average Annual Total Return. The Fund 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 "Risk/Return
Summary--Evaluating Performance" in the Prospectus.
Average annual total return is computed according to the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year periods (or
fractional portion thereof) of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year periods.
Average annual return assumes reinvestment of all dividends and
distributions and 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.
B-48
<PAGE>
Below are the average annual total returns for the Fund's share classes for
the periods ended December 31, 1999.
<TABLE>
<CAPTION>
1 5 10 Since Inception
Year Years Years Inception Date
With waiver and/or expense subsidy ----- ----- ----- --------- ---------
<S> <C> <C> <C> <C> <C>
Class A............................... -1.58% 5.79% 6.38% 6.51% 9-1-89
Class B............................... -1.79% 5.82% N/A 4.78% 12-9-92
Class C............................... -0.80% 5.60% N/A 5.03% 8-1-94
Class Z............................... 2.07% N/A N/A 5.44% 12-16-96
</TABLE>
<TABLE>
<CAPTION>
1 5 10 Since Inception
Year Years Years Inception Date
Without waiver and/or expense subsidy ----- ----- ----- --------- ---------
<S> <C> <C> <C> <C> <C>
Class A............................... -1.58% 5.79% 6.17% 6.26% 9-1-89
Class B............................... -1.79% 5.82% N/A 4.78% 12-9-92
Class C............................... -0.80% 5.60% N/A 5.03% 8-1-94
Class Z............................... 2.07% N/A N/A 5.44% 12-16-96
</TABLE>
Aggregate Total Return. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B,
Class C and Class Z shares.
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed according to 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.
Below are the aggregate total returns for the Fund's share classes for the
periods ended December 31, 1999.
<TABLE>
<CAPTION>
1 5 10 Since Inception
Year Years Years Inception Date
With waiver and/or expense subsidy ---- ----- ----- --------- ---------
<S> <C> <C> <C> <C> <C>
Class A................................ 1.72% 36.96% 91.85% 98.26% 9-1-89
Class B................................ 1.21% 32.67% N/A 39.04% 12-9-92
Class C................................ 1.21% 32.67% N/A 31.77% 8-1-94
Class Z................................ 2.07% N/A N/A 17.47% 12-16-96
<CAPTION>
1 5 10 Since Inception
Year Years Years Inception Date
Without waiver and/or expense subsidy ---- ----- ----- --------- ---------
<S> <C> <C> <C> <C> <C>
Class A................................ 1.72% 36.96% 88.01% 93.57% 9-1-89
Class B................................ 1.21% 32.67% N/A 39.04% 12-9-92
Class C................................ 1.21% 32.67% N/A 31.77% 8-1-94
Class Z................................ 2.07% N/A N/A 17.47% 12-16-96
</TABLE>
Yield. The Fund may from time to time advertise its yield as calculated over
a 30-day period. Yield is calculated separately for Class A, Class B, Class C
and Class Z shares. This yield will be computed by dividing the Fund's net
investment income per share earned during this 30-day period by the maximum
offering price per share on the last day of this period. Yield is calculated
according to the following formula:
a - b
YIELD = 2[(------ +1) /6/-1 ]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
Yield fluctuates and an annualized yield quotation is not a representation
by the Fund as to what an investment in the Fund will actually yield for any
given period.
B-49
<PAGE>
The yields for the 30-day period ended December 31, 1999 for the Portfolio's
Class A, Class B, Class C and Class Z shares were 5.86%, 5.55%, 5.50% and
6.31%, respectively.
Advertising. Advertising materials for the Fund may include biographical
information relating to its portfolio manager(s), and may include or refer to
commentary by the Fund's manager(s) concerning investment style, investment
discipline, asset growth, current or past business experience, business
capabilities, political, economic or financial conditions and other matters of
general interest to investors. Advertising materials for the Fund also may
include mention of The Prudential Insurance Company of America, its affiliates
and subsidiaries, and reference the assets, products and services of those
entities.
From time to time, advertising materials for the Fund may include
information concerning retirement and investing for retirement, may refer to
the approximate number of Fund shareholders and may refer to Lipper rankings
or Morningstar ratings, other related analyses supporting those ratings, other
industry publications, business periodicals and markets indices. In addition,
advertising materials may reference studies or analyses performed by the
Manager or its affiliates. Advertising materials for sector funds, funds that
focus on market capitalizations, index funds and international/global funds
may discuss the potential benefits and risks of that investment style.
Advertising materials for fixed income funds may discuss the benefits and
risks of investing in the bond market including discussions of credit quality,
duration and maturity.
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/
Performance Comparison of Different Types of Investments
Over The Long Term (12/31/25 - 12/31/99)
[BAR CHART]
Common Stocks 11.4%
Long-Term Gov't Bonds 5.1%
Inflation 3.1%
/1/Source: Ibbotson Associates. Used with permission. All rights reserved.
Common stock returns are based on the Standard & Poor's 500 Composite Stock
Price 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-50
<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 maturityD categories.
- --------------------------------------------------------------------------------
Portfolio of Investments as PRUDENTIAL STRUCTURED MATURITY FUND, INC.
of December 31, 1999 INCOME PORTFOLIO
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating* Amount
(Unaudited) (000) Description Value (Note
1)
<S> <C> <C> <C>
- ------------------------------------------------------------
5-6 YEARS--15.7%
Ba1 $ 1,225 Lear Corp.,
7.96%, 5/15/05 $ 1,188,250
United States Treasury Notes,
Aaa 12,800 7.50%, 2/15/05 13,350,016
Aaa 3,275 6.50%, 5/15/05 3,276,015
-------------
17,814,281
- ------------------------------------------------------------
4-5 YEARS--15.1%
A2 1,200 Coca-Cola Enterprises, Inc.,
6.625%, 8/1/04 1,174,932
Aaa 2,500 Comed Transitional Funding
Trust,
(Average life 4.43 years)D
5.44%, 3/25/07 2,340,625
Baa3 1,000 Delta Air Lines, Inc.,
6.65%, 3/15/04 954,010
Baa1 2,000 Finova Capital Corp.,
6.125%, 3/15/04 1,897,000
A2 1,000 Fortune Brands, Inc.,
7.125%, 11/1/04 986,090
A3 2,500 Heller Financial, Inc.,
6.00%, 3/19/04 2,373,825
A3 1,500 Lehman Brothers Holdings,
Inc.,
6.625%, 4/1/04 1,452,060
Baa1 2,500 PaineWebber Group, Inc.,
Medium Term Note,
7.015%, 2/10/04 2,445,375
Aaa 2,500 PECO Energy Transiton Trust,
(Average life 4.55 years)D
5.80%, 3/1/07 2,362,750
Aa2 950 Procter & Gamble Co.,
6.60%, 12/15/04 937,365
Baa3 300 Utilicorp United, Inc.,
7.00%, 7/15/04 289,722
-------------
17,213,754
3-4 YEARS--18.6%
Baa1 $ 2,000 Cendant Corp.,
7.75%, 12/1/03 $ 1,995,200
Baa1 270 Duke Realty L.P.,
7.30%, 6/30/03 267,003
A1 2,000 Ford Motor Credit Co.,
6.625%, 6/30/03 1,967,300
A2 2,500 General Motors Acceptance
Corp.,
5.95%, 3/14/03 2,407,250
A1 1,000 Goldman, Sachs Group L.P.,
6.25%, 2/1/03 970,690
A1 2,500 IBM Corp.,
5.37%, 9/22/03 2,373,625
A1 2,000 International Lease
Finance Corp., Medium Term Note,
5.90%, 3/12/03 1,924,200
Ba1 1,000 ITT Corp.,
6.75%, 11/15/03 930,230
Baa2 2,000 Litton Industries, Inc.,
6.05%, 4/15/03 1,910,080
Aa3 3,000 Morgan Stanley Dean Witter,
6.875%, 3/1/03 2,969,940
Baa2 2,000 Niagara Mohawk Power Corp.,
7.375%, 8/1/03 2,000,200
Baa3 1,500 Osprey Trust,
8.31%, 1/15/03 1,492,125
-------------
21,207,843
- ------------------------------------------------------------
2-3 YEARS--15.3%
A2 500 BankBoston Corp.,
Medium Term Note,
6.125%, 3/15/02 490,750
A3 1,000 Bombardier Capital, Inc.,
Medium Term Note,
7.30%, 12/15/02 996,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 51
<PAGE>
Portfolio of Investments as PRUDENTIAL STRUCTURED MATURITY FUND, INC.
of December 31, 1999 INCOME PORTFOLIO
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating* Amount
(Unaudited) (000) Description Value (Note 1)
- ------------------------------------------------------------
<S> <C> <C> <C>
2-3 YEARS--(cont'd.)
Baa1 $ 300 Cox Enterprises, Inc.,
6.625%, 6/14/02 $ 295,659
A1 2,500 Goldman, Sachs Group L.P.,
7.80%, 7/15/02 2,528,275
A2 3,000 Household Finance Corp.,
Medium Term Note,
6.125%, 7/15/02 2,919,840
A3 2,500 MCI Communications Corp.,
6.125%, 4/15/02 2,459,450
A3 3,000 Sears Roebuck Acceptance
Corp., Medium Term Note,
6.38%, 10/7/02 2,903,610
Baa2 1,500 Telecomunicaiones De
Puerto Rico,
6.15%, 5/15/02 1,454,475
Aaa 800 United States Treasury Notes,
6.625%, 4/30/02 806,128
Baa3 2,500 Viacom, Inc.,
7.50%, 1/15/02 2,505,425
-------------
17,359,612
- ------------------------------------------------------------
1-2 YEARS--15.8%
Baa2 2,500 Capital One Bank,
7.08%, 10/30/01 2,475,575
A1 2,500 Chrysler Financial Corp.,
Medium Term Note,
5.25%, 10/22/01 2,431,325
Ba3 500 CMS Energy Corp.,
8.00%, 7/1/01 495,300
Baa2 2,000 CSX Corp.,
Medium Term Note,
5.85%, 9/17/01 1,959,720
Baa2 5,000 First Industrial L.P.,
6.50%, 4/5/01 4,891,300
Baa3 600 Kroger Co.,
6.34%, 6/1/01 593,250
Baa2 1,000 Mallinckrodt, Inc.,
6.30%, 3/15/01DD 977,500
Baa2 $ 1,500 Raytheon Co.,
5.95%, 3/15/01 $ 1,475,595
Aaa 1,700 United States Treasury
Notes,
5.625%, 9/30/01 1,683,000
Baa1 1,060 US West Capital Funding,
Inc.,
6.875%, 8/15/01 1,055,548
-------------
18,038,113
- ------------------------------------------------------------
WITHIN 1 YEAR--18.7%
Baa3 5,000 Boise Cascade Corp.,
9.90%, 3/15/00 5,023,300
Baa2 5,000 Camden Property Trust,
7.23%, 10/30/00 4,981,500
A3 4,500 ERP Operating L.P.,
6.15%, 9/15/00 4,463,100
Baa2 4,000 Gables Realty L.P.,
6.55%, 10/1/00 3,972,640
Baa1 2,500 Ryder System, Inc.,
Medium Term Note,
7.51%, 3/24/00 2,505,425
311 Joint Repurchase Agreement
Account (Note 5)
2.83%, 1/3/00 311,000
-------------
21,256,965
- ------------------------------------------------------------
Total Investments--99.2%
(cost $115,971,976; Note 4) 112,890,568
Other assets in excess of
liabilities--0.8% 964,880
-------------
Net Assets--100% $ 113,855,448
=============
</TABLE>
- ---------------
* The Fund's current Prospectus contains a description of Moody's rating.
D 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.
DD Mandatory put/call in March 2001.
L.P. Limited Partnership.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 52
<PAGE>
Portfolio of Investments as PRUDENTIAL STRUCTURED MATURITY FUND, INC.
of December 31, 1999 INCOME PORTFOLIO
- ------------------------------------------------------------
The industry classification of portfolio holdings and other net assets shown as
a percentage of net assets as of December 31, 1999 were as follows:
U.S. Government Securities............................ 16.8%
REIT.................................................. 16.3
Consumer Finance...................................... 11.1
Investment Banking.................................... 9.1
Financial Services.................................... 6.4
Paper & Related Products.............................. 4.4
Asset Backed.......................................... 4.1
Telecommunications.................................... 3.4
Aerospace/Defense..................................... 3.0
Banking............................................... 2.6
Media................................................. 2.5
Utilities............................................. 2.5
Trucking.............................................. 2.2
Technology............................................ 2.1
Commercial Services................................... 1.8
Consumer Products..................................... 1.7
Transportation/Rail................................... 1.7
Oil & Gas Exploration/Production...................... 1.3
Auto/Truck Parts...................................... 1.0
Beverages............................................. 1.0
Finance/Leasing....................................... 0.9
Medical Products...................................... 0.9
Airlines.............................................. 0.8
Lodging............................................... 0.8
Retail................................................ 0.5
Repurchase Agreement.................................. 0.3
Other assets in excess of liabilities................. 0.8
-----
100.0%
=====
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 53
<PAGE>
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
Statement of Assets and Liabilities INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets December 31, 1999
-----------------
Investments, at value (cost $115,971,976)......................... $112,890,568
Cash.............................................................. 13,967
Interest receivable............................................... 2,181,414
Receivable for investments sold................................... 107,139
Receivable for Fund shares sold................................... 37,016
Other assets...................................................... 3,701
------------
Total assets................................................... 115,233,805
------------
Liabilities
Payable for Fund shares reacquired................................ 1,092,413
Accrued expenses.................................................. 184,385
Management fee payable............................................ 39,769
Distribution fee payable.......................................... 34,960
Dividends payable................................................. 26,830
------------
Total liabilities.............................................. 1,378,357
------------
Net Assets........................................................ $113,855,448
============
Net assets were comprised of:
Common stock, at par........................................... $ 103,618
Paid-in capital in excess of par............................... 126,916,608
------------
127,020,226
Accumulated net realized loss on investments................... (10,083,370)
Net unrealized depreciation on investments..................... (3,081,408)
------------
Net assets at December 31, 1999................................... $113,855,448
============
Class A:
Net asset value and redemption price per share
($85,359,902 / 7,768,167 shares of common stock issued and
outstanding)........................... $10.99
Maximum sales charge (3.25% of offering price)................. .37
------
Maximum offering price to public............................... $11.36
======
Class B:
Net asset value, offering price and redemption price per share
($22,281,263 / 2,028,502 shares of common stock issued and
outstanding)........................... $10.98
======
Class C:
Net asset value and redemption price per share
($2,184,765 / 198,895 shares of common stock issued and
outstanding)................................................ $10.98
Sales charge (1% of offering price)............................ .11
------
Offering price to public....................................... $11.09
======
Class Z:
Net asset value, offering price and redemption price per share
($4,029,518 / 366,248 shares of common stock issued and
outstanding)................................................ $11.00
======
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 54
<PAGE>
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
INCOME PORTFOLIO
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income December 31, 1999
-----------------
<S> <C>
Income
Interest.............................. $ 7,916,575
-----------------
Expenses
Management fee........................ 481,976
Distribution fee--Class A............. 215,061
Distribution fee--Class B............. 224,026
Distribution fee--Class C............. 13,251
Transfer agent's fees and expenses.... 183,000
Custodian's fees and expenses......... 86,000
Reports to shareholders............... 50,000
Registration fees..................... 48,000
Legal fees and expenses............... 26,000
Audit fee and expenses................ 25,000
Directors' fees and expenses.......... 24,000
Miscellaneous......................... 3,179
-----------------
Total expenses..................... 1,379,493
-----------------
Net investment income.................... 6,537,082
-----------------
Realized and Unrealized Loss
on Investments
Net realized loss on investment
transactions.......................... (1,871,916)
Net change in unrealized depreciation of
investments........................... (2,704,900)
-----------------
Net loss on investments.................. (4,576,816)
-----------------
Net Increase in Net Assets
Resulting from Operations................ $ 1,960,266
=================
</TABLE>
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
INCOME PORTFOLIO
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended December 31,
------------------------------------
in Net Assets 1999 1998
---------------- ----------------
<S> <C> <C>
Operations
Net investment income........ $ 6,537,082 $ 7,618,062
Net realized gain (loss) on
investment transactions... (1,871,916) 353,315
Net change in unrealized
appreciation
(depreciation) on
investments............... (2,704,900) 411,669
---------------- ----------------
Net increase in net assets
resulting from
operations................ 1,960,266 8,383,046
---------------- ----------------
Dividends from net investment
income
(Note 1)
Class A................... (4,779,259) (4,389,692)
Class B................... (1,502,384) (3,050,724)
Class C................... (90,019) (72,180)
Class Z................... (165,420) (105,466)
---------------- ----------------
(6,537,082) (7,618,062)
---------------- ----------------
Fund share transactions
(Net of share conversions)
(Note 6)
Net proceeds from shares
subscribed................ 63,059,266 39,833,378
Net asset value of shares
issued to shareholders in
reinvestment of
dividends................. 4,539,763 5,214,748
Cost of shares reacquired.... (80,194,949) (53,344,205)
---------------- ----------------
Net decrease in net assets
from
Fund share transactions... (12,595,920) (8,296,079)
---------------- ----------------
Total decrease.................. (17,172,736) (7,531,095)
Net Assets
Beginning of year............... 131,028,184 138,559,279
---------------- ----------------
End of year..................... $113,855,448 $131,028,184
================ ================
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 55
<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. 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.
Repurchase Agreements: In connection with transactions in repurchase agreements,
the Portfolio's custodian or designated subcustodians, as the case may be under
triparty repurchase agreements, takes possession of the underlying collateral
securities, the value of which at least equals the principal amount of the
repurchase transaction, including accrued interest. To the extent that any
repurchase transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral. If
the seller defaults and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Portfolio may be delayed or limited.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. Expenses are recorded on the accrual basis which may require the
use of certain estimates by management.
Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares based upon the
relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: It is the Portfolio's policy to continue to meet the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable net income and capital gains, if
any, to its shareholders. Therefore, no federal income tax provision is
required.
Dividends and Distributions: The Portfolio declares daily and pays monthly
dividends from net investment income. Distributions from net capital gains, if
any, are made at least annually. Dividends and distributions are recorded on the
ex-dividend date.
Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting principles.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential 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.
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 Investment Management
Services LLC ('PIMS'), which acts as the distributor of the Fund. The Fund
compensates PIMS 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 it. The distribution fees
are accrued daily and payable monthly. No distribution or service fees are paid
to PIMS as distributor of the Class Z shares of the Fund.
- --------------------------------------------------------------------------------
56
<PAGE>
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
Notes to Financial Statements INCOME PORTFOLIO
- --------------------------------------------------------------------------------
Pursuant to the Class A, B and C Plans, the Fund compensates PIMS 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 .25 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, 1999.
PIMS has advised the Portfolio that it received approximately $44,400 and $7,900
in front-end sales charges resulting from sales of Class A and Class C shares,
respectively, for the year ended December 31, 1999. From these fees, PIMS paid
such sales charges to affiliated broker-dealers, which in turn paid commissions
to salespersons and incurred other distribution costs.
PIMS has advised the Portfolio that for the year ended December 31, 1999, it
received approximately $50,000 and $200 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PIFM, PIMS and PIC are wholly owned subsidiaries of The Prudential Insurance
Company of America.
As of March 11, 1999, the Portfolio, along with other affiliated registered
investment companies (the 'Funds'), entered into a syndicated credit agreement
('SCA') with an unaffiliated lender. The maximum commitment under the SCA is $1
billion. Interest on any borrowings will be at market rates. The Funds pay a
commitment fee at an annual rate of .065 of 1% on the unused portion of the
credit facility, which is accrued and paid quarterly on a pro rata basis by the
Funds. The SCA expires on March 9, 2000. Prior to March 11, 1999, the Funds had
a credit agreement with a maximum commitment of $200,000,000. The commitment fee
was .055 of 1% on the unused portion of the credit facility. The Portfolio did
not borrow any amounts pursuant to either agreement during the year ended
December 31, 1999. The purpose of the agreements is to serve as an alternative
source of funding for capital share redemptions.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Portfolio's transfer agent. During the year ended December 31,
1999, the Portfolio incurred fees of approximately $171,000 for the services of
PMFS. As of December 31, 1999, approximately $14,700 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, 1999 were $195,399,799 and $200,001,162,
respectively.
The cost of investments for federal income tax purposes at December 31, 1999 was
$115,993,679 and accordingly, net unrealized depreciation for federal income tax
purposes was $3,103,111 (gross unrealized appreciation--$520; gross unrealized
depreciation--$3,103,631).
For federal income tax purposes, the Portfolio had a capital loss carryforward
as of December 31, 1999 of approximately $9,768,000, of which $5,082,000 expires
in 2002, $3,149,000 expires in 2004 and $1,537,000 expires in 2007. In addition,
the Fund will elect to treat net capital losses of approximately $329,000
incurred in the two month period ended December 31, 1999 as having been incurred
in the following fiscal year. 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, 1999, the Portfolio has a .044% undivided interest in the joint account. The
undivided interest for the Portfolio represents $311,000 in the principal
amount. As of such date, each repurchase agreement in the joint account and the
collateral therefor were as follows:
ABN AMRO, Inc., 2.75%, in the principal amount of $90,000,000, repurchase price
$90,020,625, due 1/3/2000. The value of the collateral including accrued
interest was $91,800,968.
Bear, Stearns & Co. Inc., 2.75%, in the principal amount of $210,000,000,
repurchase price $210,048,125, due 1/3/2000. The value of the collateral
including accrued interest was $221,923,528.
Lehman Brothers, Inc., 2.50%, in the principal amount of $100,000,000,
repurchase price $100,020,833, due 1/3/2000. The value of the collateral
including accrued interest was $101,979,049.
Morgan (J.P.) Securities, Inc., 3.00%, in the principal amount of $120,000,000,
repurchase price $120,030,000, due 1/3/2000. The value of the collateral
including accrued interest was $122,400,783.
- --------------------------------------------------------------------------------
57
<PAGE>
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
Notes to Financial Statements INCOME PORTFOLIO
- --------------------------------------------------------------------------------
Morgan (J.P.) Securities, Inc., 4.50%, in the principal amount of $78,685,000,
repurchase price $78,714,506, due 1/3/2000. The value of the collateral
including accrued interest was $80,259,686.
Salomon Smith Barney, Inc., 2.00%, in the principal amount of $110,000,000,
repurchase price $110,018,333, due 1/3/2000. The value of the collateral
including accrued interest was $112,231,078.
- ------------------------------------------------------------
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 front-end sales charge of 1% and a contingent deferred sales charge of 1%
during the first 18 months. 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. 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. Of the shares
outstanding at December 31, 1999, Prudential owned 202,051.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- -------------------------------------- ---------- ------------
<S> <C> <C>
Year ended December 31, 1999:
Shares sold........................... 1,885,912 $ 21,004,322
Shares issued in reinvestment of
dividends........................... 299,319 3,345,005
Shares reacquired..................... (2,532,550) (28,250,642)
---------- ------------
Net decrease in shares outstanding
before conversion................... (347,319) (3,901,315)
Shares issued upon conversion from
Class B............................. 651,983 7,293,535
---------- ------------
Net increase in shares outstanding.... 304,664 $ 3,392,220
========== ============
Year ended December 31, 1998:
Shares sold........................... 1,187,754 $ 13,587,731
Shares issued in reinvestment of
dividends........................... 268,042 3,061,266
Shares reacquired..................... (1,573,390) (17,967,851)
---------- ------------
Net decrease in shares outstanding
before conversion................... (117,594) (1,318,854)
Shares issued upon conversion from
Class B............................. 1,817,276 20,807,459
---------- ------------
Net increase in shares outstanding.... 1,699,682 $ 19,488,605
========== ============
<CAPTION>
Class B Shares Amount
- -------------------------------------- ---------- ------------
<S> <C> <C>
Year ended December 31, 1999:
Shares sold........................... 650,438 $ 7,273,867
Shares issued in reinvestment of
dividends........................... 87,478 979,270
Shares reacquired..................... (1,535,229) (17,199,140)
---------- ------------
Net decrease in shares outstanding
before conversion................... (797,313) (8,946,003)
Shares reacquired upon conversion into
Class A............................. (651,983) (7,293,535)
---------- ------------
Net decrease in shares outstanding.... (1,449,296) $(16,239,538)
========== ============
Year ended December 31, 1998:
Shares sold........................... 866,989 $ 9,909,284
Shares issued in reinvestment of
dividends........................... 174,565 1,992,901
Shares reacquired..................... (2,005,389) (22,904,458)
---------- ------------
Net decrease in shares outstanding
before conversion................... (963,835) (11,002,273)
Shares reacquired upon conversion into
Class A............................. (1,818,128) (20,807,459)
---------- ------------
Net decrease in shares outstanding.... (2,781,963) $(31,809,732)
========== ============
Class C
- --------------------------------------
Year ended December 31, 1999:
Shares sold........................... 187,639 $ 2,081,082
Shares issued in reinvestment of
dividends........................... 7,007 78,120
Shares reacquired..................... (127,779) (1,422,858)
---------- ------------
Net increase in shares outstanding.... 66,867 $ 736,344
========== ============
Year ended December 31, 1998:
Shares sold........................... 55,465 $ 633,410
Shares issued in reinvestment of
dividends........................... 5,916 67,555
Shares reacquired..................... (45,186) (515,505)
---------- ------------
Net increase in shares outstanding.... 16,195 $ 185,460
========== ============
Class Z
- --------------------------------------
Year ended December 31, 1999:
Shares sold........................... 2,889,588 $ 32,699,995
Shares issued in reinvestment of
dividends........................... 12,290 137,368
Shares reacquired..................... (2,939,772) (33,322,309)
---------- ------------
Net decrease in shares outstanding.... (37,894) $ (484,946)
========== ============
Year ended December 31, 1998:
Shares sold........................... 1,369,668 $ 15,702,953
Shares issued in reinvestment of
dividends........................... 8,140 93,026
Shares reacquired..................... (1,042,730) (11,956,391)
---------- ------------
Net increase in shares outstanding.... 335,078 $ 3,839,588
========== ============
</TABLE>
- --------------------------------------------------------------------------------
58
<PAGE>
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
Financial Highlights INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-------------------------------------------------------
Year Ended December 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........................... $ 11.42 $ 11.35 $ 11.36 $ 11.63 $ 10.97
------- ------- ------- ------- -------
Income from investment operations:
Net investment income........................................ .62 .68 .74 .73 .73
Net realized and unrealized gain (loss) on investment
transactions.............................................. (.43) .07 .01 (.25) .66
------- ------- ------- ------- -------
Total from investment operations.......................... .19 .75 .75 .48 1.39
------- ------- ------- ------- -------
Less distributions:
Dividends from net investment income......................... (.62) (.68) (.74) (.73) (.73)
Dividends in excess of net investment income................. -- -- (.02) (.02) --
------- ------- ------- ------- -------
Total distributions....................................... (.62) (.68) (.76) (.75) (.73)
------- ------- ------- ------- -------
Net asset value, end of year................................. $ 10.99 $ 11.42 $ 11.35 $ 11.36 $ 11.63
======= ======= ======= ======= =======
TOTAL RETURN(a):............................................. 1.72% 6.81% 6.81% 4.32% 13.12%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................................ $85,360 $85,213 $65,431 $77,031 $88,982
Average net assets (000)..................................... $86,025 $73,382 $70,899 $81,745 $89,500
Ratios to average net assets:
Expenses, including distribution fees..................... 1.02% .81% .94% .86% .82%
Expenses, excluding distribution fees..................... .77% .71% .84% .76% .72%
Net investment income..................................... 5.56% 5.98% 6.51% 6.38% 6.57%
For Class A, B, C and Z shares:
Portfolio turnover........................................ 168% 301% 180% 170% 160%
</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. 59
<PAGE>
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
Financial Highlights INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
-------------------------------------------------------
Year Ended December 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........................... $ 11.41 $ 11.35 $ 11.36 $ 11.63 $ 10.97
------- ------- ------- -------- --------
Income from investment operations:
Net investment income........................................ .56 .61 .67 .65 .66
Net realized and unrealized gain (loss) on investment
transactions.............................................. (.43) .06 .01 (.25) .66
------- ------- ------- -------- --------
Total from investment operations.......................... .13 .67 .68 .40 1.32
------- ------- ------- -------- --------
Less distributions:
Dividends from net investment income......................... (.56) (.61) (.67) (.65) (.66)
Dividends in excess of net investment income................. -- -- (.02) (.02) --
------- ------- ------- -------- --------
Total distributions....................................... (.56) (.61) (.69) (.67) (.66)
------- ------- ------- -------- --------
Net asset value, end of year................................. $ 10.98 $ 11.41 $ 11.35 $ 11.36 $ 11.63
======= ======= ======= ======== ========
TOTAL RETURN(a):............................................. 1.21% 6.03% 6.13% 3.64% 12.40%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................................ $22,281 $39,694 $71,030 $ 94,490 $120,188
Average net assets (000)..................................... $29,870 $56,913 $81,673 $106,224 $125,230
Ratios to average net assets:
Expenses, including distribution fees..................... 1.52% 1.46% 1.59% 1.51% 1.47%
Expenses, excluding distribution fees..................... .77% .71% .84% .76% .72%
Net investment income..................................... 5.03% 5.36% 5.87% 5.73% 5.92%
</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. 60
<PAGE>
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
Financial Highlights INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
--------------------------------------------------
Year Ended December 31,
--------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........................... $11.41 $11.35 $11.36 $11.63 $10.97
------ ------ ------ ------ ------
Income from investment operations:
Net investment income........................................ .57 .61 .67 .65 .66
Net realized and unrealized gain (loss) on investment
transactions.............................................. (.43) .06 .01 (.25) .66
------ ------ ------ ------ ------
Total from investment operations.......................... .14 .67 .68 .40 1.32
------ ------ ------ ------ ------
Less distributions:
Dividends from net investment income......................... (.57) (.61) (.67) (.65) (.66)
Dividends in excess of net investment income................. -- -- (.02) (.02) --
------ ------ ------ ------ ------
Total distributions....................................... (.57) (.61) (.69) (.67) (.66)
------ ------ ------ ------ ------
Net asset value, end of year................................. $10.98 $11.41 $11.35 $11.36 $11.63
====== ====== ====== ====== ======
TOTAL RETURN(a):............................................. 1.21% 6.03% 6.13% 3.64% 12.40%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................................ $2,185 $1,507 $1,314 $1,396 $1,050
Average net assets (000)..................................... $1,767 $1,351 $1,329 $1,270 $ 667
Ratios to average net assets:
Expenses, including distribution fees..................... 1.52% 1.46% 1.59% 1.51% 1.47%
Expenses, excluding distribution fees..................... .77% .71% .84% .76% .72%
Net investment income..................................... 5.10% 5.36% 5.87% 5.73% 5.92%
</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. 61
<PAGE>
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
Financial Highlights INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class Z
---------------------------------------------
December 16,
1996(c)
Year Ended December 31, Through
---------------------------- December 31,
1999 1998 1997 1996
------ ------ ------ ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......................... $11.42 $11.35 $11.37 $11.41
------ ------ ------ -----
Income from investment operations:
Net investment income........................................ .65 .69 .77 .09
Net realized and unrealized gain (loss) on investment
transactions.............................................. (.42) .07 .02 (.02)
------ ------ ------ -----
Total from investment operations.......................... .23 .76 .79 .07
------ ------ ------ -----
Less distributions:
Dividends from net investment income......................... (.65) (.69) (.77) (.09)
Dividends in excess of net investment income................. -- -- (.04) (.02)
------ ------ ------ -----
Total distributions....................................... (.65) (.69) (.81) (.11)
------ ------ ------ -----
Net asset value, end of period............................... $11.00 $11.42 $11.35 $11.37
====== ====== ====== ======
TOTAL RETURN(a):............................................. 2.07% 6.92% 7.01% .59%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............................. $4,029 $4,614 $ 784 $ 200(d)
Average net assets (000)..................................... $2,833 $1,748 $ 313 $ 200(d)
Ratios to average net assets:
Expenses, including distribution fees..................... .77% .71% .84% .76%(b)
Expenses, excluding distribution fees..................... .77% .71% .84% .76%(b)
Net investment income..................................... 5.84% 6.03% 6.71% 6.48%(b)
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than one full year are not
annualized.
(b) Annualized.
(c) Commencement of offering of Class Z shares.
(d) Figures are actual and are not rounded to the nearest thousand.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 62
<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 (the 'Fund') at December 31, 1999, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended and the financial highlights for each
of the three years in the period then ended, in conformity with accounting
principles generally accepted in the United States. 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 audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States, 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 audits, which included confirmation of securities at December
31, 1999 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above. The accompanying financial highlights for each of
the two periods in the period ended December 31, 1996 were audited by other
independent accountants, whose opinion dated February 14, 1997 was unqualified.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 18, 2000
- --------------------------------------------------------------------------------
63
<PAGE>
APPENDIX I--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.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the company ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
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.
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-1 repayment
ability will often be evidenced by many of the following characteristics:
. Leading market positions in well-established industries.
. High rates of return on funds employed.
. Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
. Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
. Well-established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This normally
will be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
I-1
<PAGE>
STANDARD & POOR'S RATINGS GROUP
Debt Ratings
AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A: An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB: An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
BB, B, CCC and CC: Obligations rated BB, B, CCC and CC are regarded as
having significant speculative characteristics, BB indicates the least degree
of speculation and CC the highest. While such obligations will likely have
some quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
Commercial Paper Ratings
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-1: This designation 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.
DUFF & PHELPS CREDIT RATING CO.
Long-Term, Debt and Preferred Stock Ratings
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA: High credit quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic conditions.
A: Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
BBB: Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
BB: Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B: Below investment grade and possessing risk that obligations will not be
met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
Duff & Phelps refines each generic rating classification from AA through B
with a "+" or a "-".
CCC: Well below investment grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
uneconomic/industry conditions, and/or with unfavorable company developments.
I-2
<PAGE>
Short-Term Debt Ratings
Duff 1+: Very high certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S. Treasury short-
term obligations.
Duff 1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors
are minor.
Duff 1-: High certainty of timely payment, Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
Duff 2: Good certainty of timely payment. Liquidity factors and Company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risks factors are
small.
I-3
<PAGE>
APPENDIX II--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
Asset Allocation
Asset allocation is a technique for reducing risk and 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.
II-1
<PAGE>
APPENDIX III--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.
This chart shows the long term performance of various asset classes and the
rate of inflation.
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY
Value of $1.00 invested on 1/1/1926 through 12/31/1999
[LINE GRAPH]
Small Stocks $6,640.79
Common Stocks $2,845.63
Long-Term Bonds $ 40.22
Treasury Bills $ 15.64
Inflation $ 9.40
Source: Ibbotson Associates. 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 due to capital appreciation and the reinvestment
of any gains. Bond returns are due to reinvesting interest. 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 measured using a constant one-bond
portfolio with a maturity of roughly 20 years. 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.
III-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 1989
through 1999. 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 "Risk/Return Summary--Fees and 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
Year 1989 1990 1991 1992 1993 1994
------------------------------------------------------------
U.S. Government
Treasury
Bonds/1/ 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)%
------------------------------------------------------------
U.S.Government
Mortgage
Securities/2/ 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)%
------------------------------------------------------------
U.S. Investment Grade
Corporate Bonds/3/ 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)%
------------------------------------------------------------
U.S. High Yield
Bonds/4/ 0.8% (9.6)% 46.2%15.8% 17.1% (1.0)%
------------------------------------------------------------
World Government
Bonds/5/ (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0%
------------------------------------------------------------
Difference between
highest and lowest 18.8% 24.9% 30.9% 11.0% 10.3% 9.9%
returns percent
Year 1995 1996 1997 1998 1999
-------------------------------------------------------
U.S. Government
Treasury
Bonds/1/ 18.4% 2.7% 9.6% 10.0% -2.56%
-------------------------------------------------------
U.S.Government
Mortgage
Securities/2/ 16.8% 5.4% 9.5% 7.0% 1.86%
-------------------------------------------------------
U.S. Investment Grad
Corporate Bonds/3/ 22.3% 3.3% 10.2% 8.6% -1.96%
-------------------------------------------------------
U.S. High Yield
Bonds/4/ 19.2% 11.4% 12.8% 1.6% 2.39%
-------------------------------------------------------
World Government
Bonds/5/ 19.6% 4.1% (4.3)% 5.3% -5.07%
--------------------------------------------------------
Difference between
highest and lowest 5.5% 8.7% 17.1% 8.4% 7.46%
returns percent
/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. Source: Lipper Inc.
/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 Smith Barney 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.
III-2
<PAGE>
The chart below shows the historical volatility of general interest rates as
measured by the long U.S. Treasury Bond.
[LINE GRAPH]
Year-End
- ----------
Source: Ibbotson Associates. Used with permission. All rights reserved. The
chart illustrates the historical yield of the long-term U.S. Treasury Bond
from 1926-1999. 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.
This chart illustrates the performance of major world stock markets for the
period from December 31, 1985 through December 31, 1999. It does not represent
the performance of any Prudential mutual fund.
Average Annual Total Returns of Major World Stock Markets
(12/31/1985 - 12/31/1999) (in U.S. dollars)
Sweden 22.70%
Hong Kong 20.37%
Spain 20.11%
Netherland 18.63%
Belgium 18.41%
France 17.69%
USA 17.39%
U.K 16.41%
Europe 16.28%
Switzeland 15.58%
Sing/Mlysia 15.07%
Denmark 14.72%
Germany 13.29%
Australia 11.68%
Italy 11.39%
Canada 11.10%
Japan 9.59%
Norway 8.91%
Austria 7.09%
Source: Morgan Stanley Capital International (MSCI), and Lipper Inc. as of
12/31/99. Used with permission. Morgan Stanley Country indexes are unmanaged
indexes which include those stocks making up the largest two-thirds of each
country's total stock market capitalization. Returns reflect the reinvestment
of all distributions. This chart is for illustrative purposes only and is not
indicative of the past, present or future performance of any specific
investment. Investors cannot invest directly in stock indexes.
III-3
<PAGE>
This chart shows the growth of a hypothetical $10,000 investment made in the
stocks representing the S&P 500 Stock Index with and without reinvested
dividends.
CHART
[LINE GRAPH]
Source: Lipper Inc. Used with permission. All rights reserved. This chart is
used for illustrative purposes only and is not intended to represent the past,
present or future performance of any Prudential mutual fund. Common stock
total return is based on the Standard & Poor's 500 Composite Stock Price
Index, a market-value-weighted index made up of 500 of the largest stocks in
the U.S. based upon their stock market value. Investors cannot invest directly
in indexes.
CHART
World Stock Market Capitalization by Region
World Total: 20.7 Trillion
----------------------------------
[PIE CHART]
Canada 2.1%
Pacific Basin 16.4%
Europe 32.5%
U.S. 49.0%
Source: Morgan Stanley Capital International, December 31, 1999. Used with
permission. This chart represents the capitalization of major world stock
markets as measured by the Morgan Stanley Capital International (MSCI) World
Index. The total market capitalization is based on the value of approximately
1577 companies in 22 countries (representing approximately 60% of the
aggregate market value of the stock exchanges). This chart is for illustrative
purposes only and does not represent the allocation of any Prudential mutual
fund.
III-4
<PAGE>
PART C
OTHER INFORMATION
Item 23. Exhibits.
(a) (1) Articles of Restatement of the Registrant. Incorporated by
reference to Exhibit 1 to Post-Effective Amendment No. 12 to the
Registration Statement on Form N-1A filed via EDGAR on February 28,
1995 (File No. 33-22363).
(2) Articles Supplementary of Registrant. Incorporated by reference to
Exhibit 1(b) to Post-Effective Amendment No. 14 to the Registration
Statement on Form N-1A filed via EDGAR on December 9, 1996 (File No. 33-
22363).
(3) Articles Supplementary of Registrant. Incorporated by reference to
Exhibit (a)(3) to Post-Effective Amendment No. 17 to the Registration
Statement on Form N-1A filed via EDGAR on January 12, 1999 (File No. 33-
22363).
(4) Articles of Amendment of Registrant.*
(b) (1) By-Laws of the Registrant. Incorporated by reference to Exhibit 2
to Post-Effective Amendment No. 12 to the Registration Statement on
Form N-1A filed via EDGAR on February 28, 1995 (File No. 33-22363).
(2) Amendment to By-Laws of the Registrant.*
(c) (1) Specimen certificate for shares of common stock, $.01 par value
per share, of the Registrant. Incorporated by reference to Exhibit
4(a) to Post-Effective Amendment No. 15 to the Registration Statement
on Form N-1A filed via EDGAR on March 3, 1997 (File No. 33-22363).
(2) Instruments defining rights of shareholders. Incorporated by
reference to Exhibit 4(e) to Post-Effective Amendment No. 9 to the
Registration Statement on Form N-1A filed via EDGAR on February 28, 1994
(File No. 33-22363).
(d) (1) Management Agreement between the Registrant and Prudential
Investments Fund Management LLC. Incorporated by reference to Exhibit
5(a) to Post-Effective Amendment No. 15 to the Registration Statement
filed on Form N-1A via EDGAR on March 3, 1997 (File No. 33-22363).
(2) Subadvisory Agreement between Prudential Investments Fund Management
LLC and The Prudential Investment Corporation. Incorporated by reference
to Exhibit 5(b) to Post-Effective Amendment No. 15 to the Registration
Statement on Form N-1A filed via EDGAR on March 3, 1997 (File No. 33-
22363).
(3) Amendment to Subadvisory Agreement dated as of November 18, 1999,
between Prudential Investments Fund Management LLC and The Prudential
Investment Corporation.*
(e) (1) Distribution Agreement between Registrant and Prudential
Investment Management Services LLC. Incorporated by reference to
Exhibit (e)(1) to Post-Effective Amendment No. 17 to the Registration
Statement on Form N-1A filed via EDGAR on January 12, 1999 (File No.
33-22363).
(2) Form of Selected Dealer Agreement. Incorporated by reference to
Exhibit (e)(2) to Post-Effective Amendment No. 17 to the Registration
Statement on Form N-1A filed via EDGAR on January 12, 1999 (File No. 33-
22363).
(g) (1) Custodian Contract between the Registrant and State Street Bank
and Trust Company. Incorporated by reference to Exhibit 8 to Post-
Effective Amendment No. 16 to the Registration Statement on Form N-1A
filed via EDGAR on March 4, 1998 (File No. 33-22363).
(2) Amendment to Custodian Contract/Agreement dated as of February 22,
1999 by and between the Registrant and State Street Bank and Trust
Company.*
(h) (1) Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc. Incorporated by reference to
Exhibit 9 to Post-Effective Amendment No. 16 to the Registration
Statement on Form N-1A filed via EDGAR on March 4, 1998 (File No. 33-
22363).
(2) Amendment to Transfer Agency and Service Agreement dated as of
August 24, 1999 by and between the Registrant and Prudential Mutual Fund
Services LLC (successor to Prudential Mutual Fund Services, Inc.).*
(i) (1) Opinion of Shereff, Friedman, Hoffman & Goodman, LLP. Incorporated
by reference to Exhibit 10 to Post-Effective Amendment No. 16 to the
Registration Statement on Form N-1A filed via EDGAR on March 4, 1998
(File No. 33-22363).
(2) Consent of Counsel.*
(j) Consent of Independent Accountants.*
C-1
<PAGE>
(m) (1) Amended and Restated Distribution and Service Plan for Class A
shares. Incorporated by reference to Exhibit (m)(1) to Post-Effective
Amendment No. 17 to the Registration Statement on Form N-1A filed via
EDGAR on January 12, 1999 (File No. 33-22363).
(2) Amended and Restated Distribution and Service Plan for Class B
shares. Incorporated by reference to Exhibit (m)(2) to Post-Effective
Amendment No. 17 to the Registration Statement on Form N-1A filed via
EDGAR on January 12, 1999 (File No. 33-22363).
(3) Amended and Restated Distribution and Service Plan for Class C
shares. Incorporated by reference to Exhibit (m)(3) to Post-Effective
Amendment No. 17 to the Registration Statement on Form N-1A filed via
EDGAR on January 12, 1999 (File No. 33-22363).
(n) Amended and Restated Rule 18f-3 Plan. Incorporated by reference to
Exhibit (o) to Post-Effective Amendment No. 17 to the Registration
Statement on Form N-1A filed via EDGAR on January 12, 1999 (File No.
33-22363).
(p) (1) Code of Ethics of Registrant.*
(2) Code of Ethics of Prudential Investment Management Services LLC,
Prudential Investments Fund Management LLC and The Prudential Investment
Corporation.*
- ------------
* Filed herewith.
Item 24. Persons Controlled by or Under Common Control with Registrant.
None.
Item 25. Indemnification.
As permitted by Sections 17(h) and (i) of the Investment Company Act of
1940, as amended (the 1940 Act) and pursuant to Article VI of the Fund's By-
Laws (Exhibit (b) to the Registration Statement), officers, directors,
employees and agents of the Registrant will not be liable to the Registrant,
any stockholder, officer, director, employee, agent or other person for any
action or failure to act, except for bad faith, willful misfeasance, gross
negligence or reckless disregard of duties, and those individuals may be
indemnified against liabilities in connection with the Registrant, subject to
the same exceptions. Section 2-418 of Maryland General Corporation Law permits
indemnification of directors who acted in good faith and reasonably believed
that the conduct was in the best interests of the Registrant. As permitted by
Section 17(i) of the 1940 Act, pursuant to Section 10 of the Distribution
Agreement (Exhibit (e)(1) to the Registration Statement), the Distributor of
the Registrant may be indemnified against liabilities which it may incur,
except liabilities arising from bad faith, gross negligence, willful
misfeasance or reckless disregard of duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (Securities Act) may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission (Commission) such indemnification is
against public policy as expressed in the 1940 Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in
connection with the successful defense of any action, suit or proceeding) is
asserted against the Registrant by such director, officer or controlling
person in connection with the shares being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the 1940 Act and will be governed by the final adjudication of
such issue.
The Registrant has purchased an insurance policy insuring its officers and
directors against liabilities, and certain costs of defending claims against
such officers and directors, to the extent such officers and directors are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of
indemnification payments to officers and directors under certain
circumstances.
Section 9 of the Management Agreement (Exhibit (d)(1) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit (d)(2) to the
Registration Statement) limit the liability of Prudential Investments Fund
Management LLC (PIFM) and The Prudential Investment Corporation (PIC),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective duties or from
reckless disregard by them of their respective obligations and duties under
the agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and each Distribution Agreement in a manner
consistent with Release No. 11330 of the Securities and Exchange Commission
under the 1940 Act so long as the interpretation of Sections 17(h) and 17(i)
of such Act remain in effect and are consistently applied.
C-2
<PAGE>
Item 26. Business and Other Connections of Investment Adviser
(a) Prudential Investments Fund Management LLC
See "How the Fund is Managed--Manager" in the Prospectus constituting Part A
of this Registration Statement and "Investment Advisory and Other Services" in
the Statement of Additional Information constituting Part B of this
Registration Statement.
The business and other connections of the officers of PIFM are listed in
Schedules A and D of Form ADV of PIFM as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104).
The business and other connections of PIFM's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, 100 Mulberry Street, Newark,
NJ 07102-4077.
<TABLE>
<CAPTION>
Name and Address Position with PIFM Principal Occupations
- ---------------- ------------------ ---------------------
<S> <C> <C>
David R. Odenath, Jr. Officer in Charge, Officer in Charge, President, Chief Executive
President, Chief Officer and Chief Operating Officer, PIFM;
Executive Officer Senior Vice President, The Prudential
and Chief Insurance Company of America (Prudential)
Operating Officer
Robert F. Gunia Executive Vice Executive Vice President and Chief
President and Administative Officer, PIFM; Vice President,
Chief Prudential; President, Prudential Investment
Administrative Management Services LLC (PIMS)
Officer
William V. Healey Executive Vice Executive Vice President, Chief Legal Officer
President, Chief and Secretary, PIFM; Vice President and
Legal Officer and Associate General Counsel, Prudential;
Secretary Senior Vice President, Chief Legal Officer
and Secretary, PIMS
Brian W. Henderson Executive Vice Executive Vice President, PIFM; Senior Vice
President President and Chief Operating Officer, PIMS
Stephen Pelletier Executive Vice Executive Vice President, PIFM
President
Judy A. Rice Executive Vice Executive Vice President, PIFM
President
Lynn M. Waldvogel Executive Vice Executive Vice President, PIFM
President
</TABLE>
(b) The Prudential Investment Corporation (PIC)
See "How the Fund is Managed--Investment Adviser" in the Prospectus
constituting Part A of this Registration Statement and "Investment Advisory
and Other Services--Manager and Investment Adviser" in the Statement of
Additional Information constituting Part B of this Registration Statement.
The business and other connections of PIC's directors and executive officers
are as set forth below. Except as otherwise indicated, the address of each
person is Gateway Center Three, Newark, New Jersey 07102.
<TABLE>
<CAPTION>
Name and Address Position with PIC Principal Occupations
- ---------------- ----------------- ---------------------
<S> <C> <C>
Jeffrey Hiller Chief Compliance Chief Compliance Officer, Prudential Global
Officer Asset Management
John R. Strangfeld, Jr. Chairman of the President of Prudential Global Asset
Board, President, Management Group of Prudential; Senior Vice
Chief Executive President, Prudential; Chairman of the
Officer and Board, President, Chief Executive Officer
Director and Director, PIC
Bernard Winograd Senior Vice Chief Executive Officer, Prudential Real
President and Estate Investors; Senior Vice President and
Director Director, PIC
</TABLE>
Item 27. Principal Underwriters
(a) Prudential Investment Management Services LLC (PIMS)
PIMS is distributor for the following open-end management companies: Cash
Accumulation Trust, COMMAND Money Fund, COMMAND Government Fund, COMMAND Tax-
Free Fund, Global Utility Fund, Inc., Nicholas-Applegate Fund, Inc. (Nicholas-
Applegate Growth Equity Fund), Prudential Balanced Fund, Prudential California
Municipal Fund, Prudential Diversified Bond Fund, Inc., Prudential Diversified
Funds, Prudential Emerging Growth Fund, Inc., Prudential Equity Fund, Inc.,
Prudential Equity Income Fund, Prudential Europe Growth Fund, Inc., Prudential
Global Genesis Fund, Inc., Prudential Global Total Return Fund, Inc.,
Prudential Government
C-3
<PAGE>
Income Fund, Inc., Prudential Government Securities Trust, Prudential High
Yield Fund, Inc., Prudential High Yield Total Return Fund, Inc., Prudential
Index Series Fund, Prudential Institutional Liquidity Portfolio, Inc.,
Prudential International Bond Fund, Inc., Prudential Mid-Cap Value Fund,
Prudential MoneyMart Assets, Inc., Prudential Municipal Bond Fund, Prudential
Municipal Series Fund, Prudential National Municipals Fund, Inc., Prudential
Natural Resources Fund, Inc., Prudential Pacific Growth Fund, Inc., Prudential
Real Estate Securities Fund, Prudential Sector Funds, Inc., Prudential Small-
Cap Quantum Fund, Inc., Prudential Small Company Value Fund, Inc., Prudential
Special Money Market Fund, Inc., Prudential Short-Term Corporate Bond Fund,
Inc., Prudential 20/20 Focus Fund, Prudential Tax-Free Money Fund, Inc.,
Prudential Tax-Managed Funds, Prudential World Fund, Inc., The Prudential
Investment Portfolios, Inc., Strategic Partners Series Target Funds and The
Target Portfolio Trust.
PIMS is also distributor of the following unit investment trusts: Separate
Accounts: Prudential's Gibraltar Fund, Inc., The Prudential Variable Contract
Account-2, The Prudential Variable Contract Account-10, The Prudential
Variable Contract Account-11, The Prudential Variable Contract Account-24, The
Prudential Variable Contract GI-2, The Prudential Discovery Select Group
Variable Contract Account, The Pruco Life Flexible Premium Variable Annuity
Account, The Pruco Life of New Jersey Flexible Premium Variable Annuity
Account, The Prudential Individual Variable Contract Account and The
Prudential Qualified Individual Variable Contract Account.
(b) Information concerning the officers and directors of PIMS is set forth
below:
<TABLE>
<CAPTION>
Positions and Positions and
Offices with Offices with
Name(1) Underwriter Registrant
- ------- ------------- -------------
<S> <C> <C>
Margaret Deverell....... Vice President and Chief Financial Officer None
Robert F. Guina......... President Vice President and Director
Kevin Frawley........... Senior Vice President and Compliance Officer None
213 Washington Street
Newark, NJ 07102
William V. Healey....... Senior Vice President, Secretary and Chief Legal Officer None
Brian W. Henderson...... Senior Vice President and Officer None
John R. Strangfeld, Jr.. Advisory Board Member President and Director
</TABLE>
- ---------
(/1/The)address of each person named is Prudential Plaza, 751 Broad Street,
Newark, New Jersey 07102 unless otherwise indicated.
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
Item 28. Location of Accounts and Records
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices
of State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171; The Prudential Investment Corporation, Prudential Plaza,
751 Broad Street, Newark, New Jersey 07102; the Registrant, Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077; and Prudential
Mutual Fund Services LLC, 194 Wood Avenue South, Iselin, New Jersey 08830.
Documents required by Rules 31a-1(b)(5), (6), (7), (9), (10) and (11) and 31a-
1(f) and Rules 31a-1(b)(4) and (11) and 31a-1(d) will be kept at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, and the
remaining accounts, books and other documents required by such other pertinent
provisions of Section 31(a) and the Rules promulgated thereunder will be kept
by State Street Bank and Trust Company and Prudential Mutual Fund Service LLC.
Item 29. Management Services
Other than as set forth under the captions "How the Fund is Managed--
Investment Adviser" and "How the Fund is Managed--Distributor" in the
Prospectus and the caption "Investment Advisory and Other Services--Manager
and Investment Adviser" and "--Principal Underwriter, Distributor and Rule
12b-1 Plans" in the Statement of Additional Information, constituting Parts A
and B, respectively, of this Post-Effective Amendment to the Registration
Statement, Registrant is not a party to any management-related service
contract.
Item 30. Undertakings
Not applicable.
C-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of
1933 and has duly caused this Post-Effective Amendment to the Registration
Statement to be signed on its behalf by the undersigned thereunto duly
authorized, in the City of Newark, and State of New Jersey on the 28th day of
April, 2000.
PRUDENTIAL SHORT-TERM CORPORATE BOND FUND, INC.
/s/ JOHN R. STRANGFELD, JR.
By:
----------------------------------
John R. Strangfeld, Jr.,
President
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
Name Title Date
/s/ Eugene C. Dorsey Director
- ------------------------------ April 28, 2000
Eugene C. Dorsey
/s/ Delayne Dedrick Gold Director
- ------------------------------ April 28, 2000
Delayne Dedrick Gold
/s/ Robert F. Gunia Vice President and
- ------------------------------ Director April 28, 2000
Robert F. Gunia
/s/ Thomas T. Mooney Director
- ------------------------------ April 28, 2000
Thomas T. Mooney
/s/ Stephen P. Munn Director
- ------------------------------ April 28, 2000
Stephen P. Munn
/s/ David R. Odenath, Jr.
- ------------------------------ Vice President andApril 28, 2000
David R. Odenath, Jr. Director
/s/ Richard A. Redeker Director
- ------------------------------ April 28, 2000
Richard A. Redeker
/s/ John R. Strangfeld, Jr. President and Director
- ------------------------------ April 28, 2000
John R. Strangfeld, Jr.
Director
/s/ Nancy Hays Teeters April 28, 2000
- ------------------------------
Nancy Hays Teeters
/s/ Louis A. Weil, III Director
- ------------------------------ April 28, 2000
Louis A. Weil, III
/s/ Grace C. Torres Principal Financial and
Accounting Officer
- ------------------------------ April 28, 2000
Grace C. Torres
C-5
<PAGE>
EXHIBIT INDEX
Exhibit No.
(a) (4) Articles of Amendment of Registrant
(b) (2) Amendment to By-Laws of the Registrant.
(d) (3) Amendment to Subadvisory Agreement dated as of November 18, 1999,
between Prudential Investments Fund Management LLC and The Prudential
Investment Corporation.
(g) (2) Amendment to Custodian Contract/Agreement dated as of February 22,
1999 by and between the Registrant and State Street Bank and Trust
Company.
(h) (2) Amendment to Transfer Agency and Service Agreement dated as of
August 24, 1999 by and between the Registrant and Prudential Mutual
Fund Services LLC (successor to Prudential Mutual Fund Services,
Inc.).
(i) (2) Consent of Counsel.
(j) Consent of Independent Accountants.
(p) (1) Code of Ethics of Registrant.
(2) Code of Ethics of Prudential Investment Management Services LLC,
Prudential Investments Fund Management LLC and The Prudential Investment
Corporation.
1
<PAGE>
Exhibit (a)(4)
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
ARTICLES OF AMENDMENT
Prudential Structured Maturity Fund, Inc., a Maryland corporation having
its principal office in Newark, New Jersey (hereinafter called the
"Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland that:
FIRST: The First Article of the Corporation's Articles of Restatement is
hereby amended in its entirety to read as follows:
The name of the corporation (hereinafter called the "Corporation") is
Prudential Short-Term Corporate Bond Fund, Inc.
SECOND: Pursuant to Sections 2-605 and 2-607 of the Maryland General
Corporation Law, the foregoing amendment to the Articles of Restatement as
hereinabove set forth was approved by a majority of the Corporation's entire
board of directors.
IN WITNESS WHEREOF, Prudential Structured Maturity Fund, Inc., has caused
these presents to be signed in its name on its behalf by its President and
attested by its Assistant Secretary on April 27, 2000.
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
By: /s/ John R. Strangfeld, Jr.
------------------------------------
Name: John R. Strangfeld, Jr.
Title: President
Attest: /s/ David F. Connor
------------------------------------
David F. Connor
Assistant Secretary
THE UNDERSIGNED, President of Prudential Structured Maturity Fund, Inc.,
who executed on behalf of said corporation the foregoing Articles of Amendment,
of which this certificate is made a part, hereby acknowledges, in the name and
on behalf of said corporation, the foregoing Articles of Amendment to be the
corporate act of said corporation and further certifies that, to the best of his
knowledge, information, and belief, the matters and facts set forth therein with
respect to the authorization and approval thereof are true in all material
respects, under the penalties of perjury.
By: /s/ John R. Strangfeld, Jr.
------------------------------------
Name: John R. Strangfeld, Jr.
Title: President
<PAGE>
Exhibit (b)(2)
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
Amendment No. 1 to Bylaws
-------------------------
Upon the affirmative vote of a majority of the Board of Directors of Prudential
Structured Maturity Fund, Inc. (the "Corporation"), the Corporation's Bylaws are
hereby amended as follows:
1. Effective November 18, 1999, the first paragraph of Article I, Section 7 is
hereby replaced in its entirety as follows:
Section 7. VOTING AND INSPECTORS. At all meetings, stockholders of
record entitled to vote thereat shall have one vote for each share of common
stock standing in his/her name on the books of the Corporation (and such
stockholder of record holding fractional shares, if any, shall have
proportionate voting rights) on the date for the determination of
stockholders entitled to vote at such meeting, either in person or by proxy.
A stockholder may sign a writing authorizing another person to act as proxy.
Signing may be accomplished by the stockholder or the stockholder's
authorized agent signing the writing or causing the stockholder's signature
to be affixed to the writing by any reasonable means, including facsimile
signature. A stockholder may authorize another person to act as proxy by
transmitting, or authorizing the transmission of, a telegram, cablegram,
datagram, or other means of electronic transmission to the person authorized
to act as proxy or to a proxy solicitation firm, proxy support service
organization, or other person authorized by the person who will act as proxy
to receive the transmission.
Approved: November 18, 1999
2. Effective February 29, 2000, Article VII is amended to read in its entirety
as follows:
ARTICLE VII
Indemnification
---------------
The Corporation shall indemnify present and former Directors, officers,
employees and agents of the Corporation (each a "Covered Person") against
judgments, fines, settlements and expenses to the fullest extent authorized,
and in the manner permitted, by applicable federal and state law. The
Corporation shall advance the expenses of Covered Persons who are parties to
any Proceeding to the fullest extent authorized, and in the manner permitted,
by applicable federal and state law. For purposes of this paragraph,
<PAGE>
"Proceeding" means any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative, or investigative.
Pursuant and subject to this Article VII, the Corporation shall indemnify
each Covered Person against, or advance the expenses of any Covered Person
for, the amount of any deductible provided in any liability insurance policy
maintained by the Corporation.
Approved: February 29, 2000
<PAGE>
Exhibit (d)(3)
AMENDMENT TO SUBADVISORY AGREEMENT
Prudential Structured Maturity Fund, Inc.
AMENDMENT made as of this 18 th day of November, 1999, between Prudential
Investments Fund Management LLC ("PIFM"), and The Prudential Investment
Corporation ("PIC").
WHEREAS, PIFM, either itself or as successor to Prudential Investments Fund
Management, Inc., and PIC have entered into a Subadvisory Agreement (the
"Agreement") dated July 25th, 1989, with respect to the management of Prudential
Structured Maturity Fund, Inc. (the "Fund"); and
WHEREAS, the Agreement provides that PIC shall provide investment advisory
services to the Fund, subject to oversight by PIFM; and
WHEREAS, PIFM and PIC desire to amend the Agreement with respect to the
compensation to be paid by PIFM to PIC for services provided by PIC pursuant to
the Agreement.
NOW, THEREFORE, for and in consideration of the continuation of the
Agreement for its current term, and other good and valuable consideration, PIFM
and PIC hereby amend the Agreement to provide for the compensation to be paid by
PIFM to PIC as described on the attached schedule, effective as of January 1,
2000, for the same term, including renewals, as the Agreement and upon the same
terms and conditions as described in the Agreement.
IN WITNESS WHEREOF, PIMS and PIC have signed this Amendment as of the day
and year first above written.
PRUDENTIAL INVESTMENTS THE PRUDENTIAL INVESTMENT
FUND MANAGEMENT LLC CORPORATION
By: /s/Robert F. Gunia By: /s/John R. Strangfeld, Jr.
------------------ --------------------------
Name: Robert F. Gunia Name: John R. Strangfeld, Jr.
--------------- -----------------------
Title: Executive Vice President Title: Chairman of the Board,
------------------------ ----------------------
and Chief Administrative President, Chief Executive
Officer Officer and Director
<PAGE>
<TABLE>
<CAPTION>
Contractual Compensation
Fund Name Mgmt Fee to PGAM
--------- -------- -------
Domestic Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Funds
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Prudential 20/20 Focus Fund* 0.75% 0.375%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Balanced Fund 0.65% 0.325%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Developing Markets Fund -Developing Markets Equity Fund 1.25% 0.625%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Developing Markets Fund -Latin America Equity Fund 1.25% 0.625%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Diversified Conservative Growth Fund* 0.75% 0.375%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Diversified Moderate Growth Fund* 0.75% 0.375%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Diversified High Growth Fund* 0.75% 0.375%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Distressed Securities Fund, Inc. 0.75% 0.375%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Emerging Growth Fund, Inc. 0.60% 0.300%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Equity Fund, Inc. .50% to $500 mil 0.250%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.475% next $500 mil 0.226%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.45% over 1 bil 0.203%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Equity Income Fund .60% to $500 mil 0.300%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.50% next $500 mil 0.238%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.475% next $500 mil 0.214%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.45% over 1.5 bil 0.191%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Bond Market Index Fund 0.25% 0.125%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Europe Index Fund 0.40% 0.200%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Pacific Index Fund 0.40% 0.200%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Small Cap Index Fund 0.30% 0.195%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Stock Index Fund 0.30% 0.150%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Active Balanced Fund 0.65% 0.325%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Mid-Cap Value Fund 0.70% 0.350%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Natural Resources Fund 0.75% 0.375%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Real Estate Securities Fund 0.75% .45% to $250 mil
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.40% next $250 mil
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.35% next $250 mil
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.30% over $750 mil
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Financial Services Fund 0.75% 0.375%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Health Sciences Fund* 0.75% 0.375%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Technology Fund 0.75% 0.375%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Utility Fund .60% to $250 mil 0.300%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.50% next $500 mil 0.238%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.45% next $750 mil 0.203%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.40% next $500 mil 0.170%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.35% next $2 bil 0.140%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.325% next $2 bil 0.122%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.30% over $6 bil 0.105%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Small-Cap Quantum Fund, Inc. 0.60% 0.390%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Small Company Value Fund, Inc. 0.70% 0.455%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Tax-Managed Equity Fund 0.65% 0.325%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential World Fund, Inc., Global Series 0.75% 0.375%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Europe Growth Fund 0.75% 0.375%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Global Genesis Fund 1.00% 0.500%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Pacific Growth Fund 0.75% 0.375%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Taxable Fixed Income Funds
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Diversified Bond Fund, Inc. 0.50% 0.250%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Global Limited Maturity Fund, Inc. 0.55% 0.275%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Government Income Fund, Inc. .50% to $3 bil 0.250%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.35% over $3 bil 0.166%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Government Securities Trust Short Intermediate Term Series 0.40% 0.200%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Contractual Compensation
Fund Name Mgmt Fee to PGAM
--------- -------- -------
<S> <C> <C>
The High Yield Income Fund, Inc. 0.70% 0.350%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential High Yield Fund, Inc. .50% to $250 mil 0.250%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.475% next $500 mil 0.226%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.45% next $750 mil 0.203%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.425% next $500 mil 0.181%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.40% next $500 mil 0.160%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.375% next $500 mil 0.141%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.35% over $3 bil 0.123%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential High Yield Total Return Fund, Inc. 0.65% 0.325%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Intermediate Global Income Fund, Inc. 0.75% 0.375%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential International Bond Fund, Inc, .75% to 1 bil 0.375%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.70% over 1 bil 0.333%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Structured Maturity Fund, Inc. 0.40% 0.200%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Global Total Return Fund, Inc. .75% to $500 mil 0.375%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.70% next $500 mil 0.333%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.65% over $1 bil 0.293%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Tax-Exempt Fixed Income Funds
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential California Municipal Fund - California Series 0.50% 0.250%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential California Municipal Fund - California Income 0.50% 0.250%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential National Municipals Fund, Inc. .50% to $250 mil 0.250%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.475% next $250 mil 0.226%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.45% next $500 mil 0.203%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.425% next $250 mil 0.181%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.40% next $250 mil 0.160%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.375% over $1.5 bil 0.141%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Municipal Bond Fund - High Income Series .50% to 1 bil 0.250%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.45% over 1 bil 0.214%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Municipal Bond Fund - Insured Series .50% to 1 bil 0.250%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.45% over 1 bil 0.214%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Municipal Series Fund - Florida Series 0.50% 0.250%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Municipal Series Fund - Massachusetts Series 0.50% 0.250%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Municipal Series Fund - New Jersey Series 0.50% 0.250%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Municipal Series Fund - New York Series 0.50% 0.250%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Municipal Series Fund - North Carolina Series 0.50% 0.250%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Municipal Series Fund - Ohio Series 0.50% 0.250%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Municipal Series Fund - Pennsylvania Series 0.50% 0.250%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Money Market Funds
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Command Money Fund .50% to $500 mil 0.250%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.425% next $500 mil 0.191%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.375% next $500 mil 0.150%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.35% over $1.5 bil 0.123%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Command Government Money Market Fund .40% to $1 bil 0.200%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.375% over $1 bil 0.169%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Command Tax-Free Fund .50% to $500 mil 0.250%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.425% next $500 mil 0.191%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.375% over $1bil 0.150%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Government Securities Trust - Money Market Series .40% to $1 bil 0.200%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.375% next $500 mil 0.169%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.35% over $1.5 bil 0.140%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Government Securities Trust - U.S. Treasury Money Market Series 0.40% 0.200%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Institutional Liquidity Portfolio, Inc. 0.20% 0.100%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Tax-Free Money Market Fund, Inc. .50% to $750 mil 0.250%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Contractual Compensation
Fund Name Mgmt Fee to PGAM
--------- -------- -------
<S> <C> <C>
.425% next $750 mil 0.191%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.375% over $1.5 bil 0.150%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential California Municipal Fund - California Money Market Series 0.50% 0.250%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential MoneyMart Assets, Inc. Fund .50% to $50 mil 0.250%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.30% over $50 mil 0.135%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Municipal Series Fund - Connecticut Money Market Series 0.50% 0.250%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Municipal Series Fund - Massachusetts Money Market Series 0.50% 0.250%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Municipal Series Fund - New Jersey Money Market Series 0.50% 0.250%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Municipal Series Fund - New York Money Market Series 0.50% 0.250%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Prudential Special Money Fund - Money Market Series 0.50% 0.250%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Accummulated Trust Fund: Liquid Assets 0.07% 0.035%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Accummulated Trust Fund: National Money Market .39% to $1 bil 0.195%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.375% next $500 mil 0.169%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.35% next $500 mil 0.140%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
.325% over $2 bil 0.114%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit (g)(2)
AMENDMENT TO CUSTODIAN CONTRACT/AGREEMENT
This Amendment to the respective Custodian Contract/Agreement is made as of
February 22, 1999 by and between each of the funds listed on Schedule D
(including any series thereof, each, a "Fund") and State Street Bank and Trust
Company (the "Custodian"). Capitalized terms used in this Amendment without
definition shall have the respective meanings given to such terms in the
Custodian Contract/Agreement referred to below.
WHEREAS, each Fund and the Custodian have entered into a Custodian
Contract/Agreement dated as of the dates set forth on Schedule D (each contract,
as amended, a "Contract"); and
WHEREAS, each Fund and the Custodian desire to amend certain provisions of
the Contract to reflect revisions to Rule 17f-5 ("Rule 17f-5") promulgated under
the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, each Fund and the Custodian desire to amend and restate certain
other provisions of the Contract relating to the custody of assets of each of
the Funds held outside of the United States.
NOW THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements hereinafter contained, the parties hereby agree to amend the
Contract, to add the following new provisions which supersede the provisions in
the existing contracts relating to the custody of assets of the Funds outside
the United States.
3. The Custodian as Foreign Custody Manager.
----------------------------------------
3.1. Definitions.
-----------
Capitalized terms in this Article 3 shall have the following meanings:
"Country Risk" means all factors reasonably related to the systemic risk of
holding Foreign Assets in a particular country including, but not limited to,
such country's political environment; economic and financial infrastructure;
systemic custody and securities settlement practices; and laws and regulations
applicable to the safekeeping and recovery of Foreign Assets held in custody in
that country.
"Eligible Foreign Custodian" has the meaning set forth in section (a)(1) of Rule
17f-5, including a majority-owned or indirect subsidiary of a U.S. Bank (as
defined in Rule 17f-5), a bank holding company meeting the requirements of an
Eligible Foreign Custodian (as set forth in Rule 17f-5 or by other appropriate
action of the U.S. Securities and Exchange Commission (the "SEC")), or a foreign
branch of a Bank (as defined in Section 2(a)(5) of the 1940 Act) meeting the
requirements of a custodian under Section 17(f) of the 1940 Act, except that the
term does not include Mandatory Securities Depositories.
1
<PAGE>
"Foreign Assets" means any of the Funds' investments (including foreign
currencies) for which the primary market is outside the United States and such
cash and cash equivalents as are reasonably necessary to effect the Funds'
transactions in such investments.
"Foreign Custody Manager" has the meaning set forth in section (a)(2) of Rule
17f-5.
"Mandatory Securities Depository" means a foreign securities depository or
clearing agency that, either as a legal or practical matter, must be used if the
Fund determines to place Foreign Assets in a country outside the United States
(i) because required by law or regulation; (ii) because securities cannot be
withdrawn from such foreign securities depository or clearing agency; or (iii)
because maintaining or effecting trades in securities outside the foreign
securities depository or clearing agency is not consistent with systemic
custodial or market practices.
3.2. Delegation to the Custodian as Foreign Custody Manager.
------------------------------------------------------
Each Fund, by resolution adopted by its Board of Trustees/Directors (the
"Board"), hereby delegates to the Custodian subject to Section (b) of Rule 17f-
5, the responsibilities set forth in this Article 3 with respect to Foreign
Assets of the Fund held outside the United States, and the Custodian hereby
accepts such delegation, as Foreign Custody Manager with respect to the Funds.
3.3. Countries Covered.
-----------------
The Foreign Custody Manager shall be responsible for performing the delegated
responsibilities defined below only with respect to the countries and custody
arrangements for each such country listed on Schedule A to this Contract, which
list of countries may be amended from time to time by the Fund with the
agreement of the Foreign Custody Manager. The Foreign Custody Manager shall
list on Schedule A the Eligible Foreign Custodians selected by the Foreign
Custody Manager to maintain the assets of the Funds which list of Eligible
Foreign Custodians may be amended from time to time in the sole discretion of
the Foreign Custody Manager. Mandatory Securities Depositories are listed on
Schedule B to this Contract, which Schedule B may be amended from time to time
by the Foreign Custody Manager upon reasonable notice to the Fund. The Foreign
Custody Manager will provide amended versions of Schedules A and B in accordance
with Section 3.7 of this Article 3.
Upon the receipt by the Foreign Custody Manager of Proper Instructions to open
an account or to place or maintain Foreign Assets in a country listed on
Schedule A, and the fulfillment by a Fund of the applicable account opening
requirements for such country, the Foreign Custody Manager shall be deemed to
have been delegated by that Fund's Board responsibility as Foreign Custody
Manager with respect to that country and to have accepted such delegation.
Execution of this Amendment by the Fund shall be deemed to be a Proper
Instruction to open an account, or to place or maintain Foreign Assets, in each
country listed on Schedule A in which the Custodian has previously placed or
currently maintains Foreign Assets pursuant to the terms of the
2
<PAGE>
Contract. Following the receipt of Proper Instructions directing the Foreign
Custody Manager to close the account of a Fund with the Eligible Foreign
Custodian selected by the Foreign Custody Manager in a designated country, the
delegation by that Fund's Board to the Custodian as Foreign Custody Manager for
that country shall be deemed to have been withdrawn and the Custodian shall
immediately cease to be the Foreign Custody Manager of the Fund with respect to
that country.
The Foreign Custody Manager may withdraw its acceptance of delegated
responsibilities with respect to a designated country upon written notice to the
Fund. Thirty days (or such longer period as to which the parties agree in
writing) after receipt of any such notice by the Fund, the Custodian shall have
no further responsibility as Foreign Custody Manager to the Fund with respect to
the country as to which the Custodian's acceptance of delegation is withdrawn.
3.4. Scope of Delegated Responsibilities.
-----------------------------------
3.4.1. Selection of Eligible Foreign Custodians.
----------------------------------------
Subject to the provisions of this Article 3, the Fund's Foreign Custody Manager
may place and maintain the Foreign Assets in the care of the Eligible Foreign
Custodian selected by the Foreign Custody Manager in each country listed on
Schedule A, as amended from time to time.
In performing its delegated responsibilities as Foreign Custody Manager to place
or maintain Foreign Assets with an Eligible Foreign Custodian, the Foreign
Custody Manager shall determine that the Foreign Assets will be subject to
reasonable care, based on the standards applicable to custodians in the country
in which the Foreign Assets will be held by that Eligible Foreign Custodian,
after considering all factors relevant to the safekeeping of such assets,
including, without limitation the factors specified in Rule 17f-5(c)(1).
3.4.2. Contracts With Eligible Foreign Custodians.
------------------------------------------
The Foreign Custody Manager shall determine that the contract (or the rules or
established practices or procedures in the case of an Eligible Foreign Custodian
that is a foreign securities depository or clearing agency) governing the
foreign custody arrangements with each Eligible Foreign Custodian selected by
the Foreign Custody Manager will satisfy the requirements of Rule 17f-5(c)(2).
3.4.3. Monitoring.
----------
In each case in which the Foreign Custody Manager maintains Foreign Assets with
an Eligible Foreign Custodian selected by the Foreign Custody Manager, the
Foreign Custody Manager shall establish a system to monitor (i) the
appropriateness of maintaining the Foreign Assets with such Eligible Foreign
Custodian and (ii) the contract governing the custody arrangements established
by the Foreign Custody Manager with the Eligible Foreign Custodian (or the rules
or established practices and procedures in the case of an Eligible Foreign
Custodian selected by the Foreign
3
<PAGE>
Custody Manager which is a foreign securities depository or clearing agency that
is not a Mandatory Securities Depository). The Foreign Custody Manager shall
provide the Board at least annually with information as to the factors used in
such monitoring system. If the Foreign Custody Manager determines that the
custody arrangements with an Eligible Foreign Custodian it has selected are no
longer appropriate, the Foreign Custody Manager shall notify the Board in
accordance with Section 3.7 hereunder and withdraw the Foreign Assets from such
Eligible Foreign Custodian as soon as reasonably practicable.
3.5. Guidelines for the Exercise of Delegated Authority.
--------------------------------------------------
For purposes of this Article 3, the Foreign Custody Manager shall have no
responsibility for Country Risk as is incurred by placing and maintaining the
Foreign Assets in each country for which the Custodian is serving as Foreign
Custody Manager of the Portfolios. The Fund and the Custodian each expressly
acknowledge that the Foreign Custody Manager shall not be delegated any
responsibilities under this Article 3 with respect to Mandatory Securities
Depositories.
3.6. Standard of Care as Foreign Custody Manager of a Portfolio.
----------------------------------------------------------
In performing the responsibilities delegated to it, the Foreign Custody Manager
agrees to exercise reasonable care, prudence and diligence such as a person
having responsibility for the safekeeping of assets of management investment
companies registered under the 1940 Act would exercise.
3.7. Reporting Requirements.
----------------------
The Foreign Custody Manager shall report the placement of Foreign Assets with an
Eligible Foreign Custodian, the withdrawal of the Foreign Assets from an
Eligible Foreign Custodian and the placement of such Foreign Assets with another
Eligible Foreign Custodian by providing to the Board amended Schedules A or B at
the end of the calendar quarter in which an amendment to either Schedule has
occurred. The Foreign Custody Manager shall make written reports notifying the
Board of any other material change in the foreign custody arrangements of the
Funds described in this Article 3 promptly after the occurrence of the material
change.
3.8. Representations with Respect to Rule 17f-5.
------------------------------------------
The Foreign Custody Manager represents to the Fund that it is a U.S. Bank as
defined in section (a)(7) of Rule 17f-5.
3.9. Effective Date and Termination of the Custodian as Foreign Custody Manager.
--------------------------------------------------------------------------
The Board's delegation to the Custodian as Foreign Custody Manager of the Funds
shall be effective as of the date hereof and shall remain in effect until
terminated at any time, without penalty, by written notice from the terminating
party to the non-terminating party. Termination will become effective sixty
(60) days after receipt by the non-terminating party of such notice.
4
<PAGE>
The provisions of Section 3.3 hereof shall govern the delegation to and
termination of the Custodian as Foreign Custody Manager of the Funds with
respect to designated countries.
3.10. Most Favored Client.
-------------------
If at any time prior to termination of this Amendment, the Custodian, as a
matter of standard business practice, accepts delegation as Foreign Custody
Manager for its U.S. mutual fund clients on terms of materially greater benefit
to the Funds than set forth in this Amendment, the Custodian hereby agrees to
negotiate with the Funds in good faith with respect thereto.
4. Duties of the Custodian with Respect to Property of the Funds held Outside
--------------------------------------------------------------------------
the United States.
-----------------
4.1 Definitions.
-----------
Capitalized terms in this Article 4 shall have the following meanings:
"Foreign Securities System" means either a clearing agency or a securities
depository listed on Schedule A hereto or a Mandatory Securities Depository
listed on Schedule B hereto.
"Foreign Sub-Custodian" means a foreign banking institution (including a foreign
branch of the Custodian or another Bank (as defined in Section 2(a)(5) of the
1940 Act)) serving as an Eligible Foreign Custodian.
4.2. Holding Securities.
------------------
The Custodian shall identify on its books as belonging to the Funds the foreign
securities held by each Foreign Sub-Custodian or Foreign Securities System. The
Custodian may hold foreign securities for all of its customers, including the
Funds, with any Foreign Sub-Custodian in an account that is identified as
belonging to the Custodian for the benefit of its customers, provided however,
----------------
that (i) the records of the Custodian with respect to foreign securities of the
Funds which are maintained in such account shall identify those securities as
belonging to the Funds and (ii), to the extent permitted and customary in the
market in which the account is maintained, the Custodian shall require that
securities so held by the Foreign Sub-Custodian be held separately from any
assets of such Foreign Sub-Custodian or of other customers of such Foreign Sub-
Custodian.
4.3. Foreign Securities Systems.
--------------------------
Foreign securities shall be maintained in a Foreign Securities System in a
designated country only through arrangements implemented by the Foreign Sub-
Custodian in such country pursuant to the terms of this Contract.
4.4. Transactions in Foreign Custody Account.
---------------------------------------
5
<PAGE>
4.4.1. Delivery of Foreign Assets.
--------------------------
The Custodian or a Foreign Sub-Custodian shall release and deliver foreign
securities of the Funds held by such Foreign Sub-Custodian, or in a Foreign
Securities System account, only upon receipt of Proper Instructions, which may
be continuing instructions when deemed appropriate by the parties, and only in
the following cases:
(i) upon the sale of such foreign securities for the Fund in
accordance with customary market practice in the country where
such foreign securities are held or traded, including, without
limitation: (A) delivery against expectation of receiving later
payment; or (B) in the case of a sale effected through a Foreign
Securities System, in accordance with the rules governing the
operation of the Foreign Securities System;
(ii) in connection with any repurchase agreement related to foreign
securities;
(iii) to the depository agent in connection with tender or other similar
offers for foreign securities of the Portfolios;
(iv) to the issuer thereof or its agent when such foreign securities are
called, redeemed, retired or otherwise become payable;
(v) to the issuer thereof, or its agent, for transfer into the name of
the Custodian (or the name of the respective Foreign Sub-Custodian
or of any nominee of the Custodian or such Foreign Sub-Custodian)
or for exchange for a different number of bonds, certificates or
other evidence representing the same aggregate face amount or
number of units;
(vi) to brokers, clearing banks or other clearing agents for examination
or trade execution in accordance with reasonable market custom;
provided that in any such case the Foreign Sub-Custodian shall have
--------
no responsibility or liability for any loss arising from the
delivery of such securities prior to receiving payment for such
securities except as may arise from the Foreign Sub-Custodian's own
negligence or willful misconduct;
(vii) for exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of
the securities of the issuer of such securities, or pursuant to
provisions for conversion contained in such securities, or pursuant
to any deposit agreement;
(viii) in the case of warrants, rights or similar foreign securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities;
6
<PAGE>
(ix) for delivery as security in connection with any borrowing by the
Funds requiring a pledge of assets by the Funds;
(x) in connection with trading in options and futures contracts,
including delivery as original margin and variation margin;
(xi) in connection with the lending of foreign securities; and
(xii) for any other proper purpose, but only upon receipt of Proper
--- ----
Instructions specifying the foreign securities to be delivered,
setting forth the purpose for which such delivery is to be made,
declaring such purpose to be a proper trust\corporate purpose, and
naming the person or persons to whom delivery of such securities
shall be made.
4.4.2. Payment of Fund Monies.
----------------------
Upon receipt of Proper Instructions, which may be continuing instructions when
deemed appropriate by the parties, the Custodian shall pay out, or direct the
respective Foreign Sub-Custodian or the respective Foreign Securities System to
pay out, monies of a Fund in the following cases only:
(i) upon the purchase of foreign securities for the Fund, unless
otherwise directed by Proper Instructions, in accordance with
reasonable market settlement practice in the country where such
foreign securities are held or traded, including, without
limitation, (A) delivering money to the seller thereof or to a
dealer therefor (or an agent for such seller or dealer) against
expectation of receiving later delivery of such foreign securities;
or (B) in the case of a purchase effected through a Foreign
Securities System, in accordance with the rules governing the
operation of such Foreign Securities System;
(ii) in connection with the conversion, exchange or surrender of foreign
securities of the Fund;
(iii) for the payment of any expense or liability of the Fund, including
but not limited to the following payments: interest, taxes,
investment advisory fees, transfer agency fees, fees under this
Contract, legal fees, accounting fees, and other operating
expenses;
(iv) for the purchase or sale of foreign exchange or foreign exchange
contracts for the Fund, including transactions executed with or
through the Custodian or its Foreign Sub-Custodians;
(v) in connection with trading in options and futures contracts,
including delivery as
7
<PAGE>
original margin and variation margin;
(vi) for payment of part or all of the dividends received in respect of
securities sold short;
(vii) in connection with the borrowing or lending of foreign securities;
and
(viii) for any other proper purpose, but only upon receipt of Proper
--- ----
Instructions specifying the amount of such payment, setting forth
the purpose for which such payment is to be made, declaring such
purpose to be a proper trust\corporate purpose, and naming the
person or persons to whom such payment is to be made.
4.4.3. Market Conditions; Market Information.
-------------------------------------
Notwithstanding any provision of this Contract to the contrary, settlement and
payment for Foreign Assets received for the account of the Funds and delivery of
Foreign Assets maintained for the account of the Funds may be effected in
accordance with the customary established securities trading or processing
practices and procedures in the country or market in which the transaction
occurs generally accepted by Institutional Clients, including, without
limitation, delivering Foreign Assets to the purchaser thereof or to a dealer
therefor (or an agent for such purchaser or dealer) with the expectation of
receiving later payment for such Foreign Assets from such purchaser or dealer.
For purposes of this Agreement, the term "Institutional Clients" means U.S.
registered investment companies or major U.S. commercial banks, insurance
companies, pension funds or substantially similar institutions which, as a part
of their ordinary business operations, purchase or sell securities and make use
of global custody services.
The Custodian shall provide to the Board information with respect to material
changes in the custody and settlement practices in countries in which the
Custodian employs a Foreign Sub-Custodian. The Custodian shall provide, without
limitation, information relating to Foreign Securities Systems and other
information described in Schedule C. The Custodian may revise Schedule C from
time to time, provided that no such revision shall result in the Board being
provided with substantively less information than had previously been provided
hereunder and provided further that the Custodian shall in any event provide to
the Board at least annually the following information and opinions with respect
to the Board approved countries listed on Schedule A:
(i) legal opinions relating to whether local law restricts with respect
to U.S. registered mutual funds (a) access of a fund's independent
public accountants to books and records of a Foreign Sub-Custodian
or Foreign Securities System, (b) a fund's ability to recover in
the event of bankruptcy or insolvency of a Foreign Sub-Custodian or
Foreign Securities System, (c) a fund's ability to recover in the
event of a loss by a Foreign Sub-Custodian or Foreign Securities
System, and (d)
8
<PAGE>
the ability of a foreign investor to convert cash and cash
equivalents to U.S. dollars;
(ii) summary of information regarding Foreign Securities Systems; and
(iii) country profile information containing market practice for (a)
delivery versus payment, (b) settlement method, (c) currency
restrictions, (d) buy-in practices, (e) foreign ownership limits,
and (f) unique market arrangements.
4.5. Registration of Foreign Securities.
----------------------------------
The foreign securities maintained in the custody of a Foreign Sub-Custodian
(other than bearer securities) shall be registered in the name of the applicable
series or in the name of the Custodian or in the name of any Foreign Sub-
Custodian or in the name of any nominee of the foregoing, and the Fund agrees to
hold any such nominee harmless from any liability as a holder of record of such
foreign securities, except to the extent that the Fund incurs loss or damage due
to failure of such nominee to meet its standard of care set forth in the
Contract. The Custodian or a Foreign Sub-Custodian shall not be obligated to
accept securities on behalf of a Fund under the terms of this Contract unless
the form of such securities and the manner in which they are delivered are in
accordance with reasonable market practice.
4.6. Bank Accounts.
-------------
The Custodian shall identify on its books as belonging to the Fund cash
(including cash denominated in foreign currencies) deposited with the Custodian.
Where the Custodian is unable to maintain, or market practice does not
facilitate the maintenance of, cash on the books of the Custodian, a bank
account or bank accounts opened and maintained outside the United States on
behalf of a Fund with a Foreign Sub-Custodian shall be subject only to draft or
order by the Custodian or such Foreign Sub-Custodian, acting pursuant to the
terms of this Contract to hold cash received by or from or for the account of
the Portfolio.
4.7. Collection of Income.
--------------------
The Custodian shall use reasonable commercial efforts to collect all income and
other payments with respect to the Foreign Assets held hereunder to which the
Funds shall be entitled and shall credit such income, as collected, to the
applicable Fund. In the event that extraordinary measures are required to
collect such income, the Fund and the Custodian shall consult as to such
measures and as to the compensation and expenses of the Custodian relating to
such measures.
4.8. Shareholder Rights.
------------------
With respect to the foreign securities held pursuant to this Article 4, the
Custodian will use
9
<PAGE>
reasonable commercial efforts to facilitate the exercise of voting and other
shareholder rights, subject always to the laws, regulations and practical
constraints that may exist in the country where such securities are issued. The
Fund acknowledges that local conditions, including lack of regulation, onerous
procedural obligations, lack of notice and other factors may have the effect of
severely limiting the ability of the Fund to exercise shareholder rights.
4.9. Communications Relating to Foreign Securities.
---------------------------------------------
The Custodian shall transmit promptly to the Fund written information
(including, without limitation, pendency of calls and maturities of foreign
securities and expirations of rights in connection therewith) received by the
Custodian via the Foreign Sub-Custodians from issuers of the foreign securities
being held for the account of the Funds. With respect to tender or exchange
offers, the Custodian shall transmit promptly to the Fund written information so
received by the Custodian from issuers of the foreign securities whose tender or
exchange is sought or from the party (or its agents) making the tender or
exchange offer. Subject to the standard of care to which the Custodian is held
under this Agreement, the Custodian shall not be liable for any untimely
exercise of any tender, exchange or other right or power in connection with
foreign securities or other property of the Funds at any time held by it unless
(i) the Custodian or the respective Foreign Sub-Custodian is in actual
possession of such foreign securities or property and (ii) the Custodian
receives Proper Instructions with regard to the exercise of any such right or
power, and both (i) and (ii) occur at least three business days prior to the
date on which the Custodian is to take action to exercise such right or power.
4.10. Liability of Foreign Sub-Custodians and Foreign Securities Systems.
------------------------------------------------------------------
Each agreement pursuant to which the Custodian employs a Foreign Sub-Custodian
shall, to the extent possible, require the Foreign Sub-Custodian to exercise
reasonable care in the performance of its duties and, to the extent possible, to
indemnify, and hold harmless, the Custodian from and against any loss, damage,
cost, expense, liability or claim arising out of or in connection with the
Foreign Sub-Custodian's performance of such obligations. At each Fund's
election, a Fund shall be entitled to be subrogated to the rights of the
Custodian with respect to any claims against a Foreign Sub-Custodian as a
consequence of any such loss, damage, cost, expense, liability or claim if and
to the extent that a Fund and any applicable series have not been made whole for
any such loss, damage, cost, expense, liability or claim.
4.11. Tax Law.
-------
Except to the extent that imposition of any tax liability arises from the
Custodian's failure to perform in accordance with the terms of this Section 4.11
or from the failure of any Foreign Sub-Custodian to perform in accordance with
the terms of the applicable subcustody agreement, the Custodian shall have no
responsibility or liability for any obligations now or hereafter imposed on a
Fund, a series thereof or the Custodian as custodian of
10
<PAGE>
the Fund by the tax law of the United States or of any state or political
subdivision thereof. It shall be the responsibility of each Fund to notify the
Custodian of the obligations imposed on the Fund or the Custodian as custodian
of the Fund by the tax law of countries other than those mentioned in the above
sentence, including responsibility for withholding and other taxes, assessments
or other governmental charges, certifications and governmental reporting. The
sole responsibility of the Custodian with regard to such tax law shall be to use
reasonable efforts to assist the Fund with respect to any claim for exemption or
refund under the tax law of countries for which the Fund has provided such
information.
4.12. Liability of Custodian.
----------------------
Except as may arise from the Custodian's own negligence or willful misconduct or
the negligence or willful misconduct of a Sub-Custodian, the Custodian shall be
without liability to a Fund for any loss, liability, claim or expense resulting
from or caused by anything which is (A) part of Country Risk or (B) part of the
"prevailing country risk" of the Fund, as such term is used in SEC Release Nos.
IC-22658; IS-1080 (May 12, 1997) or as such term or other similar terms are now
or in the future interpreted by the SEC or by the staff of the Division of
Investment Management of the SEC.
The Custodian shall be liable for the acts or omissions of a Foreign Sub-
Custodian to the same extent as set forth with respect to sub-custodians
generally in the Contract and, regardless of whether assets are maintained in
the custody of a Foreign Sub-Custodian or a Foreign Securities System, the
Custodian shall not be liable for any loss, damage, cost, expense, liability or
claim resulting from nationalization, expropriation, currency restrictions, or
acts of war or terrorism, or any other loss where the Sub-Custodian has
otherwise acted with reasonable care.
III. Except as specifically superseded or modified herein, the terms and
provisions of the Contract shall continue to apply with full force and
effect. In the event of any conflict between the terms of the Contract
prior to this Amendment and this Amendment, the terms of this Amendment
shall prevail. If the Custodian is delegated the responsibilities of
Foreign Custody Manager pursuant to the terms of Article 3 hereof, in the
event of any conflict between the provisions of Articles 3 and 4 hereof,
the provisions of Article 3 shall prevail.
11
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Amendment to be
executed in its name and behalf by its duly authorized representative as of the
date first above written.
WITNESSED BY: STATE STREET BANK AND TRUST
COMPANY
/s/Marc L. Parsons By: /s/Ronald E. Logue
- ------------------ ------------------
Marc L. Parsons Ronald E. Logue
Associate Counsel Executive Vice President
Cash Accumulation Trust
Command Government Fund
Command Money Fund
Command Tax-Free Fund
Global Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Prudential 20/20 Focus Fund
Prudential Balanced Fund
Prudential California Municipal Fund
Prudential Developing Markets Fund
Prudential Distressed Securities Fund, Inc.
Prudential Diversified Bond Fund, Inc.
Prudential Diversified Funds
Prudential Index Series Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Europe Growth Fund
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Prudential High Yield Fund, Inc.
Prudential High Yield Total Return Fund, Inc.
Prudential Institutional Liquidity Portfolio, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
The Prudential Investment Portfolios Fund, Inc.
Prudential Mid-Cap Value Fund
Prudential MoneyMart Assets, Inc.
<PAGE>
Prudential Mortgage Income Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Municipal Bond Fund
Prudential Municipal Series Fund
Prudential National Municipals Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Real Estate Securities Fund
Prudential Small Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Special Money Market Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Prudential Tax-Free Money Fund, Inc.
Prudential Tax-Managed Equity Fund
Prudential Utility Fund, Inc.
Prudential World Fund, Inc.
The Global Total Return Fund, Inc.
The Target Portfolio Trust
The Asia Pacific Fund, Inc.
The High Yield Income Fund, Inc.
Witnessed By:
By: /s/S. Jane Rose By: /s/Grace Torres
--------------- ---------------
Grace Torres
Treasurer
Prudential Government Income Fund, Inc.
Prudential High Yield Total Return Fund, Inc.
Prudential Municipal Bond Fund
Prudential California Municipal Fund
The High Yield Income Fund, Inc.
Prudential Municipal Series Fund
Prudential Government Securities Trust
Prudential Diversified Bond Fund, Inc.
Prudential High Yield Fund, Inc.
Prudential National Municipals Fund, Inc.
Prudential Structured Maturity Fund, Inc.
<PAGE>
Witnessed By:
By: /s/Robert Rosselot By: /s/Deborah A. Docs
------------------ ------------------
Deborah A. Docs
Secretary
<PAGE>
Exhibit (h)(2)
AMENDMENT TO TRANSFER AGENCY AND SERVICE AGREEMENT
THIS AMENDMENT to the Transfer Agency and Service Agreement by and between
Prudential Structured Maturity Fund, Inc. (the "Fund") and Prudential Mutual
Fund Services LLC (successor to Prudential Mutual Fund Services, Inc.)("PMFS")
is entered into as of August 24, 1999.
WHEREAS, the Fund and PMFS have entered into a Transfer Agency and Service
Agreement (the "Agreement") pursuant to which PMFS serves as transfer agent,
dividend disbursing agent and shareholder servicing agent for the Fund; and
WHEREAS, the Fund and PMFS desire to amend the Agreement to confirm the
Fund's agreement to pay transfer agency account fees and expenses for beneficial
owners holding shares through omnibus accounts maintained by The Prudential
Insurance Company of America, its subsidiaries or affiliates.
NOW, THEREFORE, for and in consideration of the continuation of the
Agreement, and other good and valuable consideration, Article 8 of the Agreement
is amended by adding the following Section:
8.04 PMFS may enter into agreements with Prudential or any subsidiary
or affiliate of Prudential whereby PMFS will maintain an omnibus account
and the Fund will reimburse PMFS for amounts paid by PMFS to Prudential, or
such subsidiary or affiliate, in an amount not in excess of the annual
maintenance fee for each active beneficial shareholder account as if each
beneficial shareholder account were maintained by PMFS on the Fund's
records, subject to the fee schedule attached hereto as Schedule A.
Prudential, its subsidiary or affiliate, as the case may be, shall maintain
records relating to each beneficial shareholder account that underlies the
omnibus account maintained by PMFS.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed in their names and on their behalf by and through their duly authorized
officers, as of the day and year first above written.
PRUDENTIAL STRUCTURED ATTEST:
MATURITY FUND, INC.
By: /s/ Robert F. Gunia By: /s/ Deborah A. Docs
----------------------- --------------------
Robert F. Gunia Deborah A. Docs
Vice President Secretary
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTEST:
By: /s/ Brian W. Henderson By: /s/ William V. Healey
----------------------- --------------------
Brian W. Henderson William V. Healey
President Secretary
<PAGE>
Exhibit (i)(2)
CONSENT OF SWIDLER BERLIN SHEREFF FRIEDMAN, LLP
We hereby consent to the reference to our firm included in the prospectus
and statement of additional information of Prudential Short-Term Corporate Bond
Fund, Inc. filed as part of Registration Statement No. 33-22363 and to the use
of our opinion of counsel, incorporated by reference to Exhibit 10 to
Post-Effective Amendment No. 16 to the Registration Statement on Form N-1A (File
No. 33-22363).
Swidler Berlin Shereff Friedman, LLP
/s/ Swidler Berlin Shereff Friedman, LLP
New York, New York
April 28, 2000
<PAGE>
Exhibit (j)
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the use in this Registration Statement on Form N-1A of our
report dated February 18, 2000, relating to the financial statements and
financial highlights of Prudential Short-Term Corporate Bond Fund, Inc.
(formally "Prudential Structured Maturity Fund, Inc. - Income Portfolio) which
appears in such Registration Statement. We also consent to the references to us
under the headings "Investment Advisory and Other Services" and "Financial
Highlights" in such Registration Statement.
PricewaterhouseCoopers LLP
New York, New York
April 28, 2000
<PAGE>
Exhibit (p)(1)
PRUDENTIAL SHORT-TERM CORPORATE BOND FUND, INC.
(the Fund)
Code of Ethics Adopted Pursuant to Rule 17j-1
Under the Investment Company Act of 1940
(the Code)
1. Purposes
--------
The Code has been adopted by the Board of Directors/Trustees of the Fund,
in accordance with Rule 17j-1(c) under the Investment Company Act of 1940 (the
Act) and in accordance with the following general principles:
(1) The duty at all times to place the interests of shareholders
first.
Investment company personnel should scrupulously avoid serving
their own personal interests ahead of shareholders' interests in any
decision relating to their personal investments.
(2) The requirement that all personal securities transactions be
conducted consistent with the Code and in such a manner as to avoid
any actual or potential conflict of interest or any abuse of an
individual's position of trust and responsibility.
Investment company personnel must not only seek to achieve
technical compliance with the Code but should strive to abide by its
spirit and the principles articulated herein.
(3) The fundamental standard that investment company personnel should
not take inappropriate advantage of their positions.
Investment company personnel must avoid any situation that might
compromise, or call into question, their exercise of fully independent
judgment in the interest of shareholders, including, but not limited
to the receipt of unusual investment opportunities, perquisites, or
gifts of more than a de minimis value from persons doing or seeking
business with the Fund.
<PAGE>
Rule 17j-1 under the Act generally proscribes fraudulent or manipulative
practices with respect to a purchase or sale of a security held or to be
acquired (as such term is defined in Section 2.) by an investment company, if
effected by an associated person of such company.
The purpose of the Code is to establish procedures consistent with the Act
and Rule 17j-1 to give effect to the following general prohibitions as set forth
in Rule 17j-1(b) as follows:
(a) It shall be unlawful for any affiliated person of or Principal
Underwriter for a registered investment company, or any affiliated person
of an investment adviser of or principal underwriter for a registered
investment company in connection with the purchase or sale, directly or
indirectly, by such person of a security held or to be acquired, by such
registered investment company:
(1) To employ any device, scheme or artifice to defraud such
registered investment company;
(2) To make to such registered investment company any untrue
statement of a material fact or omit to state to such registered
investment company a material fact necessary in order to make the
statements made, in light of the circumstances under which they are
made, not misleading;
(3) To engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon any such
registered investment company; or
(4) To engage in any manipulative practice with respect to such
registered investment company.
2. Definitions
-----------
(a) "Access Person" means any director/trustee, officer, general
partner or Advisory Person (including any Investment Personnel, as that
term is defined herein) of the Fund, the Manager, the Adviser/Subadviser,
or the Principal Underwriter.
2
<PAGE>
(b) "Adviser/Subadviser" means the Adviser or Subadviser of the Fund
or both as the context may require.
(c) "Advisory Person" means (i) any employee of the Fund, Manager or
Adviser/Subadviser (or of any company in a control relationship to the
Fund, Manager or Adviser/Subadviser) who, in connection with his or her
regular functions or duties, makes, participates in, or obtains information
regarding the purchase or sale of a security by the Fund, or whose
functions relate to the making of any recommendations with respect to such
purchases or sales; and (ii) any natural person in a control relationship
to the Fund who obtains information concerning recommendations made to the
Fund with regard to the purchase or sale of a security.
(d) "Beneficial Ownership" will be interpreted in the same manner as
it would be under Securities Exchange Act Rule 16a-1(a)(2) in determining
which security holdings of a person are subject to the reporting and short-
swing profit provisions of Section 16 of the Securities Exchange Act of
1934 and the rules and regulations thereunder, except that the
determination of direct or indirect beneficial ownership will apply to all
securities which an Access Person has or acquires (Exhibit A).
---------
(e) "Complex" means the group of registered investment companies for
which Prudential Investments Fund Management LLC serves as Manager;
provided, however, that with respect to Access Persons of the Subadviser
(including any unit or subdivision thereof), "Complex" means the group of
registered investment companies in the Complex advised by the Subadviser or
unit or subdivision thereof.
(f) "Compliance Officer" means the person designated by the Manager,
the Adviser/Subadviser, or Principal Underwriter (including his or her
designee) as having responsibility for compliance with the requirements of
the Code.
(g) "Control" will have the same meaning as that set forth in Section
2(a)(9) of the Act.
(h) "Disinterested Director/Trustee" means a Director/ Trustee of the
Fund who is not an "interested person" of the Fund within the meaning of
Section 2(a)(19) of the Act.
An interested Director/Trustee who would not otherwise be deemed to be
an Access Person, shall be treated as a Disinterested
3
<PAGE>
Director/Trustee for purposes of compliance with the provisions of the Code.
(i) "Initial Public Offering" means an offering of securities
registered under the Securities Act of 1933, the issuer of which,
immediately before the registration, was not subject to the reporting
requirements of sections 13 or 15(d) of the Securities Exchange Act of
1934.
(j) "Investment Personnel" means: (a) Portfolio Managers and other
Advisory Persons who provide investment information and/or advice to the
Portfolio Manager(s) and/or help execute the Portfolio Manager's(s')
investment decisions, including securities analysts and traders ; and (b)
any natural person in a control relationship to the Fund who obtains
information concerning recommendations made to the Fund with regard to the
purchase or sale of a security.
(k) "Manager" means Prudential Investments Fund Management, LLC.
(l) "Portfolio Manager" means any Advisory Person who has the direct
responsibility and authority to make investment decisions for the Fund.
(m) "Private placement" means a limited offering that is exempt from
registration under the Securities Act of 1933 pursuant to section 4(2) or
section 4(6) or pursuant to rule 504, rule 505 or rule 506 under such
Securities Act.
(n) "Security" will have the meaning set forth in Section 2(a)(36) of
the Act, except that it will not include shares of registered open-end
investment companies, direct obligations of the Government of the United
States, , short-term debt securities which are "government securities"
within the meaning of Section 2(a)(16) of the Act, bankers' acceptances,
bank certificates of deposit, commercial paper and such other money market
instruments as are designated by the Compliance Officer. For purposes of
the Code, an "equivalent Security" is one that has a substantial economic
relationship to another Security. This would include, among other things,
(1) a Security that is exchangeable for or convertible into another
Security, (2) with respect to an equity Security, a Security having the
same issuer (including a private issue by the same issuer) and any
derivative, option or warrant relating to that Security and (3) with
respect to a fixed-income Security, a Security having the same issuer,
maturity, coupon and rating.
4
<PAGE>
(o) "Security held or to be acquired" means any Security or any
equivalent Security which, within the most recent 15 days: (1) is or has
been held by the Fund; or (2) is being considered by the Fund or its
investment adviser for purchase by the Fund.
3. Applicability
-------------
The Code applies to all Access Persons and the Compliance Officer shall
provide each Access Person with a copy of the Code. The prohibitions described
below will only apply to a transaction in a Security in which the designated
Access Person has, or by reason of such transaction acquires, any direct or
indirect Beneficial Ownership. The Compliance Officer will maintain a list of
all Access Persons who are currently, and within the past five years, subject to
the Code.
4. Prohibited Purchases and Sales
------------------------------
A. Initial Public Offerings
No Investment Personnel may acquire any Securities in an initial public
offering. For purposes of this restriction, "Initial Public Offerings" shall
not include offerings of government and municipal securities.
B. Private Placements
No Investment Personnel may acquire any Securities in a private placement
without prior approval.
(i) Prior approval must be obtained in accordance with the
preclearance procedure described in Section 6 below. Such approval will
take into account, among other factors, whether the investment opportunity
should be reserved for the Fund and its shareholders and
5
<PAGE>
whether the opportunity is being offered to the Investment Personnel by
virtue of his or her position with the Fund. The Adviser/Subadviser shall
maintain a record of such prior approval and reason for same, for at least
5 years after the end of the fiscal year in which the approval is granted.
(ii) Investment Personnel who have been authorized to acquire
Securities in a private placement must disclose that investment to the
chief investment officer (including his or her designee) of the
Adviser/Subadviser (or of any unit or subdivision thereof) or the
Compliance Officer when they play a part in any subsequent consideration of
an investment by the Fund in the issuer. In such circumstances, the Fund's
decision to purchase Securities of the issuer will be subject to an
independent review by appropriate personnel with no personal interest in
the issuer.
C. Blackout Periods
(i) Except as provided in Section 5 below, Access Persons are
prohibited from executing a Securities transaction on a day during which
any investment company in the Complex has a pending "buy" or "sell" order
in the same or an equivalent Security and until such time as that order is
executed or withdrawn; provided, however, that this prohibition shall not
apply to Disinterested Directors/Trustees except if they have actual
knowledge of trading by any fund in the Complex and, in any event, only
6
<PAGE>
with respect to those funds on whose boards they sit.
This prohibition shall also not apply to Access Persons of the
Subadviser who do not, in the ordinary course of fulfilling his or her
official duties, have access to information regarding the purchase and sale
of Securities for the Fund and are not engaged in the day-to-day operations
of the Fund; provided that Securities investments effected by such Access
Persons during the proscribed period are not effected with knowledge of the
purchase or sale of the same or equivalent Securities by any fund in the
Complex.
A "pending 'buy' or 'sell' order" exists when a decision to purchase
or sell a Security has been made and communicated.
(ii) Portfolio Managers are prohibited from buying or selling a
Security within seven calendar days before or after the Fund trades in the
same or an equivalent Security. Nevertheless, a personal trade by any
Investment Personnel shall not prevent a Fund in the same Complex from
trading in the same or an equivalent security. However, such a transaction
shall be subject to independent review by the Compliance Officer.
(iii) If trades are effected during the periods proscribed in (i) or
(ii) above, except as provided in (iv) below with respect to (i) above, any
profits realized on such trades will be promptly required to be disgorged
to the Fund.
7
<PAGE>
(iv) A transaction by Access Persons (other than Investment Personnel)
inadvertently effected during the period proscribed in (i) above will not
be considered a violation of the Code and disgorgement will not be required
so long as the transaction was effected in accordance with the preclearance
procedures described in Section 6 below and without prior knowledge of
trading by any fund in the Complex in the same or an equivalent Security.
D. Short-Term Trading Profits
Except as provided in Section 5 below, Investment Personnel are prohibited
from profiting from a purchase and sale, or sale and purchase, of the same or an
equivalent Security within any 60 calendar day period. If trades are effected
during the proscribed period, any profits realized on such trades will be
immediately required to be disgorged to the Fund.
E. Short Sales
No Access Person may sell any security short which is owned by any Fund in
the Complex. Access Persons may, however make short sales when he/she owns an
equivalent amount of the same security.
F. Options
No Access Person may write a naked call option or buy a naked put option on
a security owned by any Fund in the Complex. Access Persons may purchase options
on securities not held by any Fund in the Complex, or purchase call
8
<PAGE>
options or write put options on securities owned by any Fund in the Complex,
subject to preclearance and the same restrictions applicable to other
Securities. Access Persons may write covered call options or buy covered put
options on a Security owned by any Fund in the Complex at the discretion of the
Compliance Officer.
G. Investment Clubs
No Access Person may participate in an investment club.
5. Exempted Transactions
---------------------
Subject to preclearance in accordance with Section 6 below with respect to
subitems (b), (e), (f), (g) and (i) hereof, the prohibitions of Sections 4(C)
and 4(D) will not apply to the following:
(a) Purchases or sales of Securities effected in any account over
which the Access Person has no direct or indirect influence or control or
in any account of the Access Person which is managed on a discretionary
basis by a person other than such Access Person and with respect to which
such Access Person does not in fact influence or control such transactions.
(b) Purchases or sales of Securities (or their equivalents) which are
not eligible for purchase or sale by any fund in the Complex.
(c) Purchases or sales of Securities which are non-volitional on the
part of either the Access Person or any fund in the Complex.
(d) Purchases of Securities which are part of an automatic dividend
reinvestment plan.
(e) Purchases effected upon the exercise of rights issued by an issuer
pro rata to all holders of a class of its Securities, to the extent such
--- ----
rights were acquired from such issuer, and sales of such rights so
acquired.
9
<PAGE>
(f) Any equity Securities transaction, or series of related
transactions effected over a 30 calendar day period, involving 500 shares
or less in the aggregate, if (i) the Access Person has no prior knowledge
of activity in such security by any fund in the Complex and (ii) the issuer
is listed on The New York Stock Exchange or has a market capitalization
(outstanding shares multiplied by the current price per share) greater than
$1 billion (or a corresponding market capitalization in foreign markets).
(g) Any fixed-income Securities transaction, or series of related
transactions effected over a 30 calendar day period, involving 100 units
($100,000 principal amount) or less in the aggregate, if the Access Person
has no prior knowledge of transactions in such Securities by any fund in
the Complex.
(h) Any transaction in index options effected on a broad-based index
(See Exhibit B.)/1/
(i) Purchases or sales of Securities which receive the prior approval
of the Compliance Officer (such person having no personal interest in such
purchases or sales), based on a determination that no abuse is involved and
that such purchases and sales are not likely to have any economic impact on
any fund in the Complex or on its ability to purchase or sell Securities of
the same class or other Securities of the same issuer.
(j) Purchases or sales of Unit Investment Trusts.
6. Preclearance
------------
Access Persons (other than Disinterested Directors/Trustees) must preclear
all personal Securities investments with the exception of those identified in
subparts (a), (c), (d), (h) and (j) of Section 5 above.
All requests for preclearance must be submitted to the Compliance Officer
for approval. All approved orders must be executed no later than 5:00 p.m.
local time on the business day following the date preclearance is granted. If
any order
- ---------------------
/1/ Exhibit B will be amended by the Compliance Officer as necessary.
10
<PAGE>
is not timely executed, a request for preclearance must be resubmitted.
7. Reporting
---------
(a) Disinterested Directors/Trustees shall report to the Secretary of the
Fund or the Compliance Officer the information described in Section 7(b) hereof
with respect to transactions in any Security in which such Disinterested
Director/Trustee has, or by reason of such transaction acquires, any direct or
indirect Beneficial Ownership in the Security only if such Disinterested
----
Director/Trustee, at the time of that transaction knew or, in the ordinary
course of fulfilling his or her official duties as a Director/Trustee of the
Fund, should have known that, during the 15-day period immediately preceding or
subsequent to the date of the transaction in a Security by such
Director/Trustee, such Security is or was purchased or sold by the Fund or was
being considered for purchase or sale by the Fund, the Manager or
Adviser/Subadviser; provided, however, that a Disinterested Director/Trustee is
not required to make a report with respect to transactions effected in any
account over which such Director/Trustee does not have any direct or indirect
influence or control or in any account of the Disinterested Director/Trustee
which is managed on a discretionary basis by a person other than such
Director/Trustee and with respect to which such Director/Trustee does not in
fact influence or control such transactions. The Secretary of the Fund or the
Compliance Officer shall maintain such reports and such other records to the
extent required by Rule 17j-1 under the Act.
(b) Every report required by Section 7(a) hereof shall be made not later
11
<PAGE>
than ten days after the end of the calendar quarter in which the transaction to
which the report relates was effected, and shall contain the following
information:
(i) The date of the transaction, the title and the number of shares, and
the principal amount of each Security involved;
(ii) The nature of the transaction (i.e., purchase, sale or any other type
----
of acquisition or disposition);
(iii) The price at which the transaction was effected;
(iv) The name of the broker, dealer or bank with or through whom the
transaction was effected; and
(v) The date that the report is submitted.
(c) Any such report may contain a statement that the report shall not be
construed as an admission by the person making such report that he or she has
any direct or indirect Beneficial Ownership in the Security to which the report
relates.
8. Records of Securities Transactions and Post-Trade Review
--------------------------------------------------------
Access Persons (other than Disinterested Directors/Trustees) are required
to direct their brokers to supply, on a timely basis, duplicate copies of
confirmations of all personal Securities transactions and copies of periodic
statements for all Securities accounts in which such Access Persons have a
Beneficial Ownership interest to the Compliance Officer. Such instructions must
be made upon becoming an Access Person and promptly as new accounts are
established, but no later than ten days after the end of a calendar quarter,
with respect to any account established by the Access Person in which any
securities were held during the quarter for the direct or indirect beneficial
interest of the Access Person.
12
<PAGE>
Notification must be made in writing and a copy of the notification must be
submitted to Compliance. This notification will include the broker, dealer or
bank with which the account was established and the date the account was
established.
Compliance with this Code requirement will be deemed to satisfy the
reporting requirements imposed on Access Persons under Rule 17j-1(d), provided,
however, that such confirmations and statements contain all the information
required by Section 7. b. hereof and are furnished within the time period
required by such section.
The Compliance Officer will periodically review the personal investment
activity and holdings reports of all Access Persons (including Disinterested
Directors/Trustees with respect to Securities transactions reported pursuant to
Section 7 above).
9. Disclosure of Personal Holdings
-------------------------------
Within ten days after an individual first becomes an Access Person and
thereafter on an annual basis, each Access Person (other than Disinterested
Directors/Trustees) must disclose all personal Securities holdings. Such
disclosure must be made in writing and be as of the date the individual first
became an Access Person with respect to the initial report and by January 30 of
each year, including holdings information as of December 31, with respect to the
annual report. All such reports shall include the following: title, number of
shares and principal amount of each security held, name of broker, dealer or
bank with whom
13
<PAGE>
these securities are held and the date of submission by the Access Person.
10. Gifts
-----
Access Persons are prohibited from receiving any gift or other thing of
more than $100 in value from any person or entity that does business with or on
behalf of the Fund. Occasional business meals or entertainment (theatrical or
sporting events, etc.) are permitted so long as they are not excessive in number
or cost.
11. Service As a Director
---------------------
Investment Personnel are prohibited from serving on the boards of directors
of publicly traded companies, absent prior authorization based upon a
determination that the board service would be consistent with the interests of
the Fund and its shareholders. In the limited instances that such board service
is authorized, Investment Personnel will be isolated from those making
investment decisions affecting transactions in Securities issued by any publicly
traded company on whose board such Investment Personnel serves as a director
through the use of "Chinese Wall" or other procedures designed to address the
potential conflicts of interest.
12. Certification of Compliance with the Code
-----------------------------------------
Access Persons are required to certify annually as follows:
(i) that they have read and understood the Code;
(ii) that they recognize that they are subject to the Code;
(iii) that they have complied with the requirements of the Code; and
(iv) that they have disclosed or reported all personal Securities
14
<PAGE>
transactions required to be disclosed or reported pursuant to the
requirements of the Code.
13. Code Violations
---------------
All violations of the Code will be reported to the Board of
Directors/Trustees of the Fund on a quarterly basis. The Board of
Directors/Trustees may take such action as it deems appropriate.
14. Review by the Board of Directors/Trustees
-----------------------------------------
The Board of Directors/Trustees will be provided with an annual report
which at a minimum:
(i) certifies to the Board that the Fund, Manager, Investment
Adviser/Subadviser, and Principal Underwriter has adopted procedures reasonably
necessary to prevent its Access persons from violating its Code.
(ii) summarizes existing procedures concerning personal investing and any
changes in the procedures made during the preceding year;
(iii) identifies material Code or procedural violations and sanctions
imposed in response to those material violations; and
(iv) identifies any recommended changes in existing restrictions or
procedures based upon the Fund's experience under the Code, evolving industry
practices, or developments in applicable laws and regulations.
The Board will review such report and determine if any further action is
required.
15
<PAGE>
Explanatory Notes to Code
-------------------------
1. No comparable Code requirements have been imposed upon Prudential
Mutual Fund Services LLC, the Fund's transfer agent, or those of its directors
or officers who are not Directors/Trustees or Officers of the Fund since they
are deemed not to constitute Access Persons or Advisory Persons as defined in
paragraphs (e)(1) and (2) of Rule 17j-1.
Dated: February 29, 2000
16
<PAGE>
Exhibit A
---------
Definition of Beneficial Ownership
----------------------------------
The term "beneficial ownership" of securities would include not only
ownership of securities held by an access person for his or her own
benefit,whether in bearer form or registered in his or her own name or
otherwise, but also ownership of securities held for his or her benefit by other
(regardless of whether or how they are registered) such as custodians, brokers,
executors, administrators, or trustees (including trusts in which he or she has
only a remainder interest), and securities held for his or her account by
pledges, securities owned by a partnership in which he or she should regard as a
personal holding corporation. Correspondingly, this term would exclude
securities held by an access person for the benefit of someone else.
Ordinarily, this term would not include securities held by executors or
administrators in estates in which an access person is a legatee or beneficiary
unless there is a specific legacy to such person of such securities or such
person is the sole legatee or beneficiary and there are other assets in the
estate sufficient to pay debts ranking ahead of such legacy, or the securities
are held in the estate more than a year after the decedent's death.
Securities held in the name of another should be considered as
"beneficially" owned by an access person where such person enjoys "benefits
substantially equivalent to ownership". The SEC has said that although the
final determination of beneficial ownership is a question to be determined in
the light of the facts of the particular case, generally a person is regarded as
the beneficial owner of securities held in the name of his or her spouse and
their minor children. Absent special circumstances such relationship ordinarily
results in such person obtaining benefits substantially equivalent to ownership,
e.g., application of the income derived from such securities to maintain a
common home, to meet expenses which such person otherwise would meet from other
sources, or the ability to exercise a controlling influence over the purchase,
sale or voting of such securities.
An access person also may be regarded as the beneficial owner of securities
held in the name of another person, if by reason of any contact, understanding,
relationship, agreement or other arrangement, he obtains therefrom benefits
substantially equivalent to those of ownership. Moreover, the fact that the
holder is a relative or relative of a spouse and sharing the same home as an
access person may in itself indicate that the access person would obtain
benefits substantially equivalent to those of ownership from securities held in
the name of such relative. Thus, absent countervailing facts, it is expected
that securities held by relatives who share the same home as an access person
will be treated as being beneficially owned by the access person.
An access person also is regarded as the beneficial owner of securities
held in the name of a spouse, minor children or other person, even though he
does not obtain therefrom the aforementioned benefits of ownership, if he can
vest or revest title in himself at once or at some future time.
<PAGE>
Exhibit B
---------
INDEX OPTIONS ON A BROAD-BASED INDEX
TICKER SYMBOL DESCRIPTION
- -------------------------------------------------------------------------------
NIK Nikkei 300 Index CI/Euro
- -------------------------------------------------------------------------------
OEX S&P 100 Close/Amer Index
- -------------------------------------------------------------------------------
OEW S&P 100 Close/Amer Index
- -------------------------------------------------------------------------------
OEY S&P 100 Close/Amer Index
- -------------------------------------------------------------------------------
SPB S&P 500 Index
- -------------------------------------------------------------------------------
SPZ S&P 500 Open/Euro Index
- -------------------------------------------------------------------------------
SPX S&P 500 Open/Euro Index
- -------------------------------------------------------------------------------
SXZ S&P 500 (Wrap)
- -------------------------------------------------------------------------------
SXB S&P 500 Open/Euro Index
- -------------------------------------------------------------------------------
RUZ Russell 2000 Open/Euro Index
- -------------------------------------------------------------------------------
RUT Russell 2000 Open/Euro Index
- -------------------------------------------------------------------------------
MID S&P Midcap 400 Open/Euro Index
- -------------------------------------------------------------------------------
NDX NASDAQ- 100 Open/Euro Index
- -------------------------------------------------------------------------------
NDU NASDAQ- 100 Open/Euro Index
- -------------------------------------------------------------------------------
NDZ NASDAQ- 100 Open/Euro Index
- -------------------------------------------------------------------------------
NDV NASDAQ- 100 Open/Euro Index
- -------------------------------------------------------------------------------
NCZ NASDAQ- 100 Open/Euro Index
- -------------------------------------------------------------------------------
SML S&P Small Cap 600
- -------------------------------------------------------------------------------
TPX U.S. Top 100 Sector
- -------------------------------------------------------------------------------
SPL S&P 500 Long-Term Close
- -------------------------------------------------------------------------------
ZRU Russell 2000 L-T Open./Euro
- -------------------------------------------------------------------------------
VRU Russell 2000 Long-Term Index
- -------------------------------------------------------------------------------
<PAGE>
EXHIBIT (p)(2)
Prudential Investment Management Services LLC (Principal Underwriter)
Prudential Investments Fund Management LLC (Managers)
The Prudential Investment Corporation (Adviser or Subadviser)
Code of Ethics Adopted Pursuant to Rule 17j-1
Under the Investment Company Act of 1940
(the Code)
1. Purposes
--------
The Code has been adopted by the Board of Directors/Trustees or the Duly
Appointed Officer-In-Charge of the Fund, the Manager, the Adviser/Subadviser,
and the Principal Underwriter in accordance with Rule 17j-1(c) under the
Investment Company Act of 1940 (the Act) and in accordance with the following
general principles:
(1) The duty at all times to place the interests of shareholders
first.
Investment company personnel should scrupulously avoid serving
their own personal interests ahead of shareholders' interests in any
decision relating to their personal investments.
(2) The requirement that all personal securities transactions be
conducted consistent with the Code and in such a manner as to avoid
any actual or potential conflict of interest or any abuse of an
individual's position of trust and responsibility.
Investment company personnel must not only seek to achieve
technical compliance with the Code but should strive to abide by its
spirit and the principles articulated herein.
(3) The fundamental standard that investment company personnel should
not take inappropriate advantage of their positions.
Investment company personnel must avoid any situation that might
compromise, or call into question, their exercise of fully independent
judgment in the interest of shareholders, including, but not limited
to the receipt of unusual investment opportunities, perquisites, or
gifts of more than a de minimis value from persons doing or seeking
business with the
<PAGE>
Fund.
Rule 17j-1 under the Act generally proscribes fraudulent or manipulative
practices with respect to a purchase or sale of a security held or to be
acquired (as such term is defined in Section 2.) by an investment company, if
effected by an associated person of such company.
The purpose of the Code is to establish procedures consistent with the Act
and Rule 17j-1 to give effect to the following general prohibitions as set forth
in Rule 17j-1(b) as follows:
(a) It shall be unlawful for any affiliated person of or Principal
Underwriter for a registered investment company, or any affiliated person
of an investment adviser of or principal underwriter for a registered
investment company in connection with the purchase or sale, directly or
indirectly, by such person of a security held or to be acquired, by such
registered investment company:
(1) To employ any device, scheme or artifice to defraud such
registered investment company;
(2) To make to such registered investment company any untrue
statement of a material fact or omit to state to such registered
investment company a material fact necessary in order to make the
statements made, in light of the circumstances under which they are
made, not misleading;
(3) To engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon any such
registered investment company; or
(4) To engage in any manipulative practice with respect to such
registered investment company.
<PAGE>
2. Definitions
-----------
(a) "Access Person" means any director/trustee, officer, general
partner or Advisory Person (including any Investment Personnel, as that
term is defined herein) of the Fund, the Manager, the Adviser/Subadviser,
or the Principal Underwriter.
(b) "Adviser/Subadviser" means the Adviser or Subadviser of the Fund
or both as the context may require.
(c) "Advisory Person" means (i) any employee of the Fund, Manager or
Adviser/Subadviser (or of any company in a control relationship to the
Fund, Manager or Adviser/Subadviser) who, in connection with his or her
regular functions or duties, makes, participates in, or obtains information
regarding the purchase or sale of a security by the Fund, or whose
functions relate to the making of any recommendations with respect to such
purchases or sales; and (ii) any natural person in a control relationship
to the Fund who obtains information concerning recommendations made to the
Fund with regard to the purchase or sale of a security.
(d) "Beneficial Ownership" will be interpreted in the same manner as
it would be under Securities Exchange Act Rule 16a-1(a)(2) in determining
which security holdings of a person are subject to the reporting and short-
swing profit provisions of Section 16 of the Securities Exchange Act of
1934 and the rules and regulations thereunder, except that the
determination of direct or indirect beneficial ownership will apply to all
securities which an Access Person has or acquires (Exhibit A).
---------
(e) "Complex" means the group of registered investment companies for
which Prudential Investments Fund Management LLC serves as Manager;
provided, however, that with respect to Access Persons of the Subadviser
(including any unit or subdivision thereof), "Complex" means the group of
registered investment companies in the Complex advised by the Subadviser or
unit or subdivision thereof.
(f) "Compliance Officer" means the person designated by the Manager,
the Adviser/Subadviser, or Principal Underwriter (including his or her
designee) as having responsibility for compliance with the requirements of
the Code.
(g) "Control" will have the same meaning as that set forth in Section
2(a)(9) of the Act.
3
<PAGE>
(h) "Disinterested Director/Trustee" means a Director/ Trustee of the
Fund who is not an "interested person" of the Fund within the meaning of
Section 2(a)(19) of the Act.
An interested Director/Trustee who would not otherwise be deemed to be
an Access Person, shall be treated as a Disinterested Director/Trustee for
purposes of compliance with the provisions of the Code.
(i) "Initial Public Offering" means an offering of securities
registered under the Securities Act of 1933, the issuer of which,
immediately before the registration, was not subject to the reporting
requirements of sections 13 or 15(d) of the Securities Exchange Act of
1934.
(j) "Investment Personnel" means: (a) Portfolio Managers and other
Advisory Persons who provide investment information and/or advice to the
Portfolio Manager(s) and/or help execute the Portfolio Manager's(s')
investment decisions, including securities analysts and traders ; and (b)
any natural person in a control relationship to the Fund who obtains
information concerning recommendations made to the Fund with regard to the
purchase or sale of a security.
(k) "Manager" means Prudential Investments Fund Management, LLC.
(l) "Portfolio Manager" means any Advisory Person who has the direct
responsibility and authority to make investment decisions for the Fund.
(m) "Private placement" means a limited offering that is exempt from
registration under the Securities Act of 1933 pursuant to section 4(2) or
section 4(6) or pursuant to rule 504, rule 505 or rule 506 under such
Securities Act.
(n) "Security" will have the meaning set forth in Section 2(a)(36) of
the Act, except that it will not include shares of registered open-end
investment companies, direct obligations of the Government of the United
States, short-term debt securities which are "government securities"
within the meaning of Section 2(a)(16) of the Act, bankers' acceptances,
bank certificates of deposit, commercial paper and such other money market
instruments as are designated by the Compliance Officer. For purposes of
the Code, an "equivalent Security" is one that has a substantial economic
relationship to another Security. This would include,
4
<PAGE>
among other things, (1) a Security that is exchangeable for or convertible
into another Security, (2) with respect to an equity Security, a Security
having the same issuer (including a private issue by the same issuer) and
any derivative, option or warrant relating to that Security and (3) with
respect to a fixed-income Security, a Security having the same issuer,
maturity, coupon and rating.
(o) Security held or to be acquired means any Security or any
equivalent Security which, within the most recent 15 days: (1) is or has
been held by the Fund; or (2) is being considered by the Fund or its
investment adviser for purchase by the Fund.
3. Applicability
-------------
The Code applies to all Access Persons and the Compliance Officer shall
provide each Access Person with a copy of the Code. The prohibitions described
below will only apply to a transaction in a Security in which the designated
Access Person has, or by reason of such transaction acquires, any direct or
indirect Beneficial Ownership. The Compliance Officer will maintain a list of
all Access Persons who are currently, and within the past five years, subject to
the Code.
4. Prohibited Purchases and Sales
------------------------------
A. Initial Public Offerings
No Investment Personnel may acquire any Securities in an initial public
offering. For purposes of this restriction, "Initial Public Offerings" shall
not include offerings of government and municipal securities.
B. Private Placements
No Investment Personnel may acquire any Securities in a private placement
without prior approval.
5
<PAGE>
(i) Prior approval must be obtained in accordance with the
preclearance procedure described in Section 6 below. Such approval will
take into account, among other factors, whether the investment opportunity
should be reserved for the Fund and its shareholders and whether the
opportunity is being offered to the Investment Personnel by virtue of his
or her position with the Fund. The Adviser/Subadviser shall maintain a
record of such prior approval and reason for same, for at least 5 years
after the end of the fiscal year in which the approval is granted.
(ii) Investment Personnel who have been authorized to acquire
Securities in a private placement must disclose that investment to the
chief investment officer (including his or her designee) of the
Adviser/Subadviser (or of any unit or subdivision thereof) or the
Compliance Officer when they play a part in any subsequent consideration of
an investment by the Fund in the issuer. In such circumstances, the Fund's
decision to purchase Securities of the issuer will be subject to an
independent review by appropriate personnel with no personal interest in
the issuer.
C. Blackout Periods
(i) Except as provided in Section 5 below, Access Persons are
prohibited from executing a Securities transaction on a day during which
any investment company in the Complex has a pending "buy" or "sell" order
in the same or an
6
<PAGE>
equivalent Security and until such time as that order is executed or
withdrawn; provided, however, that this prohibition shall not apply to
Disinterested Directors/Trustees except if they have actual knowledge of
trading by any fund in the Complex and, in any event, only with respect to
those funds on whose boards they sit.
This prohibition shall also not apply to Access Persons of the
Subadviser who do not, in the ordinary course of fulfilling his or her
official duties, have access to information regarding the purchase and sale
of Securities for the Fund and are not engaged in the day-to-day operations
of the Fund; provided that Securities investments effected by such Access
Persons during the proscribed period are not effected with knowledge of the
purchase or sale of the same or equivalent Securities by any fund in the
Complex.
A "pending 'buy' or 'sell' order" exists when a decision to purchase
or sell a Security has been made and communicated.
(ii) Portfolio Managers are prohibited from buying or selling a
Security within seven calendar days before or after the Fund trades in the
same or an equivalent Security. Nevertheless, a personal trade by any
Investment Personnel shall not prevent a Fund in the same Complex from
trading in the same or an equivalent security. However, such a transaction
shall be subject to independent review by the Compliance Officer.
(iii) If trades are effected during the periods proscribed in (i) or
(ii) above, except as provided in (iv) below with respect to (i) above, any
profits
7
<PAGE>
realized on such trades will be promptly required to be disgorged to the
Fund.
(iv) A transaction by Access Persons (other than Investment
Personnel) inadvertently effected during the period proscribed in (i) above
will not be considered a violation of the Code and disgorgement will not be
required so long as the transaction was effected in accordance with the
preclearance procedures described in Section 6 below and without prior
knowledge of trading by any fund in the Complex in the same or an
equivalent Security.
D. Short-Term Trading Profits
Except as provided in Section 5 below, Investment Personnel are prohibited
from profiting from a purchase and sale, or sale and purchase, of the same or an
equivalent Security within any 60 calendar day period. If trades are effected
during the proscribed period, any profits realized on such trades will be
immediately required to be disgorged to the Fund.
E. Short Sales
No Access Person may sell any security short which is owned by any Fund in
the Complex. Access Persons may, however make short sales when he/she owns an
equivalent amount of the same security.
F. Options
No Access Person may write a naked call option or buy a naked put option on
a security owned by any Fund in the Complex. Access Persons may purchase options
on securities not held by any Fund in the Complex, or purchase call options or
write put options on securities owned by any Fund in the Complex, subject to
preclearance and
8
<PAGE>
the same restrictions applicable to other securities. Access Persons may write
covered call options or buy covered put options on a security owned by any Fund
in the Complex at the discretion of the Compliance Officer.
G. Investment Clubs
No Access Person may participate in an investment club.
5. Exempted Transactions
---------------------
Subject to preclearance in accordance with Section 6 below with respect to
subitems (b), (e), (f), (g) and (i) hereof, the prohibitions of Sections 4(C)
and 4(D) will not apply to the following:
(a) Purchases or sales of Securities effected in any account over
which the Access Person has no direct or indirect influence or control or
in any account of the Access Person which is managed on a discretionary
basis by a person other than such Access Person and with respect to which
such Access Person does not in fact influence or control such transactions.
(b) Purchases or sales of Securities (or their equivalents) which are
not eligible for purchase or sale by any fund in the Complex.
(c) Purchases or sales of Securities which are non-volitional on the
part of either the Access Person or any fund in the Complex.
(d) Purchases of Securities which are part of an automatic dividend
reinvestment plan.
(e) Purchases effected upon the exercise of rights issued by an issuer
pro rata to all holders of a class of its Securities, to the extent such
--- ----
rights were acquired from such issuer, and sales of such rights so
acquired.
(f) Any equity Securities transaction, or series of related
transactions effected over a 30 calendar day period, involving 500 shares
or less in the aggregate, if (i) the Access Person has no prior knowledge
of activity in such security by any fund in the Complex and (ii) the issuer
is listed on The New York Stock Exchange or has a market capitalization
9
<PAGE>
(outstanding shares multiplied by the current price per share) greater than
$1 billion (or a corresponding market capitalization in foreign markets).
(g) Any fixed-income Securities transaction, or series of related
transactions effected over a 30 calendar day period, involving 100 units
($100,000 principal amount) or less in the aggregate, if the Access Person
has no prior knowledge of transactions in such Securities by any fund in
the Complex.
(h) Any transaction in index options effected on a broad-based index
(See Exhibit B.)/1/
(i) Purchases or sales of Securities which receive the prior approval
of the Compliance Officer (such person having no personal interest in such
purchases or sales), based on a determination that no abuse is involved and
that such purchases and sales are not likely to have any economic impact on
any fund in the Complex or on its ability to purchase or sell Securities of
the same class or other Securities of the same issuer.
(j) Purchases or sales of Unit Investment Trusts.
6. Preclearance
------------
Access Persons (other than Disinterested Directors/Trustees) must preclear
all personal Securities investments with the exception of those identified in
subparts (a), (c), (d), (h) and (j) of Section 5 above.
All requests for preclearance must be submitted to the Compliance Officer
for approval. All approved orders must be executed no later than 5:00 p.m.
local time on the business day following the date preclearance is granted. If
any order is not timely executed, a request for preclearance must be
resubmitted.
7. Reporting
---------
(a) Disinterested Directors/Trustees shall report to the Secretary of the
Fund
- --------------------------------------------------------------------------------
/1/ Exhibit B will be amended by the Compliance Officer as necessary.
10
<PAGE>
or the Compliance Officer the information described in Section 7(b) hereof
with respect to transactions in any Security in which such Disinterested
Director/Trustee has, or by reason of such transaction acquires, any direct or
indirect Beneficial Ownership in the Security only if such Disinterested
Director/Trustee, at the time of that transaction knew or, in the ordinary
course of fulfilling his or her official duties as a Director/Trustee of the
Fund, should have known that, during the 15-day period immediately preceding or
subsequent to the date of the transaction in a Security by such
Director/Trustee, such Security is or was purchased or sold by the Fund or was
being considered for purchase or sale by the Fund, the Manager or
Adviser/Subadviser; provided, however, that a Disinterested Director/Trustee is
not required to make a report with respect to transactions effected in any
account over which such Director/Trustee does not have any direct or indirect
influence or control or in any account of the Disinterested Director/Trustee
which is managed on a discretionary basis by a person other than such
Director/Trustee and with respect to which such Director/Trustee does not in
fact influence or control such transactions. The Secretary of the Fund or the
Compliance Officer shall maintain such reports and such other records to the
extent required by Rule 17j-1 under the Act.
(b) Every report required by Section 7(a) hereof shall be made not later
than ten days after the end of the calendar quarter in which the transaction to
which the report relates was effected, and shall contain the following
information:
(i) The date of the transaction, the title and the number of shares, and
the principal amount of each Security involved;
11
<PAGE>
(ii) The nature of the transaction (i.e., purchase, sale or any other type
----
of acquisition or disposition);
(iii) The price at which the transaction was effected;
(iv) The name of the broker, dealer or bank with or through whom the
transaction was effected; and
(v) The date that the report is submitted.
(c) Any such report may contain a statement that the report shall not be
construed as an admission by the person making such report that he or she has
any direct or indirect Beneficial Ownership in the Security to which the report
relates.
8. Records of Securities Transactions and Post-Trade Review
--------------------------------------------------------
Access Persons (other than Disinterested Directors/Trustees) are required
to direct their brokers to supply, on a timely basis, duplicate copies of
confirmations of all personal Securities transactions and copies of periodic
statements for all Securities accounts in which such Access Persons have a
Beneficial Ownership interest to the Compliance Officer. Such instructions must
be made upon becoming an Access Person and promptly as new accounts are
established, but no later than ten days after the end of a calendar quarter,
with respect to any account established by the Access Person in which any
securities were held during the quarter for the direct or indirect beneficial
interest of the Access Person. Notification must be made in writing and a copy
of the notification must be submitted to Compliance. This notification will
include the broker, dealer or bank with which the account was established and
the date the account was established.
Compliance with this Code requirement will be deemed to satisfy the
reporting
12
<PAGE>
requirements imposed on Access Persons under Rule 17j-1(d), provided, however,
that such confirmations and statements contain all the information required by
Section 7. b. hereof and are furnished within the time period required by such
section.
The Compliance Officer will periodically review the personal investment
activity and holdings reports of all Access Persons (including Disinterested
Directors/Trustees with respect to Securities transactions reported pursuant to
Section 7 above).
9. Disclosure of Personal Holdings
-------------------------------
Within ten days after an individual first becomes an Access Person and
thereafter on an annual basis, each Access Person (other than Disinterested
Directors/Trustees) must disclose all personal Securities holdings. Such
disclosure must be made in writing and be as of the date the individual first
became an Access Person with respect to the initial report and by January 30 of
each year, including holdings information as of December 31, with respect to the
annual report. All such reports shall include the following: title, number of
shares and principal amount of each security held, name of broker, dealer or
bank with whom these securities are held and the date of submission by the
Access Person.
10. Gifts
-----
Access Persons are prohibited from receiving any gift or other thing of
more than $100 in value from any person or entity that does business with or on
behalf of the Fund. Occasional business meals or entertainment (theatrical or
sporting events, etc.) are permitted so long as they are not excessive in number
or cost.
11. Service As a Director
---------------------
13
<PAGE>
Investment Personnel are prohibited from serving on the boards of directors
of publicly traded companies, absent prior authorization based upon a
determination that the board service would be consistent with the interests of
the Fund and its shareholders. In the limited instances that such board service
is authorized, Investment Personnel will be isolated from those making
investment decisions affecting transactions in Securities issued by any publicly
traded company on whose board such Investment Personnel serves as a director
through the use of "Chinese Wall" or other procedures designed to address the
potential conflicts of interest.
12. Certification of Compliance with the Code
-----------------------------------------
Access Persons are required to certify annually as follows:
(i) that they have read and understood the Code;
(ii) that they recognize that they are subject to the Code;
(iii) that they have complied with the requirements of the Code; and
(iv) that they have disclosed or reported all personal Securities
transactions required to be disclosed or reported pursuant to the
requirements of the Code.
13. Code Violations
---------------
All violations of the Code will be reported to the Board of
Directors/Trustees of the Fund on a quarterly basis. The Board of
Directors/Trustees may take such action as it deems appropriate.
14. Review by the Board of Directors/Trustees
-----------------------------------------
The Board of Directors/Trustees will be provided with an annual report
which at a
14
<PAGE>
minimum:
(i) certifies to the Board that the Fund, Manager, Investment
Adviser/Subadviser, and Principal Underwriter has adopted procedures reasonably
necessary to prevent its Access persons from violating its Code.
(ii) summarizes existing procedures concerning personal investing and any
changes in the procedures made during the preceding year;
(iii) identifies material Code or procedural violations and sanctions
imposed in response to those material violations; and
(iv) identifies any recommended changes in existing restrictions or
procedures based upon the Fund's experience under the Code, evolving industry
practices, or developments in applicable laws and regulations.
The Board will review such report and determine if any further action is
required.
15
<PAGE>
Explanatory Notes to Code
-------------------------
1. No comparable Code requirements have been imposed upon Prudential
Mutual Fund Services LLC, the Fund's transfer agent, or Prudential Investment
Management Services, LLC , which acts as the Fund's distributor, or those of
their directors or officers who are not Directors/Trustees or Officers of the
Fund since they are deemed not to constitute Access Persons or Advisory Persons
as defined in paragraphs (e)(1) and (2) of Rule 17j-1.
Dated: February 29, 2000
16
<PAGE>
Exhibit A
---------
Definition of Beneficial Ownership
----------------------------------
The term "beneficial ownership" of securities would include not only
ownership of securities held by an access person for his or her own benefit,
whether in bearer form or registered in his or her own name or otherwise, but
also ownership of securities held for his or her benefit by other (regardless of
whether or how they are registered) such as custodians, brokers, executors,
administrators, or trustees (including trusts in which he or she has only a
remainder interest), and securities held for his or her account by pledges,
securities owned by a partnership in which he or she should regard as a personal
holding corporation. Correspondingly, this term would exclude securities held
by an access person for the benefit of someone else.
Ordinarily, this term would not include securities held by executors or
administrators in estates in which an access person is a legatee or beneficiary
unless there is a specific legacy to such person of such securities or such
person is the sole legatee or beneficiary and there are other assets in the
estate sufficient to pay debts ranking ahead of such legacy, or the securities
are held in the estate more than a year after the decedent's death.
Securities held in the name of another should be considered as
"beneficially" owned by an access person where such person enjoys "benefits
substantially equivalent to ownership". The SEC has said that although the
final determination of beneficial ownership is a question to be determined in
the light of the facts of the particular case, generally a person is regarded as
the beneficial owner of securities held in the name of his or her spouse and
their minor children. Absent special circumstances such relationship ordinarily
results in such person obtaining benefits substantially equivalent to ownership,
e.g., application of the income derived from such securities to maintain a
common home, to meet expenses which such person otherwise would meet from other
sources, or the ability to exercise a controlling influence over the purchase,
sale or voting of such securities.
An access person also may be regarded as the beneficial owner of securities
held in the name of another person, if by reason of any contact, understanding,
relationship, agreement or other arrangement, he obtains therefrom benefits
substantially equivalent to those of ownership. Moreover, the fact that the
holder is a relative or relative of a spouse and sharing the same home as an
access person may in itself indicate that the access person would obtain
benefits substantially equivalent to those of ownership from securities held in
the name of such relative. Thus, absent countervailing facts, it is expected
that securities held by relatives who share the same home as an access person
will be treated as being beneficially owned by the access person.
An access person also is regarded as the beneficial owner of securities
held in the name of a spouse, minor children or other person, even though he
does not obtain therefrom the aforementioned benefits of ownership, if he can
vest or revest title in himself at once or at some future time.
<PAGE>
Exhibit B
---------
INDEX OPTIONS ON A BROAD-BASED INDEX
TICKER SYMBOL DESCRIPTION
- --------------------------------------------------------------------------------
NIK Nikkei 300 Index CI/Euro
- --------------------------------------------------------------------------------
OEX S&P 100 Close/Amer Index
- --------------------------------------------------------------------------------
OEW S&P 100 Close/Amer Index
- --------------------------------------------------------------------------------
OEY S&P 100 Close/Amer Index
- --------------------------------------------------------------------------------
SPB S&P 500 Index
- --------------------------------------------------------------------------------
SPZ S&P 500 Open/Euro Index
- --------------------------------------------------------------------------------
SPX S&P 500 Open/Euro Index
- --------------------------------------------------------------------------------
SXZ S&P 500 (Wrap)
- --------------------------------------------------------------------------------
SXB S&P 500 Open/Euro Index
- --------------------------------------------------------------------------------
RUZ Russell 2000 Open/Euro Index
- --------------------------------------------------------------------------------
RUT Russell 2000 Open/Euro Index
- --------------------------------------------------------------------------------
MID S&P Midcap 400 Open/Euro Index
- --------------------------------------------------------------------------------
NDX NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------------------
NDU NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------------------
NDZ NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------------------
NDV NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------------------
NCZ NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------------------
SML S&P Small Cap 600
- --------------------------------------------------------------------------------
TPX U.S. Top 100 Sector
- --------------------------------------------------------------------------------
SPL S&P 500 Long-Term Close
- --------------------------------------------------------------------------------
ZRU Russell 2000 L-T Open./Euro
- --------------------------------------------------------------------------------
VRU Russell 2000 Long-Term Index
- --------------------------------------------------------------------------------
