<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON AUGUST 31, 1994
REGISTRATION NO. 33-46658
811-6615
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 4 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 5 /X/
(CHECK APPROPRIATE BOX OR BOXES)
------------------
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC.
(Exact name of registrant as specified in charter)
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 214-1250
S. JANE ROSE, ESQ.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(NAME AND ADDRESS OF AGENT FOR SERVICE)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE
OF THE REGISTRATION STATEMENT.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX):
/ / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/X/ 60 days after filing pursuant to paragraph (a)
/ / on (date) pursuant to paragraph (a), of Rule 485
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant
has previously registered an indefinite number of shares of common stock par
value $.01 per share. The Registrant will file a notice under such Rule for its
fiscal year ended February 28, 1995 on or before April 29, 1995.
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<PAGE> 2
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
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PART A
<S> <C> <C>
Item 1. Cover Page.................................................. Cover Page
Item 2. Synopsis.................................................... Fund Expenses
Item 3. Condensed Financial Information............................. Fund Expenses; Financial
Highlights; General
Information
Item 4. General Description of Registrant........................... Cover Page; How the Fund is
Managed; General Information
Item 5. Management of the Fund...................................... Financial Highlights; How the
Fund is Managed; General
Information
Item 6. Capital Stock and Other Securities.......................... Taxes, Dividends and
Distributions; General
Information
Item 7. Purchase of Securities Being Offered........................ Shareholder Guide; How the
Fund Values Its Shares
Item 8. Redemption or Repurchase.................................... Shareholder Guide; General
Information
Item 9. Legal Proceedings........................................... Not Applicable
PART B
Item 10. Cover Page.................................................. Cover Page
Item 11. Table of Contents........................................... Table of Contents
Item 12. General Information and History............................. Not Applicable
Item 13. Investment Objectives and Policies.......................... Investment Objectives and
Policies; Investment
Restrictions
Item 14. Management of the Fund...................................... Directors and Officers;
Manager; Distributor
Item 15. Control Persons and Principal Holders of Securities......... Not Applicable
Item 16. Investment Advisory and Other Services...................... Manager; Distributor;
Custodian, Transfer and
Dividend Disbursing Agent and
Independent Accountants
Item 17. Brokerage Allocation........................................ Portfolio Transactions and
Brokerage
Item 18. Capital Stock and Other Securities.......................... Not Applicable
Item 19. Purchase, Redemption and Pricing of Securities Being Purchase and Redemption of
Offered..................................................... Fund Shares; Shareholder
Investment Account
Item 20. Tax Status.................................................. Taxes, Dividends and
Distributions
Item 21. Underwriters................................................ Distributor
Item 22. Calculation of Performance Data............................. Performance Information
Item 23. Financial Statements........................................ Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Post-Effective Amendment
to the Registration Statement.
<PAGE> 3
PRUDENTIAL ADJUSTABLE RATE
SECURITIES FUND, INC.
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PROSPECTUS DATED NOVEMBER 1, 1994
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Prudential Adjustable Rate Securities Fund, Inc. (the Fund) is an open-end,
diversified management investment company whose investment objective is high
current income consistent with low volatility of principal. The Fund seeks to
achieve its objective by investing, under normal circumstances, at least 65% of
its total assets in adjustable rate securities, including mortgage-backed
securities issued or guaranteed by private institutions or the U.S. Government,
its agencies or instrumentalities, asset-backed securities and corporate and
other debt obligations, all of which have interest rates which reset at periodic
intervals. The Fund may invest the remainder of its assets in fixed rate
securities. The Fund expects that under normal market conditions at least 75% of
the value of the securities purchased by the Fund (excluding options and
futures) will be rated "AA" or "AAA" by Standard & Poor's Ratings Group
(Standard & Poor's) or "Aa" or "Aaa" by Moody's Investors Service (Moody's) or,
if unrated, will be determined to be of comparable quality by the Fund's
Manager. The Fund expects that under normal market conditions the remaining 25%
of the value of the securities purchased by the Fund (excluding options and
futures) will be rated "A" by Moody's or Standard & Poor's or, if unrated,
determined to be of comparable quality by the investment adviser. The Fund may
also purchase and sell put and call options on securities and financial indices
and engage in transactions involving futures contracts and related options.
While these options and futures contracts are not themselves rated, the
securities acquired pursuant to these options and futures contracts will be
rated at least "A" by Standard & Poor's or Moody's or, if unrated, be determined
to be of comparable quality by the Investment Adviser. In addition, the Fund may
engage in short selling and use leverage, including reverse repurchase
agreements, dollar rolls and bank borrowings, which entails additional risks to
the Fund. See "Other Investments and Policies." There can be no assurance that
the Fund's investment objective will be achieved. The Fund is currently not
accepting purchase orders for its Class B shares. See "How the Fund
Invests--Investment Objective and Policies." The Fund's address is One Seaport
Plaza, New York, New York 10292, and its telephone number is (800) 225-1852.
- --------------------------------------------------------------------------------
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information about
the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated November 1, 1994, which information
is incorporated herein by reference (is legally considered a part of this
Prospectus) and is available without charge upon request to the Fund at the
address or telephone number noted above.
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Investors are advised to read this Prospectus and retain it for future
reference.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSIONS NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE> 4
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FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in the Prospectus and is qualified in its entirety by more detailed information
appearing elsewhere herein.
WHAT IS PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC.?
Prudential Adjustable Rate Securities Fund, Inc. is a mutual fund. A mutual
fund pools the resources of investors by selling its shares to the public and
investing the proceeds of such sale in a portfolio of securities designed to
achieve its investment objective. Technically, the Fund is an open-end,
diversified management investment company.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is to seek high current income consistent
with low volatility of principal. There can be no assurance that the Fund's
objective will be achieved. See "How the Fund Invests--Investment Objectives and
Policies" at page 6.
RISK FACTORS AND SPECIAL CHARACTERISTICS
In seeking to achieve its investment objective, the Fund will under normal
circumstances invest at least 65% of its assets in adjustable rate securities,
including mortgage-backed securities, obligations issued or guaranteed by the
U.S. Government, its agencies and instrumentalities and corporate and other debt
securities, all of which have their interest rates reset at periodic intervals.
The Fund may also invest up to 35% of its total assets in fixed rate securities.
The Fund expects that under normal conditions at least 75% of the value of the
securities purchased by the Fund (excluding options and futures) will be rated
"AA" or "AAA" by Standard & Poor's or "Aa" or "Aaa" by Moody's or, if unrated,
will be determined to be of comparable quality by the Manager. See "How the Fund
Invests--Investment Objective and Policies" at page 6. The Fund may engage in
various hedging and income enhancement strategies, including derivatives, short
selling and leverage, including reverse repurchase agreements, dollar rolls and
bank borrowings, which entail additional risks to the Fund. The Fund may also
purchase and sell put and call options on securities and financial indices and
engage in transactions involving futures contracts and related options. See
"Other Investments and Investment Techniques" at page 13.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the Manager
of the Fund and is compensated for its services at an annual rate of .50 of 1%
of the Fund's average daily net assets. As of July 31, 1994 PMF served as
manager or administrator to 66 investment companies, including 37 mutual funds,
with aggregate assets of approximately $47 billion. The Prudential Investment
Corporation (PIC or the Subadviser) furnishes investment advisory services in
connection with the management of the Fund under a Subadvisory Agreement with
PMF. See "How the Fund is Managed--Manager" at page 20.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor of
the Fund's Class A shares. Pursuant to the Fund's Class A Distribution and
Service Plan, the Fund reimburses the Distributor for expenses related to the
distribution of Class A shares up to an annual rate of .50 of 1% of the average
daily net assets of the Class A shares. PMFD is currently waiving all payments
to it under the Class A Distribution and Service Plan.
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Fund's Class B and Class C shares. Prudential Securities is
reimbursed for its expenses related to the distribution of Class B shares at an
annual rate of up to 1% of the average daily net assets of the Class B shares
and is paid an annual distribution and service fee with respect to the Class C
shares which is currently being charged at the
2
<PAGE> 5
rate of .75 of 1% of the average daily net assets of the Class C shares. See
"How the Fund is Managed-- Distributor" at page 21. Prudential Securities
currently has no costs reimbursable to it under the Fund's Class B Plan of
Distribution and as a consequence the Fund is currently not paying any 12b-1
fees on the Class B shares. See "How the Fund is Managed--Distributor" at page
21.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $5,000 for all classes. The subsequent
minimum investment is $1,000 for all classes. There is no minimum investment
requirement for certain retirement plans and employee savings plans or custodial
accounts for the benefit of minors. For purchases made through the Automatic
Savings Accumulation Plan, the minimum initial and subsequent investment is $50.
See "Shareholder Guide-- How to Buy Shares of the Fund" at page 27 and
"Shareholder Guide--Shareholder Services" at page 34.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund, through its transfer
agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent) at the
net asset value per share (NAV) next determined after receipt of your purchase
order by the Transfer Agent or Prudential Securities plus a sales charge which
may be imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class B or Class C shares). See "How The Fund Values Its Shares"
at page 24 and "Shareholder Guide--How to Buy Shares of the Fund" at page 27.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers three classes of shares:
- Class A Shares: Sold with an initial sales charge of up to 1% of the
offering price.
- Class B Shares: Sold without an initial sales charge but are subject to a
contingent deferred sales charge or CDSC (1% of the lower
of the amount invested or the redemption proceeds) which
will be imposed on certain redemptions made within one
year of purchase. Although Class B shares are subject to
higher ongoing distribution-related expenses than Class A
shares, Class B shares will automatically convert to Class
A shares (which are subject to lower ongoing
distribution-related expenses) approximately one year
after purchase.
- Class C Shares: Sold without an initial sales charge and for one year
after purchase, are subject to a 1% CDSC on redemptions.
Like Class B shares, Class C shares are subject to higher
ongoing distribution-related expenses than Class A shares
but do not convert to another class.
THE FUND IS CURRENTLY NO LONGER ACCEPTING PURCHASE ORDERS FOR CLASS B
SHARES. THE FUND IS ACCEPTING PURCHASE ORDERS FOR CLASS A AND CLASS C SHARES.
See "Shareholder Guide--Alternative Purchase Plan" at page 20.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds or redemptions of Class B and Class C shares held for less than one
year may be subject to a CDSC. See "Shareholder Guide--How to Sell Your Shares"
at page 31.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to declare daily and pay monthly dividends of net
investment income and make distributions of any net capital gains at least
annually. Dividends and distributions will be reinvested automatically in
additional shares of the Fund at NAV without a sales charge unless you request
that they be paid to you in cash. See "Taxes, Dividends and Distributions" at
page 25.
3
<PAGE> 6
- --------------------------------------------------------------------------------
FUND EXPENSES
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)........................... 1.00% None None
Maximum Sales Load or Deferred Sales Load Imposed on Reinvested
Dividends..................................................... None None None
Deferred Sales Load (as a percentage of original purchase price
or redemption proceeds, whichever is lower)................... None 1% during the 1% during the
first year and first year and
0% thereafter++ 0% thereafter
Redemption Fees................................................. None None None
Exchange Fee.................................................... None None None
</TABLE>
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES***
-------------- -------------- -----------------
<S> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees................................................. .50% .50% .50%
12b-1 Fees* + (Before fee waiver)............................... .50% 1.00% .75%
Other Expenses.................................................. .21% .21% .21%
---- ---- ----
Total Fund Operating Expenses (Before fee waiver)**............. 1.21% 1.71% 1.46%
----- ----- -----
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period:
Class A.................................................................. 23 50 79 162
Class B++................................................................ 28 45 74 158
Class C***............................................................... 25 46 80 175
You would pay the following expenses on the same investment, assuming
no redemption:
Class A.................................................................. 23 50 79 162
Class B++................................................................ 18 45 74 158
Class C***............................................................... 15 46 80 175
</TABLE>
The above example with respect to Class A and Class B shares is based on
restated data for the Fund's fiscal year ending February 28, 1994. The above
example with respect to Class C shares is based upon expenses expected to have
been incurred if Class C shares had been in existence during the fiscal year
ended February 28, 1994. The example should not be considered a representation
of future expenses. Actual expenses may be greater or less than those shown.
The purpose of this table is to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear, whether
directly or indirectly. For more complete descriptions of the various costs and
expenses, see "How the Fund is Managed." "Other Expenses" includes operating
expenses of the Fund, such as directors' and professional fees, registration
fees, reports to shareholders, transfer agency and custodian fees.
- ---------------
* The Distributor has temporarily and voluntarily agreed to waive all payments
to it under the Fund's Class A Plan. Therefore,
the Fund will not assess any 12b-1 fees on the Class A shares unless and
until payments are resumed to the Distributor under
the Class A Plan. In addition, the Distributor no longer has any costs
reimbursable to it under the Fund's Class B Plan. Therefore, the Fund will
not assess any 12b-1 fees on the Class B shares unless and until payments are
resumed to the Distributor under the Class B Plan. Although the Class C Plan
provides that the Fund may pay up to an annual rate of 1.00% of the average
daily net assets of the Class C shares, the Distributor has agreed to limit
its distribution fees to no more than .75 of 1% of the average daily net
asset value of the Class C shares for the fiscal year ended February 28,
1995. Total operating expenses without such limitation would be % for
Class C shares.
** Taking into account the current level of fees charged under the Fund's
Distribution and Service Plan, 12b-1 fees would be 0 and Total Fund
Operating Expenses would be .71% for both of the Fund's Class A and Class B
shares. See "How the Fund is Managed--Fee Waivers and Subsidy."
*** Estimated based on expenses expected to have been incurred if Class C shares
had been in existence during the fiscal year ended February 28, 1994.
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-based
sales charges on shares of the Fund may not exceed 6.25% of total gross
sales, subject to certain exclusions. This 6.25% limitation is imposed on the
Fund rather than on a per shareholder basis. Therefore, long term
shareholders of the Fund may pay more in total sales charges than the
economic equivalent of 6.25% of such shareholder's investment in such shares.
See "How the Fund is Managed--Distributor."
++ Class B shares will be automatically converted to Class A shares after the
one year contingent deferred sales charge period has expired. See
"Shareholder Guide--Alternative Purchase Plan."
4
<PAGE> 7
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FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIOD)
The following financial highlights (with the exception of the six months ended
August 31, 1994) have been audited by Deloitte & Touche LLP, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and notes thereto, which
appear in the Statement of Additional Information. The financial highlights
contains selected data for a share of common stock outstanding, total return,
ratios to average net assets and other supplemental data for the period
indicated. This information is based on data contained in the financial
statements. No Class C shares were outstanding during the periods indicated.
<TABLE>
<CAPTION>
CLASS A CLASS B
--------------------------------------- ----------------------------------------
JUNE 10, JUNE 10,
SIX MONTHS FISCAL YEAR 1992* SIX MONTHS FISCAL YEAR 1992*
ENDED ENDED THROUGH ENDED ENDED THROUGH
AUGUST 31, FEBRUARY 28, FEBRUARY 28, AUGUST 31, FEBRUARY 28, FEBRUARY 28,
1994 1994 1993 1994 1994 1993
---------- ------------ ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period.............................. $ 9.94 $ 10.00 $ 9.94 $ 10.00
---------- ------------ ------------ ----------
Income from investment operations
Net investment income+................ 0.41 0.35 0.41 0.31
Net realized and unrealized loss on
investment transactions............. (0.29) (0.05) (0.29) (0.05)
---------- ------------ ------------ ----------
Total from investment operations.... 0.12 0.30 0.12 0.26
Less distributions
Dividends from net investment
income.............................. (0.41) (0.35) (0.41) (0.31)
Dividends in excess of net investment
income.............................. (0.02) (0.01) (0.01) (0.01)
---------- ------------ ------------ ----------
Total distributions................. (0.43) (0.36) (0.42) (0.32)
---------- ------------ ------------ ----------
Contingent deferred sales charge col-
lected.............................. -- -- .03 --
---------- ------------ ------------ ----------
Net asset value, end of period........ $ 9.63 $ 9.94 $ 9.67 $ 9.94
========= =========== =========== =========
TOTAL RETURN++........................ 1.24% 2.92% 1.58% 2.56%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)....... $122,860 $219,352 $ 5,312 $ 38,766
Average net assets (000).............. $176,863 $217,329 $ 19,742 $ 33,895
Ratios to average net assets+
Expenses, including distribution
fees.............................. 0.69% 0.77%** 0.75% 1.27%**
Expenses, excluding distribution
fees.............................. 0.63% 0.27%** 0.63% 0.27%**
Net investment income............... 4.29% 4.81%** 4.23% 4.31%**
Portfolio turnover rate............... 130% 45% 130% 45%
</TABLE>
- ---------------
* Commencement of investment operations.
** Annualized.
+ Net of management and/or distribution fee waivers.
++ Total return represents the change in net asset value from the first day to
the last day of the period reported plus the reinvestment of dividends and
does not take into account any sales charges. Total returns for periods of
less than one year are not annualized.
5
<PAGE> 8
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HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
THE FUND'S INVESTMENT OBJECTIVE IS HIGH CURRENT INCOME CONSISTENT WITH LOW
VOLATILITY OF PRINCIPAL. THE FUND SEEKS TO ACHIEVE ITS OBJECTIVE BY INVESTING,
UNDER NORMAL CIRCUMSTANCES, AT LEAST 65% OF ITS TOTAL ASSETS IN ADJUSTABLE RATE
SECURITIES, INCLUDING MORTGAGE-BACKED SECURITIES ISSUED OR GUARANTEED BY PRIVATE
INSTITUTIONS OR THE U.S. GOVERNMENT, ITS AGENCIES OR INSTRUMENTALITIES,
ASSET-BACKED SECURITIES AND CORPORATE AND OTHER DEBT OBLIGATIONS. By investing
primarily in adjustable rate securities, all of which have their interest rates
reset at periodic intervals, the Fund seeks to achieve less volatility of
principal than a portfolio which invests exclusively in fixed rate securities.
THERE IS NO ASSURANCE THAT THE FUND'S INVESTMENT OBJECTIVE CAN BE ACHIEVED. See
"Investment Objective and Policies" in the Statement of Additional Information.
THE FUND'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND MAY NOT BE
CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE FUND'S
OUTSTANDING VOTING SECURITIES, AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE FUND HAS ALSO ADOPTED A FUNDAMENTAL
POLICY TO INVEST AT LEAST 25% OF ITS ASSETS IN MORTGAGE-BACKED AND ASSET-BACKED
SECURITIES. FUND POLICIES THAT ARE NOT FUNDAMENTAL MAY BE CHANGED BY THE BOARD
OF DIRECTORS.
THE FUND MAY ALSO INVEST UP TO 35% OF ITS TOTAL ASSETS IN FIXED RATE
SECURITIES, INCLUDING MORTGAGE-BACKED SECURITIES, ASSET-BACKED SECURITIES,
OBLIGATIONS ISSUED OR GUARANTEED BY THE U.S. GOVERNMENT, ITS AGENCIES AND
INSTRUMENTALITIES AND CORPORATE AND OTHER DEBT OBLIGATIONS. THE FUND EXPECTS
THAT UNDER NORMAL MARKET CONDITIONS AT LEAST 75% OF THE VALUE OF THE SECURITIES
PURCHASED BY THE FUND (EXCLUDING OPTIONS AND FUTURES) WILL BE RATED "AA" OR
"AAA" BY STANDARD & POOR'S OR "AA" OR "AAA" BY MOODY'S OR, IF UNRATED, WILL BE
DETERMINED TO BE OF COMPARABLE QUALITY BY THE INVESTMENT ADVISER. THE FUND
EXPECTS THAT UNDER NORMAL MARKET CONDITIONS THE REMAINING 25% OF THE VALUE OF
THE SECURITIES PURCHASED BY THE FUND (EXCLUDING OPTIONS AND FUTURES) WILL BE
RATED "A" BY MOODY'S OR STANDARD & POOR'S OR, IF UNRATED, DETERMINED TO BE OF
COMPARABLE QUALITY BY THE INVESTMENT ADVISER. For temporary defensive purposes,
the Fund may invest up to 100% of its assets in cash, U.S. Government securities
and high quality money market instruments.
THE FUND MAY ALSO PURCHASE AND SELL PUT AND CALL OPTIONS ON SECURITIES AND
FINANCIAL INDICES AND ENGAGE IN TRANSACTIONS INVOLVING FUTURES CONTRACTS AND
RELATED OPTIONS. WHILE THESE OPTIONS AND FUTURES CONTRACTS ARE NOT THEMSELVES
RATED, THE SECURITIES ACQUIRED PURSUANT TO THESE OPTIONS AND FUTURES CONTRACTS
WILL BE RATED AT LEAST "A" BY STANDARD & POOR'S OR MOODY'S OR, IF UNRATED,
DETERMINED TO BE OF COMPARABLE QUALITY BY THE INVESTMENT ADVISER. IN ADDITION,
THE FUND MAY ENGAGE IN VARIOUS HEDGING AND INCOME ENHANCEMENT STRATEGIES,
INCLUDING DERIVATIVES, SHORT SELLING AND LEVERAGE, INCLUDING REVERSE REPURCHASE
AGREEMENTS, DOLLAR ROLLS AND BANK BORROWINGS.
ADJUSTABLE RATE SECURITIES
ADJUSTABLE RATE SECURITIES ARE DEBT SECURITIES HAVING INTEREST RATES WHICH
ARE ADJUSTED OR RESET AT PERIODIC INTERVALS RANGING FROM ONE MONTH TO THREE
YEARS. The interest rate of an adjustable rate security typically responds to
changes in general market levels of interest. The
6
<PAGE> 9
interest paid on any particular adjustable rate security is a function of the
index upon which the interest rate of that security is based. There are three
main categories of indices: (i) those based on U.S. Treasury securities, (ii)
those derived from a calculated measure such as a cost of funds index and (iii)
those based on a moving average of mortgage rates. Commonly utilized indices
include, for example, the 1-year, 3-year and 5-year constant maturity Treasury
rate, the 3-month and 6-month T-bill rate, 1-month, 6-month or 1-year London
Interbank Offered Rate (LIBOR), the Federal Home Loan Bank Cost of Funds, the
prime rate and commercial paper rates.
THE ADJUSTABLE RATE FEATURE OF THE SECURITIES IN WHICH THE FUND MAY INVEST
WILL TEND TO REDUCE SHARP CHANGES IN THE FUND'S NET ASSET VALUE IN RESPONSE TO
NORMAL INTEREST RATE FLUCTUATIONS. As the coupon rates of the Fund's adjustable
rate securities are reset periodically, yields of these portfolio securities
will reflect changes in market rates and should cause the net asset value of the
Fund's shares to fluctuate less dramatically than that of a fund invested in
long-term fixed rate securities. However, while the adjustable rate feature of
such securities will tend to limit sharp swings in the Fund's net asset value in
response to movements in general market interest rates, it is anticipated that
during periods of fluctuations in interest rates, the net asset value of the
Fund will fluctuate.
ADJUSTABLE RATE SECURITIES ALLOW THE FUND TO PARTICIPATE IN INCREASES IN
INTEREST RATES THROUGH PERIODIC INTEREST RATE ADJUSTMENTS RESULTING IN BOTH
HIGHER YIELDS AND LOWER PRICE FLUCTUATIONS. DURING PERIODS OF DECLINING INTEREST
RATES, COUPON RATES MAY READJUST DOWNWARD RESULTING IN LOWER YIELDS TO THE FUND.
The value of an adjustable rate security is unlikely to rise during periods of
declining interest rates to the same extent as fixed rate instruments. With
mortgage-backed securities, interest rate declines may result in accelerated
prepayment of mortgages with the result that proceeds from prepayments will be
reinvested at lower interest rates. During periods of rising interest rates,
changes in the coupon rate will lag behind changes in the market rate resulting
in a lower net asset value until the coupon resets to market rates. Investors
who sell shares before the interest rates in portfolio securities are adjusted
could suffer some loss of principal. Adjustable rate securities are also
typically subject to maximum increases and decreases in the interest rate
adjustment which can be made on any one adjustment date, in any one year, or
during the life of the security. In the event of dramatic increases or decreases
in prevailing market interest rates, the value of the Fund may fluctuate more
substantially since these limits may prevent the security from fully adjusting
its interest rate to the prevailing market rates.
U.S. GOVERNMENT SECURITIES
The Fund invests in adjustable rate and fixed rate U.S. Government
securities.
U.S. TREASURY SECURITIES
THE FUND MAY INVEST IN U.S. TREASURY SECURITIES, INCLUDING BILLS, NOTES,
BONDS AND OTHER DEBT SECURITIES ISSUED BY THE U.S. TREASURY. 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. Treasury securities are generally fixed rate securities.
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SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES
THE FUND WILL INVEST IN BOTH ADJUSTABLE RATE AND FIXED RATE SECURITIES
ISSUED OR GUARANTEED BY AGENCIES OR INSTRUMENTALITIES OF THE U.S. GOVERNMENT,
INCLUDING, BUT NOT LIMITED TO, GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA),
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) AND FEDERAL HOME LOAN MORTGAGE
CORPORATION (FHLMC) SECURITIES. Obligations of 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. Such
securities include obligations issued by the Student Loan Marketing Association
(SLMA), FNMA and FHLMC, each of which may borrow from the U.S. Treasury to meet
its obligations, although the U.S. Treasury is under no obligation to lend to
such entities. GNMA, FNMA and FHLMC may also issue collateralized mortgage
obligations. See "How the Fund Invests --Private Mortgage Pass-Through
Securities--Collateralized Mortgage Obligations and Multiclass Pass-Through
Securities" below.
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 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. The
Fund may also invest in custodial receipts held by a third party that are not
U.S. Government securities. See "Other Investments" in the Statement of
Additional Information.
MORTGAGE-RELATED SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT
AGENCIES AND INSTRUMENTALITIES
THE FUND WILL INVEST IN MORTGAGE-BACKED SECURITIES AND OTHER DERIVATIVE
MORTGAGE PRODUCTS, INCLUDING THOSE REPRESENTING AN UNDIVIDED OWNERSHIP INTEREST
IN A POOL OF MORTGAGES, E.G., GNMA, FNMA AND FHLMC CERTIFICATES WHERE THE U.S.
GOVERNMENT OR ITS AGENCIES OR INSTRUMENTALITIES GUARANTEES THE PAYMENT OF
INTEREST AND PRINCIPAL OF THESE SECURITIES. See "How the Fund Invests
- --Mortgage-Backed Securities" below. However, these guarantees do not extend to
the securities' yield or value, which are likely to vary inversely with
fluctuations in interest rates, nor do these guarantees extend to the yield or
value of the Fund's shares. See "Investment Objective and Policies--U.S.
Government Securities" in the Statement of Additional Information. These
certificates are in most cases "pass-through" instruments, through which the
holder receives a share of all interest and principal payments from the
mortgages underlying the certificate, net of certain fees. See "How the Fund
Invests--Mortgage-Backed Securities" below.
IN ADDITION TO GNMA, FNMA OR FHLMC CERTIFICATES THROUGH WHICH THE HOLDER
RECEIVES A SHARE OF ALL INTEREST AND PRINCIPAL PAYMENTS FROM THE MORTGAGES
UNDERLYING THE CERTIFICATE, THE FUND MAY ALSO INVEST IN CERTAIN MORTGAGE
PASS-THROUGH SECURITIES ISSUED BY THE U.S. GOVERNMENT OR ITS AGENCIES AND
INSTRUMENTALITIES COMMONLY REFERRED TO AS MORTGAGE-BACKED SECURITY STRIPS OR MBS
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STRIPS. MBS strips are usually structured with two classes that receive
different proportions of the interest and principal distributions on a pool of
mortgage assets. A common type of stripped mortgage security will have one class
receiving some of the interest and most of the principal from the mortgage
assets, while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will receive all
of the interest (the interest-only or "IO" class), while the other class will
receive all of the principal (the principal-only or "PO" class). The yields to
maturity on IOs and POs are sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage assets, and principal
payments may have a material effect on yield to maturity. If the underlying
mortgage assets experience greater than anticipated prepayments of principal,
the Fund may not fully recoup its initial investment in IOs. Conversely, if the
underlying mortgage assets experience less than anticipated prepayments of
principal, the yield on POs could be materially adversely affected.
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 government guarantee but usually having
some form of private credit enhancement.
ADJUSTABLE RATE MORTGAGE SECURITIES
THE FUND WILL INVEST IN ADJUSTABLE RATE MORTGAGE SECURITIES (ARMS), WHICH
ARE PASS-THROUGH MORTGAGE SECURITIES COLLATERALIZED BY MORTGAGES WITH ADJUSTABLE
RATHER THAN FIXED RATES. ARMs eligible for inclusion in a mortgage pool
generally provide for a fixed initial mortgage interest rate for either the
first three, six, twelve, thirteen, thirty-six or sixty scheduled monthly
payments. Thereafter, the interest rates are subject to periodic adjustment
based on changes to a designated benchmark index.
ARMs contain maximum and minimum rates beyond which the mortgage interest
rate may not vary over the lifetime of the security. In addition, certain ARMs
provide for limitations on the maximum amount by which the mortgage interest
rate may adjust for any single adjustment period. Alternatively, certain ARMs
contain limitations on changes in the required monthly payment. In the event
that a monthly payment is not sufficient to pay the interest accruing on an ARM,
any such excess interest is added to the principal balance of the mortgage loan,
which is repaid through future monthly payments. If the monthly payment for such
an instrument exceeds the sum of the interest accrued at the applicable mortgage
interest rate and the principal payment required at such point to amortize the
outstanding principal balance over the remaining term of the loan, the excess is
utilized to reduce the then outstanding principal balance of the ARM.
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PRIVATE MORTGAGE PASS-THROUGH SECURITIES
PRIVATE MORTGAGE PASS-THROUGH SECURITIES ARE STRUCTURED SIMILARLY TO 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. Types of credit enhancements are described under "Asset Backed
Securities" below.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES. COLLATERALIZED MORTGAGE OBLIGATIONS OR "CMOS" ARE DEBT OBLIGATIONS
COLLATERALIZED BY MORTGAGE LOANS OR MORTGAGE PASS-THROUGH SECURITIES. Typically,
CMOs are collateralized by GNMA, FNMA or FHLMC certificates, but also may be
collateralized by whole loans or private mortgage pass-through securities (such
collateral collectively hereinafter referred to as "Mortgage Assets").
Multiclass pass-through securities are equity interests in a trust composed of
Mortgage Assets. Payments of principal of 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 multiclass 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 Real Estate Mortgage Investment Conduit (REMIC). All future
references to CMOs shall also be deemed to include REMICs.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final distribution
dates. Interest is paid or accrues on all classes of CMOs on a monthly,
quarterly or semi-annual basis. The principal of 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 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.
THE FUND ALSO MAY INVEST IN, AMONG OTHER THINGS, PARALLEL PAY CMOS AND
PLANNED AMORTIZATION CLASS CMOS (PAC BONDS). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds generally require payments of a
specified amount of principal on each payment date. PAC Bonds always are
parallel pay CMOs with the required principal payment on such securities having
the highest priority after interest has been paid to all classes.
In reliance on rules and interpretations of the Securities and Exchange
Commission (SEC), the Fund's investments in certain qualifying CMOs and REMICs
are not subject to the Investment
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Company Act's limitation on acquiring interests in other investment companies.
See "Additional Investment Information--Collateralized Mortgage Obligations" in
the Statement of Additional Information.
STRIPPED MORTGAGE-BACKED SECURITIES
STRIPPED MORTGAGE-BACKED SECURITIES OR MBS STRIPS ARE DERIVATIVE MULTICLASS
MORTGAGE SECURITIES. IN ADDITION TO MBS STRIPS ISSUED BY AGENCIES OR
INSTRUMENTALITIES OF THE U.S. GOVERNMENT, THE FUND MAY PURCHASE MBS STRIPS
ISSUED BY PRIVATE ORIGINATORS OF, OR INVESTORS IN, MORTGAGE LOANS, INCLUDING
DEPOSITORY INSTITUTIONS, MORTGAGE BANKS, INVESTMENT BANKS AND SPECIAL PURPOSE
SUBSIDIARIES OF THE FOREGOING. See "How the Fund Invests--U.S. Government
Securities--Mortgage-Related Securities Issued or Guaranteed by U.S. Government
Agencies and Instrumentalities."
CORPORATE AND OTHER DEBT OBLIGATIONS
THE FUND MAY INVEST IN CORPORATE AND OTHER DEBT OBLIGATIONS RATED AT LEAST
"A" BY S&P OR MOODY'S OR, IF UNRATED, DEEMED TO BE OF COMPARABLE CREDIT QUALITY
BY THE FUND'S INVESTMENT ADVISER. These debt securities may have adjustable or
fixed rates of interest and in certain instances may be secured by assets of the
issuer. Adjustable rate corporate debt securities may have features similar to
those of adjustable rate mortgage-backed securities, but corporate debt
securities, unlike mortgage-backed securities, are not subject to prepayment
risk other than through contractual call provisions which generally impose a
penalty for prepayment. Fixed rate debt securities may also be subject to call
provisions.
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 automobile
and credit card receivables and home equity loans, have been securitized in
pass-through structures similar to the mortgage pass-through structures or in a
pay-through structure similar to the CMO structure. The Fund may invest in these
and other types of asset-backed securities that 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 a security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, some of which may reduce the ability
to obtain full payment. In the case of automobile receivables, 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.
In general, these types of loans are of shorter average life than mortgage loans
and are less likely to have substantial prepayments.
TYPES OF CREDIT ENHANCEMENT
Mortgage-backed securities and asset-backed securities are often backed by
a pool of assets representing the obligations of a number of different parties.
To lessen the effect of failures by obligors on underlying assets to make
payments, those securities may contain elements of credit support which fall
into two categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to
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the provision of advances, generally by the entity administering the pool of
assets, to seek to ensure that the receipt of payments on the underlying pool
occurs in a timely fashion. Protection against losses resulting from default
seeks to ensure ultimate payment of the obligations on at least a portion of the
assets in the pool. This protection may be provided through guarantees,
insurance policies or letters of credit obtained by the issuer or sponsor from
third parties, through various means of structuring the transaction or through a
combination of such approaches. The degree of credit support provided for each
issue is generally based on historical information respecting the level of
credit risk associated with the underlying assets. Delinquencies or losses in
excess of those anticipated could adversely affect the return on an investment
in a security. The Fund will not pay any additional fees for credit support,
although the existence of credit support may increase the price of a security.
RISK FACTORS RELATING TO INVESTING IN MORTGAGE-BACKED AND ASSET-BACKED
SECURITIES
The yield characteristics of mortgage-backed and asset-backed securities
differ from traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently, usually monthly, and
that 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 "Additional Investment Information" in the
Statement of Additional Information. The investment adviser will seek to
minimize this risk by investing in mortgage-backed securities rated at least "A"
by Moody's and Standard & Poor's. See "Asset-Backed Securities."
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 rates as
mortgage-backed securities, may respond to certain of the same factors
influencing prepayments, while at other times different factors will
predominate. Mortgage-backed securities and asset-backed securities may decrease
in value as a result of increases in interest rates and may benefit less than
other fixed income securities from declining interest rates because of the risk
of prepayment.
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MONEY MARKET INSTRUMENTS
THE FUND MAY INVEST IN HIGH QUALITY MONEY MARKET INSTRUMENTS, INCLUDING
COMMERCIAL PAPER OF A U.S. OR FOREIGN COMPANY OR FOREIGN GOVERNMENT;
CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS OF DOMESTIC AND
FOREIGN BANKS; AND OBLIGATIONS ISSUED OR GUARANTEED BY THE U.S. GOVERNMENT, ITS
AGENCIES AND INSTRUMENTALITIES. These obligations will be U.S. dollar
denominated. Commercial paper will be rated, at the time of purchase, at least
"A-2" by Standard & Poor's 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 Standard & Poor's or "A" or "Prime-2" by Moody's.
OTHER INVESTMENTS AND INVESTMENT TECHNIQUES
The Fund may also (i) engage in hedging and income enhancement techniques,
including derivatives, through the purchase and sale of put and call options on
securities and indices and the purchase and sale of futures contracts and
related options (including futures contracts on U.S. Government securities and
indices and options thereon), (ii) enter into repurchase agreements, (iii) enter
into reverse repurchase agreements and dollar rolls, (iv) lend its securities,
(v) make short sales, (vi) purchase and sell securities on a when-issued and
delayed delivery basis, (vii) engage in interest rate swap transactions and
(viii) borrow money in all instances subject to the limitations described below
and in the Statement of Additional Information. See "Investment Objective and
Policies" in the Statement of Additional Information.
HEDGING AND INCOME ENHANCEMENT STRATEGIES
THE FUND MAY ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING DERIVATIVES,
TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO ENHANCE INCOME.
THESE STRATEGIES INCLUDE THE USE OF OPTIONS AND FUTURES CONTRACTS AND OPTIONS
THEREON. THE FUND'S ABILITY TO USE THESE STRATEGIES MAY BE LIMITED BY MARKET
CONDITIONS, REGULATORY LIMITS AND TAX CONSIDERATIONS AND THERE CAN BE NO
ASSURANCE THAT ANY OF THESE STRATEGIES WILL SUCCEED. See "Investment Objective
and Policies" in the Statement of Additional Information.
OPTIONS TRANSACTIONS
THE FUND MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON
SECURITIES AND FINANCIAL INDICES THAT ARE TRADED ON NATIONAL SECURITIES
EXCHANGES OR IN THE OVER-THE-COUNTER MARKET TO ENHANCE INCOME OR TO HEDGE THE
FUND'S PORTFOLIO. THESE OPTIONS WILL BE ON DEBT SECURITIES, AGGREGATES OF DEBT
SECURITIES, FINANCIAL INDICES AND U.S. GOVERNMENT SECURITIES AND MAY BE TRADED
ON NATIONAL SECURITIES EXCHANGES OR OVER-THE-COUNTER. See "Additional
Risks--Options on Securities" in the Statement of Additional Information. The
Fund may write covered put and call options to generate additional income
through the receipt of premiums, purchase put options in an effort to protect
the value of a security that it owns against a decline in market value and
purchase call options in an effort to protect against an increase in price of
securities it intends to purchase. The Fund may also purchase put and call
options to offset previously written put and call options of the same series.
See "Investment Objective and Policies--Additional Investment Policies--Options
on Securities" in the Statement of Additional Information. As an operating
policy, the Fund may invest up to 5% of its total assets in listed and
over-the-counter call and put options on U.S.
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Government securities and mortgage-backed securities. The Fund may also purchase
call and put options on futures contracts.
A CALL OPTION GIVES THE PURCHASER, IN EXCHANGE FOR A PREMIUM PAID, THE
RIGHT FOR A SPECIFIED PERIOD OF TIME TO PURCHASE THE SECURITIES SUBJECT TO THE
OPTION AT A SPECIFIED PRICE (THE "EXERCISE PRICE" OR "STRIKE PRICE"). The writer
of a call option, in return for the premium, has the obligation, upon exercise
of the option, to deliver, depending upon the terms of the option contract, the
underlying securities or a specified amount of cash to the purchaser upon
receipt of the exercise price. When the Fund writes a call option, the Fund
gives up the potential for gain on the underlying securities or currency in
excess of the exercise price of the option during the period that the option is
open.
A PUT OPTION GIVES THE PURCHASER, IN RETURN FOR A PREMIUM, THE RIGHT, FOR A
SPECIFIED PERIOD OF TIME, TO SELL THE SECURITIES SUBJECT TO THE OPTION TO THE
WRITER OF THE PUT AT THE SPECIFIED EXERCISE PRICE. The writer of the put option,
in return for the premium, has the obligation, upon exercise of the option, to
acquire the securities underlying the option at the exercise price. The Fund
might, therefore, be obligated to purchase the underlying securities for more
than their current market price.
THE FUND WILL WRITE ONLY "COVERED" OPTIONS. An option is covered if, so
long as the Fund is obligated under the option, it owns an offsetting position
in the underlying security or maintains cash, U.S. Government securities or
other liquid high-grade debt obligations with a value sufficient at all times to
cover its obligations in a segregated account. See "Investment Objective and
Policies --Additional Investment Policies" in the Statement of Additional
Information.
THERE IS NO LIMITATION ON THE AMOUNT OF CALL OPTIONS THE FUND MAY WRITE.
THE FUND MAY ONLY WRITE COVERED PUT OPTIONS TO THE EXTENT THAT COVER FOR SUCH
OPTIONS DOES NOT EXCEED 25% OF THE FUND'S NET ASSETS. THE FUND WILL NOT PURCHASE
AN OPTION IF, AS A RESULT OF SUCH PURCHASE, MORE THAN 20% OF ITS TOTAL ASSETS
WOULD BE INVESTED IN PREMIUMS FOR OPTIONS AND OPTIONS ON FUTURES CONTRACTS.
FUTURES CONTRACTS AND OPTIONS THEREON
THE FUND MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS AND OPTIONS
THEREON WHICH ARE TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE FOR CERTAIN
HEDGING, RETURN ENHANCEMENT AND RISK MANAGEMENT PURPOSES IN ACCORDANCE WITH
REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION. THESE FUTURES CONTRACTS
AND RELATED OPTIONS WILL BE ON DEBT SECURITIES, AGGREGATES OF DEBT SECURITIES,
FINANCIAL INDICES AND U.S. GOVERNMENT SECURITIES AND INCLUDE FUTURES CONTRACTS
AND OPTIONS THEREON WHICH ARE LINKED TO LIBOR. A FINANCIAL FUTURES CONTRACT IS
AN AGREEMENT TO PURCHASE OR SELL AN AGREED AMOUNT OF SECURITIES OR CURRENCIES AT
A SET PRICE FOR DELIVERY IN THE FUTURE.
THE FUND MAY NOT PURCHASE OR SELL FUTURES CONTRACTS AND RELATED OPTIONS FOR
OTHER THAN BONA FIDE HEDGING PURPOSES IF IMMEDIATELY THEREAFTER THE SUM OF THE
AMOUNT OF INITIAL MARGIN DEPOSITS ON THE FUND'S EXISTING FUTURES AND OPTIONS ON
FUTURES AND PREMIUMS PAID FOR SUCH RELATED OPTIONS WOULD EXCEED 5% OF THE
LIQUIDATION VALUE OF THE FUND'S TOTAL ASSETS.
THE FUND'S SUCCESSFUL USE OF FUTURES CONTRACTS AND RELATED OPTIONS DEPENDS
UPON THE INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET AND
IS SUBJECT TO VARIOUS ADDITIONAL RISKS. The correlation between movements in the
price of a futures contract and the price
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of the securities being hedged is imperfect and there is a risk that the value
of the securities being hedged may increase or decrease at a greater rate than a
specified futures contract resulting in losses to the Fund.
THE FUND'S ABILITY TO ENTER INTO FUTURES CONTRACTS AND OPTIONS THEREON MAY
ALSO BE LIMITED BY THE REQUIREMENTS OF THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED (THE INTERNAL REVENUE CODE), FOR QUALIFICATION AS A REGULATED INVESTMENT
COMPANY. See "Investment Objective and Policies--Additional Investment
Policies--Futures Contracts--Options on Futures Contracts" and "Taxes" in the
Statement of Additional Information.
RISKS OF HEDGING AND INCOME 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. If the investment adviser's prediction of movements in the
direction of the securities and interest rate markets is 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 options and 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 being hedged; (3) the fact that skills needed to use
these strategies are different from those needed to select portfolio securities;
(4) the possible absence of a liquid secondary market for any particular
instrument at any time, (5) the possible need to defer closing out certain
hedged positions to avoid adverse tax consequences; and (6) the possible
inability of the Fund to purchase or sell a portfolio security at a time that
otherwise would be favorable for it to do so, or the possible need for the Fund
to sell the security at a disadvantageous time, due to the requirement that the
Fund to maintain "cover" or to segregate securities in connection with hedging
transactions. See "Investment Objective and Policies" and "Taxes" in the
Statement of Additional Information.
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 repurchase date is usually within a day
or two of the original purchase, although it may not be a number of months. The
resale price is in excess of the purchase price, reflecting an agreed-upon rate
of return effective for the period of time the Fund's money is invested in the
security. The Fund's repurchase agreements will at all times be fully
collateralized in an amount at least equal to the purchase price including
accrued interest earned on the underlying securities. The instruments held as
collateral are valued daily, and if the value of such 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. In the event of a default or bankruptcy of 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 obligations 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 Mutual Fund Management, Inc. pursuant to an order of the
Securities and Exchange Commission. See "Investment Objective and
Policies--Repurchase Agreements" in the Statement of Additional Information.
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REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
Reverse repurchase agreements involve sales by the Fund of portfolio assets
concurrently with an agreement by the Fund to repurchase the same assets at a
later date at a fixed price. During the reverse repurchase agreement period, the
Fund continues to receive principal and interest payments on these securities.
The Fund may enter into dollar rolls in which the Fund sells securities for
delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type and coupon) securities on a specified future
date from the same party. During the roll period, the Fund forgoes principal and
interest paid on the securities. The Fund is compensated by the difference
between the current sales price and the forward price for the future purchase
(often referred to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale. A "covered roll" is a specific type of dollar roll
for which there is an offsetting cash position or a cash equivalent security
position which matures on or before the forward settlement date of the dollar
roll transaction.
The Fund will establish a segregated account with its Custodian in which it
will maintain cash, U.S. Government securities or other liquid high-grade debt
obligations equal in value to its obligations in respect of reverse repurchase
agreements and dollar rolls. Reverse repurchase agreements and 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
reverse repurchase agreement or 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.
Reverse repurchase agreements and dollar rolls are speculative techniques
involving leverage and are considered borrowings by the Fund for purposes of the
percentage limitations applicable to borrowings. See "How the Fund
Invests--Borrowings" below.
SECURITIES LENDING
The Fund may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or equivalent collateral or secures a
letter of credit in favor of the Fund in an amount equal to at least 100% of the
market value of the securities loaned. During the time portfolio securities are
on loan, the borrower will pay the Fund an amount equivalent to any dividend or
interest paid on such securities and the Fund may invest the cash collateral and
earn additional income, or it may receive an agreed-upon amount of interest
income from the borrower who has delivered cash equivalent collateral or secured
a letter of credit. Loans are subject to termination at the option of the Fund
or the borrower. As with any extension of credit, there are risks of delay in
recovery and in some cases even loss of rights in the collateral should the
borrower of the securities fail financially. The Fund may pay reasonable
administration and custodial fees in connection with a loan. As a matter of
fundamental policy, the Fund cannot lend more than 33 1/3% of the value of its
total assets.
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<PAGE> 19
SHORT SALES
The Fund may sell a security it does not own in anticipation of a decline
in the market value of that security ("short sales"). To complete the
transaction, the Fund will borrow the security to make delivery to the buyer.
The Fund is then obligated to replace the security borrowed by purchasing it at
the market price at the time of replacement. The price at such time may be more
or less than the price at which the security was sold by the Fund. Until the
security is replaced, the Fund is required to pay to the lender any interest
which accrues during the period of the loan. To borrow the security, the Fund
may be required to pay a premium which would increase the cost of the security
sold. The proceeds of the short sale will be retained by the broker to the
extent necessary to meet margin requirements until the short position is closed
out. Until the Fund replaces the borrowed security, it will (a) maintain in a
segregated account cash or U.S. Government securities at such a level that the
amount deposited in the account plus the amount deposited with the broker as
collateral will equal the current market value of the security sold short and
will not be less than the market value of the security at the time it was sold
short or (b) otherwise cover its short position.
The Fund will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on which
the Fund replaces the borrowed security. The Fund will realize a gain if the
security declines in price between those dates. This result is the opposite of
what one would expect from a cash purchase of a long position in a security. The
amount of any gain will be decreased, and the amount of any loss will be
increased, by the amount of any premium or interest paid in connection with the
short sale. No more than 25% of the Fund's net assets will be, when added
together: (i) deposited as collateral for the obligation to replace securities
borrowed to effect short sales and (ii) allocated to segregated accounts in
connection with short sales.
The Fund may also make short sales against-the-box for the purpose of
deferring realization of gain or loss for federal income tax purposes. A short
sale against-the-box is a short sale in which the Fund owns an equal amount of
the securities sold short or securities convertible into or exchangeable,
without payment of any further consideration, for securities of the same issue
as, and equal in amount to, the securities sold short.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase or sell securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place in the future in order to secure what is considered to be an advantageous
price and yield to the Fund at the time of entering into the transaction. The
Fund's Custodian will maintain, in a segregated account of the Fund, cash, U.S.
Government securities or other liquid high-grade debt obligations having a value
equal to or greater than the Fund's purchase commitments; the Custodian will
likewise segregate securities sold on a delayed delivery basis. The securities
so purchased are subject to market fluctuation and no interest accrues to the
purchaser during this period. 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
net asset value.
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<PAGE> 20
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, for example, an exchange of floating rate payments for
fixed rate payments. The Fund expects to enter into these transactions primarily
to preserve a return or spread on a particular investment or portion of its
portfolio or to protect against any increase in the price of securities the Fund
anticipates purchasing at a later date. The Fund intends to use these
transactions as a hedge and not as a speculative investment. See "Investment
Objective and Policies--Other Investment Strategies" in the Statement of
Additional Information. The risk of loss with respect to interest rate swaps is
limited to the net amount of interest payments that the Fund is contractually
obligated to make and will not exceed 5% of the Fund's net assets. The use of
interest rate swaps may involve 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.
ILLIQUID ASSETS
The Fund may invest up to 15% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as amended (the Securities Act), and privately placed commercial paper
that have a readily available market are not considered illiquid for purposes of
this limitation. The investment adviser will monitor the liquidity of such
restricted securities under the supervision of the Board of Directors.
Repurchase agreements subject to demand are deemed to have a maturity equal to
the applicable notice period.
The staff of the SEC has taken the position that purchased over-the-counter
options and the assets used as "cover" for written over-the-counter options are
illiquid securities unless the Fund and the counterparty have provided for the
Fund at the Fund's option 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."
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 Fund will also treat
non-U.S. Government POs and IOs as illiquid securities so long as the staff of
the SEC maintains its position that such securities are illiquid.
PORTFOLIO TURNOVER
The Fund has no policy with respect to portfolio turnover. The investment
adviser expects that, under normal circumstances, the Fund's annual portfolio
turnover rate will not exceed 200%. The portfolio turnover rate is calculated by
dividing the lesser of sales or purchases of portfolio
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<PAGE> 21
securities by the average monthly value of the Fund's portfolio securities,
excluding securities having a maturity at the date of purchase of one year or
less. While the Fund will pay commissions in connection with options and futures
transactions, the securities in which it invests are generally traded on a "net"
basis with dealers acting as principals for their own account without a stated
commission. Nevertheless, high portfolio turnover may involve correspondingly
greater brokerage commissions and other transaction costs which will be borne
directly by the Fund. Higher portfolio turnover results in increased costs to
the Fund and therefore to the Fund's shareholders. See "Portfolio Transactions
and Brokerage" in the Statement of Additional Information.
BORROWING
The Fund may borrow an amount equal to no more than 33 1/3% of the value of
its total assets (computed at the time the loan is made) to take advantage of
investment opportunities, for temporary, extraordinary or emergency purposes, or
for the clearance of transactions. The Fund may pledge up to 33 1/3% 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. If the Fund borrows to invest in securities, any investment gains
made on the securities in excess of interest paid on the borrowing will cause
the net asset value of the Fund's shares to rise faster than would otherwise be
the case. On the other hand, if the investment performance of the additional
securities purchased fails to cover their cost (including any interest paid on
the money borrowed) to the Fund, the net asset value of the Fund's shares will
decrease faster than would otherwise be the case. This is the speculative
characteristic known as "leverage." Reverse repurchase agreements, dollar rolls
and short sales also include leverage and are considered borrowings by the Fund
for purposes of the percentage limitations applicable to borrowings. See
"Reverse Repurchase Agreements and Dollar Rolls" and "Short Sales" above.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
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HOW THE FUND IS MANAGED
THE FUND HAS A BOARD OF DIRECTORS WHICH, IN ADDITION TO OVERSEEING THE
ACTIONS OF THE FUND'S MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW,
DECIDES UPON MATTERS OF GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND
SUPERVISES THE DAILY BUSINESS OPERATIONS OF THE FUND. THE FUND'S SUBADVISER
FURNISHES DAILY INVESTMENT ADVISORY SERVICES.
FOR THE YEAR ENDED FEBRUARY 28, 1994, THE TOTAL EXPENSES, NET OF MANAGEMENT
FEE WAIVER, AS A PERCENTAGE OF AVERAGE NET ASSETS FOR THE FUND'S CLASS A AND
CLASS B SHARE WERE 0.69% AND 0.75%, RESPECTIVELY. NO CLASS C SHARES WERE
OUTSTANDING DURING THE FISCAL YEAR ENDED FEBRUARY 28, 1994. SEE "FINANCIAL
HIGHLIGHTS" AND "FEE WAIVERS AND SUBSIDY."
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<PAGE> 22
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1% OF THE FUND'S AVERAGE DAILY NET
ASSETS. PMF was incorporated in May 1987 under the laws of the State of
Delaware.
For the period March 1, 1993 through April 14, 1993, PMF voluntarily waived
100% of its management fees or $150,690 (0.08% of average daily net assets). For
the period April 15, 1993 through February 28, 1994 the fund paid management
fees to PMF of $832,334 (0.42% of average daily net assets).
As of July 31, 1994, PMF served as the manager to 37 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator of 29 closed-end investment companies, with aggregate assets of
approximately $47 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF THE FUND AND ALSO ADMINISTERS THE FUND'S CORPORATE AFFAIRS. See
"Manager" in the Statement of Additional Information.
UNDER THE SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), PIC FURNISHES INVESTMENT ADVISORY SERVICES
IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PMF FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PIC's performance of such services.
The current portfolio manager of the Fund is David Graham, a Vice President
of Prudential Investment Advisors, a unit of The Prudential Investment
Corporation (PIC). Mr. Graham has responsibility for the day-to-day management
of the Fund's portfolio. Mr. Graham was previously employed by Alliance Capital
Management L.P. (February 1993-October 1993) as a fixed-income portfolio manager
in the mortgage-backed securities group, by Equitable Capital Management
Corporation (May 1989-February 1993) where he served as a Vice President and was
responsible for managing total return accounts with mortgage securities, and
prior thereto, by Metropolitan Life Insurance Company (June 1986-April 1989)
where he served as a portfolio manager. Mr. Graham joined PIC on November 15,
1993.
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance
Company of America (Prudential), a major diversified insurance and financial
services company.
FEE WAIVERS AND SUBSIDY
PMF may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. Fee waivers
and expense subsidies will increase the Fund's yield and total return. See
"Performance Information" and "Fund Expenses." The Distributors may also from
time to time waive all or a portion of the distribution expenses reimbursable or
payable to them under the Fund's Distribution and Service Plans. See
"Distributor." Any fee waiver or subsidy may be terminated at any time without
notice after which the Fund's expenses will increase and its yield and total
return will be reduced.
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<PAGE> 23
DISTRIBUTOR
PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC. (PMFD), ONE SEAPORT PLAZA, NEW
YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF
DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS A SHARES OF THE FUND. IT IS
A WHOLLY-OWNED SUBSIDIARY OF PMF.
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE
SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE
LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS B AND
CLASS C SHARES OF THE FUND. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF
PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS
B PLAN AND THE CLASS C PLAN, COLLECTIVELY THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND SEPARATE DISTRIBUTION AGREEMENTS
(THE DISTRIBUTION AGREEMENTS), PMFD AND PRUDENTIAL SECURITIES (COLLECTIVELY THE
DISTRIBUTOR) INCUR THE EXPENSES OF DISTRIBUTING THE FUND'S CLASS A, CLASS B AND
CLASS C SHARES, RESPECTIVELY. These expenses include commissions and account
servicing fees paid to, or on account of, financial advisers of Prudential
Securities and representatives of Pruco Securities Corporation (Prusec), an
affiliated broker-dealer, commissions and account servicing fees paid to, or on
account of, other broker-dealers or financial institutions (other than national
banks) which have entered into agreements with the Distributor, advertising
expenses, the cost of printing and mailing prospectuses to potential investors
and indirect and overhead costs of Prudential Securities and Prusec associated
with the sale of Fund shares, including lease, utility, communications and sales
promotion expenses. The State of Texas requires that shares of the Fund may be
sold in that state only by dealers or other financial institutions which are
registered there as broker-dealers.
Under the Class C Plan, 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, as is the case
under the Class A and Class B Plans. If the Distributor's expenses under the
Class C Plan exceed its distribution and service fees, the Fund will not be
obligated to pay any additional expenses under the Class C Plan. If the
Distributor's expenses under the Class C Plan are less than such distribution
and service fees, it will retain its full fees and realize a profit.
UNDER THE CLASS A PLAN, THE FUND REIMBURSES PMFD FOR ITS
DISTRIBUTION-RELATED EXPENSES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE
OF UP TO .50 OF 1% OF THE AVERAGE DAILY NET ASSET VALUE OF THE CLASS A SHARES.
The Class A Plan provides that (i) up to .25 of 1% of the average daily net
assets of the Class A shares may be used to pay for personal service and the
maintenance of shareholder accounts (service fee) and (ii) total distribution
fees (including the service fee of .25 of 1%) may not exceed .50 of 1%. It is
expected that, in the case of Class A shares, proceeds from the distribution fee
will be used primarily to pay an account servicing fee to financial advisers.
Unlike the Class B Plan, there are no carry forward amounts under the Class A
Plan and interest expenses are not incurred under the Class A Plan.
For the fiscal year ended February 28, 1994, PMFD incurred
distribution-related expenses under the Class A Plan of $884,314 (0.50% of
average daily net assets of Class A shares). Of such amount, PMFD waived
$755,963 (0.44% of average daily net assets of Class A shares) and was
reimbursed $128,351 (0.06% of average daily net assets of Class A shares)
through the distribution fee paid by the Fund to PMFD. In addition, for this
period, PMFD received approximately $7,900 in initial sales charges. PMFD has
agreed to waive, temporarily and voluntarily, all payments to it
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<PAGE> 24
under the Class A Plan. Therefore, the Fund has discontinued assessing 12b-1
fees on the Class A shares and will not resume assessing such fees unless and
until payments are resumed to PMFD under the Class A Plan. PMFD may terminate
its waiver of payments under the Class A Plan at any time and, in such event,
the Fund will once again assess 12b-1 fees on the Class A shares.
UNDER THE CLASS B PLAN, THE FUND REIMBURSES PRUDENTIAL SECURITIES FOR ITS
DISTRIBUTION-RELATED EXPENSES WITH RESPECT TO CLASS B SHARES (ASSET-BASED SALES
CHARGES) AT AN ANNUAL RATE OF UP TO .75 OF 1% OF THE AVERAGE DAILY NET ASSETS OF
THE CLASS B SHARES. Prudential Securities recovers the distribution expenses it
incurs through the receipt of reimbursement payments from the Fund under the
Class B Plan and the receipt of contingent deferred sales charges from certain
redeeming shareholders. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges." For the fiscal year ended February
28, 1994, Prudential Securities received approximately $33,100 in contingent
deferred sales charges.
THE CLASS B PLAN ALSO PROVIDES FOR THE PAYMENT OF A SERVICE FEE TO
PRUDENTIAL SECURITIES AT A RATE NOT TO EXCEED .25 OF 1% OF THE AVERAGE DAILY NET
VALUE OF THE CLASS B SHARES. The service fee is used to pay financial advisers
for personal service and/or the maintenance of shareholder accounts.
Actual distribution expenses (asset-based sales charges) for Class B shares
for any given year may exceed the fees received pursuant to the Class B Plan and
will be carried forward and paid by the Fund in future years so long as the
Class B Plan is in effect. Interest is accrued monthly on such carry forward
amounts at a rate comparable to that paid by Prudential Securities for bank
borrowings. See "Distributor" in the Statement of Additional Information.
THE AGGREGATE DISTRIBUTION FEE FOR CLASS B SHARES (ASSET-BASED SALES
CHARGES PLUS SERVICE FEES) WILL NOT EXCEED THE ANNUAL RATE OF 1% OF THE AVERAGE
DAILY NET ASSET VALUE OF CLASS B SHARES UNDER THE CLASS B PLAN.
UNDER THE CLASS C PLAN, THE FUND MAY PAY PRUDENTIAL SECURITIES FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS C SHARES AT AN ANNUAL RATE
OF UP TO 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS C SHARES. The Class C
Plan provides for the payment to Prudential Securities of (i) an asset-based
sales charge of up to .75 of 1% of the average daily net assets of the Class C
shares, and (ii) a service fee of up to .25 of 1% of the average daily net
assets of the Class C shares. The service fee is used to pay for personal
service and/or the maintenance of shareholder accounts. Prudential Securities
has agreed to limit its distribution-related fees payable under the Class C Plan
to .75 of 1% of the average daily net assets of the Class C shares for the
fiscal year ending February 28, 1995. Prudential Securities also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges."
For the fiscal year ended February 28, 1994 Prudential Securities received
distribution fees under the Class B Plan of $44,677 and spent approximately
$64,300 in distribution-related expenses. As of April 14, 1993, the Distributor
no longer had any distribution expenses not yet reimbursed by the Fund or
recovered through contingent deferred sales charges. Therefore the Fund has
discontinued assessing any 12b-1 fees on the Class B shares and will not resume
assessing 12b-1 fees on the Class B shares unless and until the Distributor
incurs additional costs reimbursable to it under the Class B Plan. Until such
time, all contingent deferred sales charges collected on the redemption of Class
B shares will be paid to the Fund. No Class C shares were outstanding during the
fiscal year ended February 28, 1994.
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<PAGE> 25
For the fiscal year ended February 28, 1994, the Fund paid distribution
expenses of .06% and .12% of the average net assets of the Class A and Class B
shares of the Fund, respectively. The Fund records all payments made under the
Plans as expenses in the calculation of net investment income.
Distribution expenses attributable to the sale of shares of the Fund will
be allocated to each class based upon the ratio of sales of each class to the
sales of all shares of the Fund. The distribution fee and sales charge of one
class will not be used to subsidize the sale of another class.
Each Plan provides that it shall continue in effect from year to year
provided that a majority of the Board of Directors of the Fund, including a
majority of the Directors who are not "interested persons" of the Fund (as
defined in the Investment Company Act) and who have no direct or indirect
financial interest in the operation of the Plan or any agreement related to the
Plan (the Rule 12b-1 Directors), vote annually to continue the Plan. Each Plan
may be terminated at any time by vote of a majority of the Rule 12b-1 Directors
or of a majority of the outstanding shares of the applicable class of the Fund.
In the event of termination or discontinuation of the Class B Plan, the Board of
Directors may consider the appropriateness of having the Fund reimburse
Prudential Securities for the outstanding carry forward amounts plus interest
thereon.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers and other persons which
distribute shares of the Fund. Such payments may be calculated by reference to
the net asset value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. governing maximum sales charges. See "Distributor" in
the Statement of Additional Information.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant
for the Fund provided that the commissions, fees or other remuneration received
by Prudential Securities are fair and reasonable. See "Portfolio Transaction and
Brokerage" in the Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and, in that capacity, maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. Its mailing address is P.O. Box
9131, Boston, Massachusetts 02205.
Prudential Mutual Fund Services, Inc., Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and in
those capacities maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
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<PAGE> 26
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HOW THE FUND VALUES ITS SHARES
THE FUND'S NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING
ITS LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES OF THE FUND. THE BOARD OF DIRECTORS HAS 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.
Portfolio securities are valued based on market quotations or, if not
readily available, at fair value as determined in good faith under procedures
established by the Fund's Board of Directors. See "Net Asset Value" in the
Statement of Additional Information.
The Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Fund or days on which changes in the
value of the Fund's portfolio securities do not materially affect the NAV. The
New York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class may result in different
NAVs and dividends. As long as the Fund declares dividends daily, the NAV of
Class A, Class B and Class C shares will generally be the same. It is expected,
however, that the Fund's dividends will differ by approximately the amount of
the distribution expense accrual differential among the classes.
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HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE ITS "YIELD" AND "TOTAL RETURN"
(INCLUDING "AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE TOTAL RETURN") IN
ADVERTISEMENTS AND SALES LITERATURE. TOTAL RETURN IS CALCULATED SEPARATELY FOR
CLASS A, CLASS B AND CLASS C SHARES. These figures are based on historical
earnings and are not intended to indicate future performance. The "yield" refers
to the income generated by an investment in the Fund over a one-month or 30-day
period. This income is then "annualized," that is, the amount of income
generated by the investment during that 30-day period is assumed to be generated
each 30-day period for twelve periods and is shown as a percentage of the
investment. The income earned on the investment is also assumed to be reinvested
at the end of the sixth 30-day period. The "total return" shows how much an
investment in the Fund would have increased (decreased) over a specified period
of time (i.e., one, five or ten years or since inception of the Fund) assuming
that all distributions and dividends by the Fund were reinvested on the
reinvestment dates during the period and less all recurring fees. The
"aggregate" total return reflects actual performance over a stated period of
time. "Average annual" total return is a hypothetical rate of return that, if
achieved annually, would have produced the same aggregate total return if
performance had been constant over the entire period. "Average annual" total
return smooths out variations in performance and takes into account any
applicable initial or contingent deferred sales charges. Neither "average
annual" total return nor "aggregate" total return takes into account any federal
or state income taxes which may be payable upon redemption. The Fund also may
include comparative performance information in advertising or marketing the
Fund's
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<PAGE> 27
shares. Such performance information may include data from Lipper Analytical
Services, Inc., Morningstar Publications, Inc., other industry publications,
business periodicals, and market indices. See "Performance Information" in the
Statement of Additional Information. The Fund will include performance data for
each class of shares of the Fund in any advertisement or information including
performance data of the Fund. Further performance information is contained in
the Fund's annual and semi-annual reports to shareholders, which may be obtained
without charge. See "Shareholder Guide--Shareholder Services--Reports to
Shareholders."
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TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE FUND HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED. ACCORDINGLY, THE FUND WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON
ITS NET INVESTMENT INCOME AND CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS
SHAREHOLDERS.
TAXATION OF SHAREHOLDERS
All dividends out of net investment income, together with distributions of
short-term capital gains, will be taxable as ordinary income to the shareholder
whether or not reinvested. Any net long-term capital gains distributed to
shareholders will be taxable as such to the shareholders, whether or not
reinvested and regardless of the length of time a shareholder has owned his or
her shares.
The Fund has obtained opinions of counsel to the effect that neither (i)
the conversion of Class B shares into Class A shares nor (ii) the exchange of
Class B or Class C shares for Class A shares constitutes a taxable event for
federal income tax purposes. However, such opinions are not binding on the
Internal Revenue Service.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Taxes" in the Statement of
Additional Information.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Fund is required to withhold and remit
to the U.S. Treasury 31% of dividends, capital gain income and redemption
proceeds payable to individuals and certain noncorporation shareholders who fail
to furnish correct tax identification numbers on IRS Form W-9 (or IRS Form W-8
in the case of certain foreign shareholders).
DIVIDENDS AND DISTRIBUTIONS
THE FUND EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY NET CAPITAL
GAINS. Dividends paid by the Fund with respect to each class of shares, to the
extent any dividends are paid, will be calculated in the same manner, at the
same time, on the same day and will be in the same amount except that each class
will bear its own distribution charges, generally resulting in lower dividends
for Class B and Class C
25
<PAGE> 28
shares. Distributions of net capital gains, if any, will be paid in the same
amount for Class A, Class B and Class C shares. See "How the Fund Values Its
Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES, UNLESS
THE SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE
RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election
should be submitted to Prudential Mutual Fund Services, Inc., Attention: Account
Maintenance, P.O. Box 15015, New Brunswick, New Jersey 08906-5015. The Fund will
notify each shareholder after the close of the Fund's taxable year of both the
dollar amount and the taxable status of that year's dividends and distributions
on a per share basis. If you hold shares through Prudential Securities, you
should contact your financial adviser to elect to receive dividends and
distributions in cash.
WHEN THE FUND GOES "EX-DIVIDEND," ITS NAV IS REDUCED BY THE AMOUNT OF THE
DIVIDEND OR DISTRIBUTION. IF YOU BUY SHARES JUST PRIOR TO THE EX-DIVIDEND DATE,
THE PRICE YOU PAY WILL INCLUDE THE DIVIDEND OR DISTRIBUTION AND A PORTION OF
YOUR INVESTMENT WILL BE RETURNED TO YOU AS A TAXABLE DISTRIBUTION. YOU SHOULD,
THEREFORE, CONSIDER THE TIMING OF DIVIDENDS WHEN MAKING YOUR PURCHASES.
- --------------------------------------------------------------------------------
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
THE FUND WAS INCORPORATED IN MARYLAND ON DECEMBER 23, 1991. THE FUND IS
AUTHORIZED TO ISSUE 2 BILLION SHARES OF COMMON STOCK, $.001 PAR VALUE PER SHARE,
DIVIDED INTO THREE CLASSES, DESIGNATED CLASS A, CLASS B AND CLASS C COMMON
STOCK, EACH OF WHICH CONSISTS OF 666,666,666 2/3 AUTHORIZED SHARES. Each class
of common stock represent an interest in the same assets of the Fund and are
identical in all respects except that (i) each class bears different
distribution expenses, (ii) each class has exclusive voting rights with respect
to its distribution and service plan, (iii) each class has a different exchange
privilege and (iv) only Class B shares have a conversion feature. See "How the
Fund is Managed--Distributor." The Fund has received an order of the SEC
permitting the issuance and sale of multiple classes of common stock. Currently,
the Fund is offering three classes, designated as Class A, Class B and Class C
shares. In accordance with the Fund's Articles of Incorporation, the Board of
Directors may authorize the creation of additional series of common stock and
classes within such series, with such preferences, privileges, limitations and
voting and dividend rights as the Board may determine.
The Board of Directors may increase or decrease the number of authorized
shares without the approval of shareholders. Shares of the Fund, when issued,
are fully paid, nonassessable, fully transferable and redeemable at the option
of the holder. Shares are also redeemable at the option of the Fund under
certain circumstances as described under "Shareholder Guide--How to Sell Your
Shares." Each share of common stock is equal as to earnings, assets and voting
privileges, except as noted above, and each class bears the expenses related to
the distribution of its shares. There are no conversion, preemptive or other
subscription rights, except with respect to the conversion of Class B shares
into Class A shares described above. 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 these
26
<PAGE> 29
classes are likely to be lower than to Class A shareholders. The Fund's shares
do not have cumulative voting rights for the election of directors.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF DIRECTORS IS REQUIRED TO BE
ACTED ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE DIRECTORS OR TO TRANSACT ANY OTHER BUSINESS.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which
has been incorporated by reference herein, does not contain all the information
set forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
- --------------------------------------------------------------------------------
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, PRUSEC
OR DIRECTLY FROM THE FUND THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT). The minimum initial investment is
$5,000 for all classes. The minimum subsequent investment is $1,000 for all
classes. All minimum investment requirements are waived for certain retirement
and employee savings plans or custodial accounts for the benefit of minors. For
purchases of Class B and Class C shares made through the Automatic Savings
Accumulation Plan, the minimum initial and subsequent investment is $50. See
"Shareholder Services."
THE PURCHASE PRICE IS THE NAV NEXT DETERMINED FOLLOWING RECEIPT OF AN ORDER
BY THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE WHICH, AT
YOUR OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS A SHARES)
OR (II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). SEE "ALTERNATIVE
PURCHASE PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES." THE FUND NO
LONGER ACCEPTS PURCHASE ORDERS FOR CLASS B SHARES.
Application forms can be obtained from PMFS, Prudential Securities or
Prusec. If a stock certificate is desired, it must be requested in writing for
each transaction. Certificates are issued only for full shares. Shareholders who
hold their shares through Prudential Securities will not receive stock
certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
27
<PAGE> 30
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
Transactions in shares of the Fund may be subject to postage and handling
charges imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire,
you must first telephone PMFS to receive an account number at (800) 225-1852
(toll-free). The following information will be requested: your address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company, Boston,
Massachusetts, Custody and Shareholder Services Division, Attention: Prudential
Adjustable Rate Securities Fund, Inc., specifying on the wire the account number
assigned by PMFS and your name and identifying the sales charge alternative
(Class A, Class B or Class C shares).
If you arrange for receipt by State Street of Federal Funds prior to 4:15
P.M., New York time, on a business day, you may purchase shares of the Fund as
of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Adjustable Rate
Securities Fund, Inc., Class A, Class B or Class C 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 subsequent amount which may
be invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS THREE CLASSES OF SHARES (CLASS A, CLASS B AND CLASS C
SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE
FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH
OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES
(ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES (AS A %
OF AVERAGE DAILY NET
SALES CHARGE ASSETS) OTHER INFORMATION
-------------------------- -------------------------- --------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales .50 of 1% Initial sales charge
charge of 1% of the public waived or reduced for
offering price certain purchases
CLASS B Maximum contingent 1% Shares convert to Class A
deferred sales charge or shares approximately one
CDSC of 1% of the lesser year after purchase. The
of the amount invested or Fund is no longer
the redemption proceeds on accepting purchase orders
redemptions made within for Class B shares
one year of purchase
</TABLE>
28
<PAGE> 31
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES (AS A %
OF AVERAGE DAILY NET
SALES CHARGE ASSETS) OTHER INFORMATION
-------------------------- -------------------------- --------------------------
<S> <C> <C> <C>
CLASS C Maximum CDSC of 1% of the 1% (Currently being Shares do not convert to
lesser of the amount charged at a rate of .75 another class
invested or the redemption of 1%)
proceeds on redemptions
made within one year of
purchase
</TABLE>
The three classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan and
(ii) each class has exclusive voting rights with respect to its plan and (iii)
only Class B shares have a conversion feature. The three classes also have
separate exchange privileges. See "How to Exchange Your Shares" below. The
income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee of each class.
Class B and Class C shares bear the expenses of a higher distribution fee which
will generally cause them to have higher expense ratios and to pay lower
dividends than the Class A shares. Currently, the Fund is not assessing any fees
under the Class A or Class B Plan and in such circumstance the Class A and Class
B shares will have the same expense ratio and pay the same dividends.
Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER
THINGS, (1) the length of time you expect to hold your investment, (2) the
amount of any applicable sales charge (whether imposed at the time of purchase
or redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, and (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below).
The following illustrations are provided to assist you in determining which
method of purchase best suits your individual circumstances:
If you qualify for a reduced sales charge, you might elect to purchase
Class A shares because a similar sales charge reduction is not available for
purchases of Class B or Class C shares and because Class A shares are typically
subject to lower distribution and service fees than are Class B and Class C
shares. However, because the initial sales charge for Class A shares is deducted
at the time of purchase, you would not have all of your funds invested
initially.
If you do not qualify for a reduced initial sales charge and expect to
maintain your investment in the Fund for less than one year you might also elect
to purchase Class A shares because Class A shares are not subject to a deferred
sales charge upon redemption and because Class A shares are typically subject to
lower distribution and service fees than are Class B and Class C shares. Again,
however, you must weigh this consideration against the fact that not all of your
funds will be invested initially.
On the other hand, you might determine that it is more advantageous to have
all of your funds invested initially, although you may be subject, for a one
year period, to a distribution and service fee
29
<PAGE> 32
and a contingent deferred sales charge. If you are not entitled to a reduced
initial sales charge and you expect to maintain your investment in the Fund for
more than four years, you should consider purchasing Class A shares over Class C
shares since over time the accumulated continuing distribution and service fee
of Class C shares will exceed the initial sales charge plus distribution and
service fee for Class A shares.
ALL PURCHASES OF $100,000 OR MORE EITHER AS PART OF A SINGLE INVESTMENT, OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES.
SEE "REDUCTION AND WAIVER OF INITIAL SALES CHARGES" BELOW.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The offering price of Class A shares for investors choosing the initial
sales charge alternative is the NAV next determined plus a sales charge
(expressed as a percentage of the offering price and of the amount invested) as
shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION AS
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
------------------ --------------- ----------------- --------------------
<S> <C> <C> <C>
Less than $100,000 1.00% 1.00% 1.00%
$100,000 and above 0% 0% 0%
</TABLE>
Selling dealers may be deemed to be underwriters, as that term is defined
under federal securities laws.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
Benefit Plans. Class A shares may be purchased at NAV, without payment of
an initial sales charge, by pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal
Revenue Code (Benefit Plans), provided that the plan has existing assets of at
least $1 million invested in shares of Prudential Mutual Funds (excluding money
market funds other than those acquired pursuant to the exchange privilege) or
1,000 eligible employees or members. In the case of Benefit Plans whose accounts
are held directly with the Transfer Agent or Prudential Securities and for which
the Transfer Agent or Prudential Securities does individual account record
keeping (Direct Account Benefit Plans) and Benefit Plans sponsored by PSI or its
subsidiaries (PSI or Subsidiary Prototype Benefit Plans), Class A shares may be
purchased at NAV by participants who are repaying loans made from such plans to
the participant.
Prudential Retirement Accumulation Program 401(k) Plan. Class A shares may
be purchased at net asset value, with a waiver of the initial sales charge, by
or on behalf of participants in the Prudential Retirement Accumulation Program
401(k) Plan for which the Transfer Agent or Prudential Securities provides
recordkeeping services (PruRap Plan) provided that (i) for existing plans, the
plan has existing assets of $1 million or more, as measured on the last business
day of the month, invested in shares of Prudential Mutual Funds (excluding money
market funds other than
30
<PAGE> 33
those acquired pursuant to the exchange privilege) held at the Transfer Agent or
Prudential Securities and (ii) for new plans, the plan initially invests $1
million or more in shares of non-money market Prudential Mutual Funds or has at
least 1,000 eligible employees or members.
Special Rules Applicable to Retirements Plans. After a Benefit Plan or the
PruRap Plan qualifies to purchase Class A shares at NAV, all subsequent
purchases will be made at NAV.
Miscellaneous Waivers. In addition, Class A shares may be purchased at
NAV, through Prudential Securities or the Transfer Agent, by the following
persons: (a) Directors and officers of the Fund and other Prudential Mutual
Funds, (b) employees of Prudential Securities and PMF and their subsidiaries and
members of the families of such persons who maintain an "employee related"
account at Prudential Securities or the Transfer Agent, (c) employees 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,
(d) registered representatives and employees of dealers who have entered into a
selected dealer agreement with Prudential Securities provided that purchases at
NAV are permitted by such person's employer and (e) investors who have a
business relationship with a financial adviser who joined Prudential Securities
from another investment firm, provided that (i) the purchase is made within 90
days of the commencement of the financial adviser's employment at Prudential
Securities, (ii) the purchase is made with proceeds of a redemption of shares of
any open-end, 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) on which no deferred sales load, fee or other charge was
imposed on redemption an (iii) the financial adviser served as the client's
broker on the previous purchases.
You must notify the Transfer Agent either directly or through Prudential
Securities or PruSec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
purchased upon the reinvestment of dividends and distributions. See "Purchase
and Redemption of Fund Shares--Reduction and Waiver of Initial Sales
Charges--Class A Shares" in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one
of the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges."
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE FUND AT ANY TIME AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
In certain cases, however, redemption proceeds will be reduced by the amount of
any applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges."
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM YOUR SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD SHARES IN NON-CERTIFICATE
31
<PAGE> 34
FORM, A WRITTEN REQUEST FOR REDEMPTION SIGNED BY YOU EXACTLY AS THE ACCOUNT IS
REGISTERED IS REQUIRED. IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN
THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES, MUST BE RECEIVED BY THE
TRANSFER AGENT IN ORDER FOR THE REDEMPTION REQUEST TO BE PROCESSED. IF
REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR FIDUCIARY,
WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST BE SUBMITTED
BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and documents
concerning redemptions should be sent to the Fund in care of its Transfer Agent,
Prudential Mutual Fund Services, Inc., Attention: Redemption Services, P.O. Box
15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Prudential Preferred Financial Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS WRITTEN BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to determine
the value of its net assets, or (d) during any other period when the SEC, by
order, so permits; provided that applicable rules and regulations of the SEC
shall govern as to whether the conditions prescribed in (b), (c) or (d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL
THE FUND OR THE TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in kind of securities from the investment
portfolio of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values Its Shares." If your
shares are redeemed in kind, you would incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
32
<PAGE> 35
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.
30-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the NAV next
determined after the order is received, which must be within 30 days after the
date of the redemption. No sales charge will apply to such repurchases. You will
receive pro rata credit for any contingent deferred sales charge paid in
connection with the redemption of Class B or Class C shares. You must notify the
Fund's Transfer Agent, either directly or through Prudential Securities or
Prusec, at the time the repurchase privilege is exercised that you are entitled
to credit for the contingent deferred sales charge previously paid. Exercise of
the repurchase privilege will generally not affect federal income tax treatment
of any gain realized upon redemption. If the redemption resulted in a loss, some
or all of the loss, depending on the amount reinvested, will not be allowed for
federal income tax purposes.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B or Class C shares made within one year of purchase
will be subject to a contingent deferred sales charge or CDSC of 1%. The CDSC
will be deduced from the redemption proceeds and reduce the amount paid to you.
A CDSC will be applied on the lesser of the original purchase price or the
current value of the shares being redeemed, as described below. Increases in the
value of your shares purchased through reinvestment of dividends or
distributions are not subject to a CDSC. The amount of any contingent deferred
sales charge in connection with redemptions of Class B shares is currently being
paid to the Fund. The amount of any CDSC paid on redemptions of Class C shares,
and in the event the Distributor incurs additional costs reimbursable to it
under the Class B Plan, the amount of CDSC paid on redemptions of Class B
shares, will be paid to and retained by the Distributor. See "How the Fund is
Managed-- Distributor."
Solely for purposes of determining the number of years from the time of any
payment for the purchase of shares all payments during a month will be
aggregated and deemed to have been made on the last day of the month. The CDSC
will be calculated from the first day of the month after the initial purchase,
excluding the time shares were held in a money market fund. See "How to Exchange
Your Shares."
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.
In the case of Class B shares, it will be assumed that the redemption is made
first of shares acquired pursuant to reinvestment of dividends and distributions
and then of shares held beyond the applicable one-year CDSC period. In the case
of Class C shares, it will be assumed that the redemption is made first of
amounts representing shares acquired pursuant to the reinvestment of dividends
and distributions; then of amounts representing the increase in net asset value
above the total amount of payments for the purchase of shares made during the
preceding one-year period; and then of amounts representing the cost of shares
held beyond the applicable one-year CDSC period.
33
<PAGE> 36
CLASS B. For example, assume you purchased 1,000 Class B shares at $10 per
share for a cost of $10,000. Subsequently, you acquired 50 additional shares
through dividend reinvestment. Six months after the purchase, you decided to
redeem 200 shares. Assuming at the time of redemption the net asset value had
appreciated to $10.20 per share, the proceeds of the redemption would be $2,040.
Fifty shares would not be subject to charge because of dividend reinvestment.
With respect to the remaining 150 shares, the charge would be applied to the
original cost of $10 per share and not to the increase in net asset value per
share of $.20. Therefore, $1,500 of the $2,040 redemption proceeds would be
charged at a rate of 1%.
CLASS C. For example, assume you purchased 100 Class C shares at $10 per
share for a cost of $1,000. Subsequently, you acquired 5 additional Class C
shares through dividend reinvestment. Six months after purchase, you decided to
redeem $500 of your investment. Assuming at the time of redemption the NAV had
appreciated to $12 per share, the value of your Class C 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 1%.
For federal income tax purposes, the amount of the contingent deferred
sales charge will reduce the gain or increase the loss, as the case may be, on
the amount recognized on the redemption of shares.
HOW TO EXCHANGE YOUR SHARES
Class A and Class B shareholders of the Fund may exchange their shares for
Class A shares of certain other Prudential Mutual Funds, or for shares of one or
more specified money market funds, on the basis of the relative net asset value
and subject to the minimum investment requirements of that fund. See
"Shareholder Investment Account--Exchange Privilege" in the Statement of
Additional Information. See "Exchange Privilege" in the Statement of Additional
Information. Once Class B shares are exchanged out of the Fund pursuant to the
Exchange Privilege, they may not be re-exchanged for shares of the Fund.
Class C shares of the Fund may also be exchanged for Class C shares of
another Fund on the basis of the relative NAV. No sales charge will be imposed
at the time of any exchange of shares of the Fund. An exchange will be treated
as a redemption and purchase for tax purposes. Any applicable CDSC payable upon
the redemption of shares exchanged will be calculated from the first day of the
month after the initial purchase. See "Shareholder Investment Account--Exchange
Privilege" in the Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE THE TELEPHONE
EXCHANGE PRIVILEGE ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE
TRANSFER AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call
the Fund at (800) 225-1852 to execute a telephone exchange of shares, weekdays,
except holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time.
For your protection and to prevent fraudulent exchanges, your telephone call
will be recorded and you will be asked to provide your personal identification
number. A written confirmation of the exchange transaction will be sent to you.
NEITHER THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST
WHICH RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE
UNDER THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative net asset value of the two funds next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
34
<PAGE> 37
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES YOU MAY EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATE SIGNED IN THE NAME(S) SHOWN ON
THE FACE OF THE CERTIFICATE MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE
OF SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGE. Commencing in or about February 1995, a special
exchange privilege is available for all shareholders who quality to purchase
Class A shares at NAV. See "Alternative Purchase Plan--Class A Shares--Reduction
and Waiver of Initial Sales Charges" above. Under this exchange privilege,
amounts representing any 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 on a quarterly basis, unless the shareholder elects otherwise. It is
currently anticipated that this exchange will occur quarterly in February, May,
August and November. Eligibility for this exchange privilege will be calculated
on the business day prior to the date of the exchange. Amounts representing
Class C shares which are not subject to a CDSC include the following: (1)
amounts representing Class C shares acquired pursuant to the automatic
reinvestment of dividends and distributions, (2) amounts representing the
increase in the net asset value above the total amount of payments for the
purchase of Class C shares and (3) amounts representing Class C shares held
beyond the applicable CDSC period.
The Exchange Privilege may be modified or terminated at any time on sixty
days' notice to shareholders.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in the Fund, you
can take advantage of the following additional services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Fund at NAV without a sales
charge. You may direct the Transfer Agent in writing not less that 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make
regular purchases of the Fund's Class B and Class C shares in amounts as little
as $50 via an automatic debit to a bank account or Prudential Securities account
(including a Command Account). ASAP is not available for purchases of Class A
shares. For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec registered representative or the
Transfer Agent directly.
35
<PAGE> 38
- TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan a self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the Distributor. These plans are for use by both
self-employed individuals and corporate employers. These plans permit either
self-direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from Prudential Securities or the
Transfer Agent. If you are considering adopting such a plan, you should consult
with your own legal or tax adviser with respect to the establishment and
maintenance of such a plan.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available
for shareholders having Class A and Class C shares of the Fund with a minimum
value of $10,000. Such withdrawal plan provides for monthly or quarterly checks.
Withdrawals of Class C shares may be subject to a CDSC. See "Shareholder
Investment Account -- Systematic Withdrawal Plan" in the Statement of Additional
Information.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1825 or by writing to the Fund at One Seaport
Plaza, New York, New York 10292. In addition, monthly unaudited financial data
are available upon request from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at One
Seaport Plaza, New York, New York 10292, or by telephone, at (800) 225-1852
(toll-free) or, from outside the U.S.A. at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
36
<PAGE> 39
- --------------------------------------------------------------------------------
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Fund at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
<TABLE>
<S> <C>
TAXABLE BOND FUNDS
EQUITY FUNDS
Prudential Adjustable Rate Securities Fund, Inc.
Prudential GNMA Fund, Inc. Prudential Allocation
Prudential Government Income Fund Conservatively Managed Portfolio
Prudential Government Securities Trust Strategy Portfolio
Intermediate Term Series Prudential Equity Fund, Inc.
Prudential High Yield Fund, Inc. Prudential Equity Income Fund
Prudential Structured Maturity Fund, Inc. Prudential Growth Opportunity Fund, Inc.
Income Portfolio Prudential IncomeVertible(R) Fund, Inc.
Prudential U.S. Government Fund Prudential Multi-Sector Fund, Inc.
The BlackRock Government Income Trust Prudential Strategist Fund, Inc.
Prudential Utility Fund, Inc.
TAX-EXEMPT BOND FUNDS Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
Prudential California Municipal Fund
California Series MONEY MARKET FUNDS
California Income Series
Prudential Municipal Bond Fund - Taxable Money Market Funds
High Yield Series Prudential Government Securities Trust
Insured Series Money Market Series
Modified Term Series U.S. Treasury Money Market Series
Prudential Municipal Series Fund Prudential Special Money Market Fund
Arizona Series Money Market Series
Florida Series Prudential MoneyMart Assets
Georgia Series
Maryland Series - Tax-Free Money Market Funds
Massachusetts Series Prudential Tax-Free Money Fund
Michigan Series Prudential California Municipal Fund
Minnesota Series California Money Market Series
New Jersey Series Prudential Municipal Series Fund
New York Series Connecticut Money Market Series
North Carolina Series Massachusetts Money Market Series
Ohio Series New Jersey Money Market Series
Pennsylvania Series New York Money Market Series
Prudential National Municipals Fund, Inc.
- Command Funds
GLOBAL FUNDS Command Money Fund
Command Government Fund
Prudential Europe Growth Fund, Inc. Command Tax-Free Fund
Prudential Global Fund Inc.
Prudential Global Genesis Fund, Inc. - Institutional Money Market Funds
Prudential Global Natural Resources Fund, Inc. Prudential Institutional Liquidity Portfolio, Inc.
Prudential Intermediate Global Income Fund, Inc. Institutional Money Market Series
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
</TABLE>
A-1
<PAGE> 40
No dealer, sales representative or
any other person has been authorized
to give any information or to make
any representations, other than those
contained in this Prospectus, in
connection with the offer contained
herein, and, if given or made, such
information or representations must
not be relied upon as having been authorized
by the Fund or the Distributor. This
Prospectus does not constitute an
offer by the Fund or by the
Distributor to sell or a solicitation
of an offer to buy any of the
securities offered hereby in any
jurisdiction to any person to whom it
is unlawful to make such
offer in such jurisdiction.
- ------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
- ------------------------------------------------
FUND HIGHLIGHTS....................... 2
Risk Factors and Special
Characteristics................... 2
FUND EXPENSES......................... 4
FINANCIAL HIGHLIGHTS.................. 5
HOW THE FUND INVESTS.................. 6
Investment Objective and Policies... 6
Other Investments and Investment
Techniques........................ 13
Investment Restrictions............. 19
HOW THE FUND IS MANAGED............... 19
Manager............................. 20
Fee Waivers and Subsidy............. 20
Distributor......................... 21
Portfolio Transactions.............. 23
Custodian and Transfer and Dividend
Disbursing Agent.................. 23
HOW THE FUND VALUES ITS SHARES........ 24
HOW THE FUND CALCULATES PERFORMANCE... 24
TAXES, DIVIDENDS AND DISTRIBUTIONS.... 25
Taxation of the Fund................ 25
Taxation of Shareholders............ 25
Withholding Taxes................... 25
Dividends and Distributions......... 25
GENERAL INFORMATION................... 26
Description of Common Stock......... 26
Additional Information.............. 27
SHAREHOLDERS' GUIDE................... 27
How to Buy Shares of the Fund....... 27
Alternative Purchase Plan........... 28
How to Sell Your Shares............. 31
How to Exchange Your Shares......... 34
Shareholder Services................ 35
THE PRUDENTIAL MUTUAL FUND FAMILY... A-1
</TABLE>
- ----------------------------------------------
MF 156A 4445901
CUSIP NOS.: Class A: 74429J106
Class B: 74429J205
Class C:
---------
Prospectus
November, 1, 1994
Prudential
Adujstable
Rate
Securities
Fund, Inc
- -----------
Prudential Mutual Funds
Building Your Future
On Our Strength (SM)
[LOGO]
<PAGE> 41
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC.
Statement of Additional Information
dated November 1, 1994
Prudential Adjustable Rate Securities Fund, Inc. (the Fund) is an open-end,
diversified management investment company whose investment objective is high
current income consistent with low volatility of principal. The Fund seeks to
achieve its objective by investing, under normal circumstances, at least 65% of
its assets in adjustable rate securities, including mortgage-backed securities
issued or guaranteed by private institutions or the U.S. Government, its
agencies or instrumentalities, asset-backed securities and corporate and other
debt obligations, all of which have interest rates which reset at periodic
intervals. The Fund may invest the remainder of its assets in fixed rate
securities. All securities purchased by the Fund will be rated at least ``A''
by Moody's Investors Service (Moody's) or Standard & Poor's Ratings Group
(Standard & Poor's) or, if unrated, determined to be of comparable quality by
the investment adviser. The Fund expects that, under normal market conditions,
at least 75% of the securities purchased by the Fund will be rated at least
``AA'' by Standard & Poor's or ``Aa'' by Moody's or, if unrated, determined
to be of comparable quality by the investment adviser. There can be no assurance
the Fund's investment objective will be achieved.
The Fund's address is One Seaport Plaza, New York, New York 10292, and its
telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus dated November 1, 1994 a copy of
which may be obtained from the Fund at One Seaport Plaza, New York, New York
10292 upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
----- ---------------
<S> <C> <C>
Investment Objective and Policies.......................................... B-2 6
Additional Investment Information.......................................... B-2 6
Investment Restrictions.................................................... B-11 19
Directors and Officers..................................................... B-13 20
Manager.................................................................... B-15 20
Distributor................................................................ B-16 21
Portfolio Transactions and Brokerage....................................... B-18 23
Purchase and Redemption of Fund Shares..................................... B-19 27
Shareholder Investment Account............................................. B-20 33
Net Asset Value............................................................ B-23 23
Taxes, Dividends and Distributions......................................... B-24 25
Performance Information.................................................... B-25 24
Custodian, Transfer and Dividend Disbursing Agent and Independent
Accountants.............................................................. B-27 23
Financial Statements....................................................... B-28 --
Report of Independent Accountants.......................................... B-36 --
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 42
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is high current income consistent with
low volatility of principal. There can be no assurance that the Fund's
investment objective will be achieved. See ``How the Fund Invests--Investment
Objective and Policies'' in the Prospectus.
ADDITIONAL INVESTMENT INFORMATION
U.S. GOVERNMENT SECURITIES
MORTGAGE-RELATED SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT
AGENCIES AND INSTRUMENTALITIES. The Fund may purchase mortgage-related
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, including GNMA, FNMA and FHLMC certificates. See
``Mortgage-Backed Securities'' below. Mortgages backing the securities which
may be 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 amortized mortgage security with installments of principal
and interest, the last installment of which is predominately principal.
All of these mortgages can be used to create pass-through securities.
A pass-through security is formed when mortgages are pooled together and
undivided interests in the pool or pools are sold. The cash flow from the
mortgages is passed through to the holders of the securities in the form of
periodic payments of interest, principal and prepayments (net of a service fee).
Prepayments occur when the holder of an undivided mortgage prepays the remaining
principal before the mortgage's scheduled maturity date. As a result of the
pass-through of prepayments of principal on the underlying securities,
mortgage-backed securities are often subject to more rapid prepayment of
principal than their stated maturity would indicate. The remaining expected
average life of a pool of mortgage loans underlying a mortgage-backed security
is a prediction of when the mortgage loans will be repaid and is based upon a
variety of factors, such as the demographic and geographic characteristics of
the borrowers and the mortgaged properties, the length of time that each of
the mortgage loans has been outstanding, the interest rates payable on the
mortgage loans and the current interest rate environment.
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 are 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.
SPECIAL CONSIDERATIONS. Fixed income U.S. Government securities are
considered among the most creditworthy of fixed income investments. The yields
available from U.S. Government securities are generally lower than the yields
available from corporate debt securities. The values of U.S. Government
securities will change as interest rates fluctuate. To the extent U.S.
Government securities are not adjustable rate securities, these changes in
value in response to changes in interest rates generally will be more
pronounced. During periods of falling interest rates, the values of
outstanding long-term fixed rate U.S. Government securities generally rise.
Conversely, during periods of rising interest rates, the values of such
securities generally decline. The magnitude of these fluctuations will
generally be greater for securities with longer maturities. Although changes
in the value of U.S. Government securities will not affect investment income
from those securities, they may affect the net asset value of the Fund.
At a time when the Fund has written call options on a portion of its U.S.
Government securities, its ability to profit from declining interest rates will
be limited. Any appreciation in the value of the securities held in the
portfolio above the strike price would likely be partially or wholly offset by
unrealized losses on call options written by the Fund. The termination of
option positions under these conditions would generally result in the
realization of capital losses, which would reduce the Fund's capital gains
distribution. Accordingly, the Fund would generally seek to realize capital
gains to offset realized losses by selling portfolio securities. In such
circumstances, however, it is likely that the proceeds of such sales would
be reinvested in lower yielding securities. See ``Additional Risks--Options
Transactions and Related Risks.''
MORTGAGE-BACKED SECURITIES
As discussed in the Prospectus, the mortgage-backed securities purchased by
the Fund evidence an interest in a specific pool of mortgages. Such securities
may be issued by GNMA, FNMA and FHLMC.
GNMA CERTIFICATES. 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 the principal of and interest on certificates
that are based on and backed by a pool of mortgage loans issued by the Federal
Housing Administration under the Housing Act, or Title V of the Housing Act of
1949 (FHA Loans), or guaranteed by the Veterans' Administration under the
Servicemen's Readjustment Act of 1944, as amended (VA Loans), or by pools of
other eligible mortgage loans.
B-2
<PAGE> 43
The Housing Act provides that the full faith and credit of the U.S. Government
is pledged to the payment of all amounts that may be required to be paid under
the guarantee. In order to meet its obligations under such guarantee, GNMA is
authorized to borrow from the U.S. Treasury with no limitations as to amount.
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 multifamily residential
properties under construction; (vi) mortgage loans on completed multifamily
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.
FNMA CERTIFICATES. FNMA is a federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act. FNMA provides funds to the mortgage market primarily
by purchasing home mortgage loans from local lenders, thereby replenishing
their funds for additional lending. FNMA acquires funds to purchase home
mortgage loans from many capital market investors that may not ordinarily
invest in mortgage loans directly.
Each FNMA Certificate will entitle the registered holder thereof to receive
amounts, representing such holder's pro rata interest in scheduled principal
payments and interest payments (at such FNMA Certificate's pass-through rate,
which is net of any servicing and guarantee fees on the underlying mortgage
loans), and any principal prepayments on the mortgage loans in the pool
represented by such FNMA Certificate and such holder's proportionate interest
in the full principal amount of any foreclosed or otherwise finally liquidated
mortgage loan. The full and timely payment of principal and interest on each
FNMA Certificate will be guaranteed by FNMA, which guarantee is not backed by
the full faith and credit of the U.S. Government.
Each FNMA Certificate will represent a pro rata interest in one or more
pools of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (i) fixed rate level payment mortgage loans; (ii) fixed rate
growing equity mortgage loans; (iii) fixed rate graduated payment mortgage
loans; (iv) variable rate California mortgage loans; (v) other adjustable rate
mortgage loans; and (vi) fixed rate mortgage loans secured by multifamily
projects.
FHLMC CERTIFICATES. FHLMC is a corporate instrumentality of the United
States created pursuant to the Emergency Home Finance Act of 1970, as amended
(the FHLMC Act). The principal activity of FHLMC consists of the purchase of
first lien, conventional, residential mortgage loans and participation
interests in such mortgage loans and the resale of the mortgage loans so
purchased in the form of mortgage securities, primarily FHLMC Certificates.
FHLMC guarantees to each registered holder of the FHLMC Certificate the
timely payment of interest at the rate provided for by such FHLMC Certificate,
whether or not received. FHLMC also guarantees to each registered holder of a
FHLMC Certificate ultimate collection of all principal on the related mortgage
loans, without any offset or deduction, but does not, generally, guarantee the
timely payment of scheduled principal. FHLMC may remit the amount due on
account of its guarantee of collection of principal at any time after default
on an underlying mortgage loan, but not later than 30 days following
(i) foreclosure sale, (ii) payment of a claim by any mortgage insurer or
(iii) the expiration of any right of redemption, whichever occurs later,
but in any event no later than one year after demand has been made upon the
mortgagor for accelerated payment of principal. The obligations of FHLMC
under its guarantee are obligations solely of FHLMC and are not backed by
the full faith and credit of the U.S. Government.
FHLMC Certificates represent a pro rata interest in a group of mortgage
loans (a FHLMC Certificate group) purchased by FHLMC. The mortgage loans
underlying the FHLMC Certificates will consist of fixed rate or adjustable rate
mortgage loans with original terms to maturity of between ten and thirty years,
substantially all of which are secured by first liens on one-to four-family
residential properties or multifamily projects. Each mortgage loan must meet
the applicable standards set forth in the FHLMC Act. An FHLMC Certificate
group may include whole loans, participation interests in whole loans and
undivided interests in whole loans and participations comprising another FHLMC
Certificate group.
The market value of mortgage securities, like other securities, will
generally vary inversely with changes in market interest rates, declining when
interest rates rise and rising when interest rates decline. However, mortgage
securities, while having comparable risk of decline during periods of rising
rates, usually have less potential for capital appreciation than other
investments of comparable maturities due to the likelihood of increased
prepayments of mortgages as interest rates decline. In addition, to the extent
such mortgage securities are purchased at a premium, mortgage foreclosures and
unscheduled principal prepayments generally will result in some loss of the
holders' principal to the extent of the premium paid. On the other hand, if
such mortgage securities are purchased at a discount, an unscheduled prepayment
of principal will increase current and total returns and will accelerate the
recognition of income which when distributed to shareholders will be taxable as
ordinary income.
B-3
<PAGE> 44
ADJUSTABLE RATE MORTGAGE SECURITIES. The Fund will invest in adjustable
rate mortgage securities (ARMs), which are pass-through mortgage securities
collateralized by mortgages with adjustable rather than fixed rates. Generally,
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 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 can be charged to the mortgagor 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.
There are two main categories of indices which serve as benchmarks for
periodic adjustments to coupon rates on ARMs; those based on U.S. Treasury
securities and those derived from a calculated measure such as a cost of funds
index or a moving average of mortgage rates. Commonly utilized indices include
the one-year and five-year constant maturity Treasury Note rates, the
three-month Treasury Bill rate, the 180-day Treasury Bill rate, rates on
longer-term Treasury securities, the 11th District Federal Home Loan Bank Cost
of Funds, the National Median Cost of Funds, the one-month or three-month
London Interbank Offered Rate (LIBOR), the prime rate of a specific bank, or
commercial paper rates. Some indices, such as the one-year constant maturity
Treasury Note rate, closely mirror changes in market interest rate levels.
Others, such as the 11th District Home Loan Bank Cost of Funds index
(often related to ARMs issued by FNMA), tend to lag changes in market
rate levels and tend to be somewhat less volatile.
COLLATERALIZED MORTGAGE OBLIGATIONS. Certain issuers of mortgage-backed
obligations (CMOs), including certain CMOs that have elected to be treated as
Real Estate Mortgage Investment Conduits (REMICs), are not considered
investment companies pursuant to a rule recently adopted by the Securities
and Exchange Commission (SEC), and the Fund may invest in the securities
of such issuers without the limitations imposed by the Investment Company
Act of 1940 (the Investment Company Act) on investments by the Fund in other
investment companies. In addition, in reliance on an earlier SEC
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 SEC's interpretation,
these CMOs must be unmanaged, fixed asset issuers, that (a) invest primarily
in mortgage-backed securities, (b) do not issue redeemable securities,
(c) operate under general exemptive orders exempting them from all provisions
of the Investment Company Act and (d) are not registered or regulated under
the Investment Company Act as investment companies. To the extent that the
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.
OTHER INVESTMENTS. Obligations issued or guaranteed as to principal and
interest by the United States Government may be acquired by the Fund in the
form of custodial receipts that evidence ownership of future interest payments,
principal payments or both on certain United States Treasury notes or bonds.
Such notes and bonds are held in custody by a bank on behalf of the owners.
These custodial receipts are known by various names, including ``Treasury
Receipts,'' ``Treasury Investment Growth Receipts'' (TIGRs) and ``Certificates
of Accrual on Treasury Securities'' (CATS). The Fund will not invest more than
5% of its assets in such custodial receipts.
ADDITIONAL RISKS
OPTIONS TRANSACTIONS AND RELATED RISKS
The Fund may purchase put and call options and sell covered put and call
options which are traded on national securities exchanges and may also engage
in over-the-counter options transactions with recognized United States
securities dealers (OTC Options).
OPTIONS ON SECURITIES. The purchaser of a call option has the right, for a
specified period of time, to purchase the securities subject to the option at a
specified price (the ``exercise price'' or ``strike price''). By writing a call
option, the Fund becomes obligated during the term of the option, upon exercise
of the option, to deliver the underlying securities or a specified amount of
cash to the purchaser against receipt of the exercise price. When the Fund
writes a call option, the Fund loses the potential for gain on the underlying
securities in excess of the exercise price of the option during the period that
the option is open.
The purchaser of a put option has the right, for a specified period of
time, to sell the securities subject to the option to the writer of the put at
the specified exercise price. By writing a put option, the Fund becomes
obligated during the term of the option, upon exercise of the option, to
purchase the securities underlying the option at the exercise price. The Fund
might, therefore, be obligated to purchase the underlying securities for more
than their current market price.
B-4
<PAGE> 45
The writer of an option retains the amount of the premium, although this
amount may be offset or exceeded, in the case of a covered call option, by a
decline and, in the case of a covered put option, by an increase in the market
value of the underlying security during the option period.
The Fund may wish to protect certain portfolio securities against a decline
in market value at a time when put options on those particular securities are
not available for purchase. The Fund may therefore purchase a put option on
other carefully selected securities, the values of which the investment adviser
expects will have a high degree of positive correlation to the values of such
portfolio securities. If the investment adviser's judgment is correct, changes
in the value of the put options should generally offset changes in the value of
the portfolio securities being hedged. If the investment adviser's judgment is
not correct, the value of the securities underlying the put option may decrease
less than the value of the Fund's investments and therefore the put option may
not provide complete protection against a decline in the value of the Fund's
investments below the level sought to be protected by the put option.
The Fund may similarly wish to hedge against appreciation in the value of
debt securities that it intends to acquire at a time when call options on such
securities are not available. The Fund may, therefore, purchase call options on
other carefully selected debt securities the values of which the investment
adviser expects will have a high degree of positive correlation to the values
of the debt securities that the Fund intends to acquire. In such circumstances
the Fund will be subject to risks analogous to those summarized above in the
event that the correlation between the value of call options so purchased and
the value of the securities intended to be acquired by the Fund is not as
close as anticipated and the value of the securities underlying the call
options increases less than the value of the securities to be acquired by the
Fund.
The Fund may write options on securities in connection with buy-and-write
transactions; that is, the Fund may purchase a security and concurrently write
a call option against that security. If the call option is exercised, the
Fund's maximum gain will be the premium it received for writing the option,
adjusted upwards or downwards by the difference between the Fund's purchase
price of the security and the exercise price of the option. If the option is
not exercised and the price of the underlying security declines, the amount
of the decline will be offset in part, or entirely, by the premium received.
The exercise price of a call option may be below (``in-the-money''), equal
to (``at-the-money'') or above (``out-of-the-money'') the current value of the
underlying security at the time the option is written. Buy-and-write
transactions using in-the-money call options may be used when it is expected
that the price of the underlying security will remain flat or decline
moderately during the option period. Buy-and-write transactions using
at-the-money call options may be used when it is expected that the price of
the underlying security will remain fixed or advance moderately during the
option period. A buy-and-write transaction using an out-of-the-money call
option may be used when it is expected that the premium received from writing
the call option plus the appreciation in the market price of the underlying
security up to the exercise price will be greater than the appreciation in
the price of the underlying security alone. If the call option is exercised
in such a transaction, the Fund's maximum gain will be the premium received
by it for writing the option, adjusted upwards or downwards by the difference
between the Fund's purchase price of the security and the exercise price of the
option. If the option is not exercised and the price of the underlying security
declines, the amount of the decline will be offset in part, or entirely,
by the premium received.
Prior to being notified of exercise of the option, the writer of an
exchange-traded option that wishes to terminate its obligation may effect a
``closing purchase transaction'' by buying an option of the same series as the
option previously written. (Options of the same series are options with respect
to the same underlying security, having the same expiration date and the same
strike price.) The effect of the purchase is that the writer's position will be
cancelled by the exchange's affiliated clearing organization. Likewise, an
investor who is the holder of an exchange-traded option may liquidate a
position by effecting a ``closing sale transaction'' by selling an option of
the same series as the option previously purchase. There is no guarantee that
either a closing purchase or a closing sale transaction can be effected.
Exchange-traded options are issued by a clearing organization affiliated
with the exchange on which the option is listed which, in effect, gives its
guarantee to every exchange-traded option transaction. In contrast, OTC options
are contracts between the Fund and its contra-party with no clearing
organization guarantee. Thus, when the Fund purchases an OTC option, it relies
on the dealer from which it has purchased the OTC option to make or take
delivery of the securities underlying the option. Failure by the dealer to do
so would result in the loss of the premium paid by the Fund as well as the
loss of the expected benefit of the transaction. The Board of Directors of
the Fund will approve a list of dealers with which the Fund may engage in
OTC options.
When the Fund writes an OTC option, it generally will be able to close out
the OTC options prior to its expiration only by entering into a closing
purchase transaction with the dealer to which the Fund originally wrote the
OTC option. While the Fund will enter into OTC options only with dealers
which agree to, and which are expected to be capable of, entering into closing
transactions with the Fund, there can be no assurance that the Fund will be
able to liquidate an OTC option at a favorable price at any time prior to
expiration. Until the Fund is able to effect a closing purchase transaction
in a covered OTC call option the Fund has written, it will not be able to
liquidate securities used as cover until the option expires or is exercised
or different cover is substituted. In the event of insolvency of the
contra-party, the Fund may be unable to liquidate an OTC option.
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OTC options purchased by the Fund will be treated as illiquid securities
subject to any applicable limitation on such securities. Similarly, the assets
used to ``cover'' OTC options written by the Fund will be treated as illiquid
unless the OTC options are sold to qualified dealers who agree that the Fund
may repurchase any OTC options it writes for a maximum price to be calculated
by a formula set forth in the option agreement. The ``cover'' for an OTC option
written subject to this procedure would be considered illiquid only to the
extent that the maximum repurchase price under the formula exceeds the
intrinsic value of the option.
The Fund may write only ``covered'' options. This means that so long as the
Fund is obligated as the writer of a call option, it will own the underlying
securities subject to the option or an option to purchase the same underlying
securities, having an exercise price equal to or less than the exercise price
of the ``covered'' option, or will establish and maintain with its Custodian
for the term of the option a segregated account consisting of cash,
U.S. Government securities or other liquid high-grade debt obligations
having a value equal to or greater than the exercise price of the option.
In the case of a straddle written by the Fund, the amount maintained in the
segregated account will equal the amount, if any, by which the puts is
``in-the-money.''
OPTIONS ON SECURITIES INDICES. The Fund also may purchase and write call
and put options on securities indices in an attempt to hedge against market
conditions affecting the value of securities that the Fund owns or intends to
purchase, and not for speculation. Through the writing or purchase of index
options, the Fund can achieve many of the same objectives as through the use of
options on individual securities. Options on securities indices are similar to
options on a security except that, rather than the right to take or make
delivery of a security at a specified price, an option on a securities index
gives the holder the right to receive, upon exercise of the option, an amount
of cash if the closing level of the securities index upon which the option is
based is greater than, in the case of a call, or less than, in the case of a
put, the exercise price of the option. This amount of cash is equal to such
difference between the closing price of the index and the exercise price of
the option.The writer of the option is obligated, in return for the premium
received, to make delivery of this amount. Unlike security options, all
settlements are in cash and gain or loss depends upon price movements in
the market generally (or in a particular industry or segment of the market),
rather than upon price movements in individual securities. Price movements
in securities that the Fund owns or intends to purchase will probably not
correlate perfectly with movements in the level of an index and, therefore,
the Fund bears the risk that a loss on an index option would not be completely
offset by movements in the price of such securities.
When the Fund writes an option on a securities index, it will be required
to deposit with its custodian, and mark-to-market, eligible securities equal in
value to 100% of the exercise price in the case of a put, or the contract value
in the case of a call. In addition, where the Fund writes a call option on a
securities index at a time when the contract value exceeds the exercise price,
the Fund will segregate and mark-to-market, until the option expires or is
closed out, cash or cash equivalents equal in value to such excess.
Options on a securities index involve risks similar to those risks relating
to transactions in financial futures contracts described below. Also, an option
purchased by the Fund may expire worthless, in which case the Fund would lose
the premium paid therefor.
OPTIONS ON GNMA CERTIFICATES. Options on GNMA Certificates are not
currently traded on any Exchange. However, the Fund may purchase and write such
options should they commence trading on any Exchange and may purchase or write
OTC Options on GNMA certificates.
Since the remaining principal balance of GNMA Certificates declines each
month as a result of mortgage payments, the Fund, as a writer of a covered GNMA
call holding GNMA Certificates as ``cover'' to satisfy its delivery obligation
in the event of assignment of an exercise notice, may find that its GNMA
Certificates no longer have a sufficient remaining principal balance for this
purpose. Should this occur, the Fund will enter into a closing purchase
transaction or will purchase additional GNMA Certificates from the same pool
(if obtainable) or replacement GNMA Certificates in the cash market in order to
remain covered.
A GNMA Certificate held by the Fund to cover an option position in any but
the nearest expiration month may cease to represent cover for the option in the
event of a decline in the GNMA coupon rate at which new pools are originated
under the FHA/VA loan ceiling in effect at any given time. Should this occur,
the Fund will no longer be covered, and the Fund will either enter into a
closing purchase transaction or replace the GNMA Certificate with a GNMA
Certificate which represents cover. When the Fund closes its position or
replaces the GNMA Certificate, it may realize an unanticipated loss and incur
transaction costs.
RISKS OF OPTIONS TRANSACTIONS. An exchange-traded option position may be
closed out only on an Exchange which provides a secondary market for an option
of the same series. Although the Fund will generally purchase or write 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 at any particular time, and for some exchange-traded
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 exchange-traded
options in order to realize any profit and may incur transaction costs in
connection therewith. If the Fund as a covered call option writer is unable
to effect a closing purchase transaction in a secondary market, it will not
be able to sell the underlying security until the option expires or it delivers
the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an Exchange include
the following: (a) insufficient trading interest in certain options; (b)
restrictions on transactions imposed by an Exchange; (c) trading halts,
suspensions or other restrictions imposed with
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respect to particular classes or series of options or underlying securities;
(d) interruption of the normal operations on an Exchange; (e) inadequacy of the
facilities of an Exchange or the OCC to handle current trading volume; or (f) a
decision by one or more Exchanges to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that Exchange (or in that class or series of options) would cease to exist,
although outstanding options on that Exchange that had been issued by the OCC
as a result of trades on that Exchange would generally continue to be
exercisable in accordance with their terms.
In the event of the bankruptcy of a broker through which the Fund engages
in options transactions, 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 part of its margin deposits with the broker. Similarly, in the
event of the bankruptcy of the writer of an OTC option purchased by the Fund,
the Fund could experience a loss of all or part of the value of the option.
Transactions are entered into by the Fund only with brokers or financial
institutions deemed creditworthy by the investment adviser.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the option markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be
reflected in the option markets.
Futures Contracts. As a purchaser of a 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 may purchase
futures contracts on debt securities, aggregates of debt securities, financial
indices and U.S. Government securities including futures contracts or options
linked to the London Interbank Offered Rate (LIBOR). Eurodollar futures
contracts are currently traded on the Chicago Mercantile Exchange. They enable
purchasers to obtain a fixed rate for the lending of funds and sellers to
obtain a fixed rate for borrowings. The Fund would use Eurodollar futures
contracts and options thereon to hedge against changes in LIBOR, to which
many interest rate swaps are linked. See the discussion of ``Risks of Options
Transactions.''
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 the Fund's portfolio securities
may fall, 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 securities the Fund intends to purchase.
Subsequently, appropriate 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 with its Custodian, in a segregated account in the name of the broker
performing the transaction, an ``initial margin'' of cash or U.S. Government
securities equal to approximately 2-3% of the contract amount. Initial margin
requirements are established by the Exchanges on which futures contracts trade
and may, from time to time, change. In addition, brokers may establish margin
deposit requirements in excess of those required by the Exchanges.
Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing
of funds by a brokers' client but is, rather, a good faith deposit on a 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 at its Custodian for that purpose, of cash or U.S. Government
securities, called ``variation margin'', in the name of the broker, which are
reflective of price fluctuations in the futures contract.
OPTIONS ON FUTURES CONTRACTS. The Fund may purchase and sell 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 an offsetting futures position by the writer and holder of
the option will be accompanied by delivery of the accumulated cash balance
in the writer's futures margin account which represents the amount by
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<PAGE> 48
which the market price of the futures contract at exercise exceeds, in the case
of a call, or is less than, in the case of a put, the exercise price of the
option on the futures contract.
The Fund may only write ``covered'' put and call options on futures
contracts. The Fund will be considered ``covered'' with respect to a call
option it writes on a futures contract if the Fund owns the assets which are
deliverable under the futures contract or an option to purchase that futures
contract having a strike price equal to or less than the strike price of the
``covered'' option and having an expiration date not earlier than the
expiration date of the ``covered'' option, or if it segregates and maintains
with its Custodian for the term of the option cash, U.S. Government securities
or other liquid high-grade debt obligations equal to the fluctuating value of
the optioned future. The Fund will be considered ``covered'' with respect to a
put option it writes on a futures contract if it owns an option to sell that
futures contract having a strike price equal to or greater than the strike
price of the ``covered'' option, or if it segregates and maintains with its
Custodian for the term of the option cash, U.S. Government securities or
liquid high-grade debt obligations at all times equal in value to the
exercise price of the put (less any initial margin deposited by the Fund
with its Custodian with respect to such option). There is no limitation on
the amount of the Fund's assets which can be placed in the segregated account.
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.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. 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.
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.
In order to assure that the Fund is entering into transactions in futures
contracts for hedging purposes as such term is defined by the Commodities
Futures Trading Commission, either: (1) a substantial majority (i.e.,
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 maintained at its Custodian,
cash, U.S. Government securities or other liquid high-grade debt obligations
equal in value (when added to any initial or variation margin on deposit) to
the market value of the securities underlying the futures contract. Such a
position may also be covered by owning the securities underlying the futures
contract, or by holding a call option permitting the 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, U.S. Government securities or other liquid high-grade debt
obligations equal to the purchase price of the contract (less the amount of
initial or variation margin on deposit) in a segregated account maintained for
the Fund by its Custodian. 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 effectively hedge 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 part 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.
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<PAGE> 49
There are risks inherent in the use of futures contracts and options
transactions for the purpose of hedging the Fund's portfolio securities. One
such risk which may arise in employing futures contracts to protect against the
price volatility of portfolio securities is that the prices of securities
subject to futures contracts (and thereby the futures contract prices) may
correlate imperfectly with the behavior of the cash prices of the Fund's
portfolio securities. Another such risk is that prices 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 which are the subject of the hedge. If participants in the futures
market elect to close out their contracts through offsetting transactions
rather than meet margin deposit requirements, distortions in the normal
relationships between the debt securities and futures market could result.
Price distortions could also result if investors in futures contracts elect
to make or take delivery of underlying securities rather than engage in closing
transactions due to the resultant reduction in the liquidity of the futures
market. In addition, due to the fact that, from the point of view of
speculators, the deposit requirements in the futures markets are less onerous
than margin requirements in the cash market, increased participation by
speculators in the futures 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
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.
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 U.S. Government
securities.
REPURCHASE AGREEMENTS
The Fund will enter into repurchase transactions only with parties meeting
creditworthiness standards approved by the Fund's Board of Directors. The
Fund's investment adviser will monitor the creditworthiness of such parties,
under the general supervision of the Board of Directors. In the event of a
default or bankruptcy by a seller, the 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 Mutual Fund Management, Inc. (PMF or the
Manager) pursuant to an order of the SEC. On a daily basis, any uninvested cash
balances of the Fund may be aggregated with such of other 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.
SECURITIES LENDING
Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to brokers, dealers and other financial institutions,
provided that such loans are callable at any time by the Fund, and are at all
times secured by cash or cash equivalents, which are maintained in a segregated
account pursuant to applicable regulations that are equal to at least the
market value, determined daily, of the loaned securities. The advantage of
such loans is that the Fund continues to receive the income on the loaned
securities while at the same time earning interest on the cash amounts
deposited as 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 on two business days' notice. If the borrower fails to deliver the
loaned securities within two days after receipt of notice, 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 even loss of
rights in the collateral should the borrower of the securities fail
financially. However,these loans of portfolio securities will only be made to
firms deemed by the Fund's investment adviser to be creditworthy and when
the income which can be earned from such loans justifies the attendant risks.
Upon termination of the loan, the borrower is required to return the securities
to the Fund. Any gain or loss in the market price during the loan period would
inure to the Fund. The creditworthiness of firms to which the Fund lends its
portfolio securities will be monitored on an ongoing basis by the investment
adviser pursuant to procedures adopted and reviewed, on an ongoing basis, by
the Board of Directors of the Fund.
When voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loaned securities, to
be delivered within one day after notice, to permit the exercise of such rights
if the matters involved would have a
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material effect on the Fund's investment in such loaned securities. The Fund
may pay reasonable finders', administrative and custodial fees in connection
with a loan of its securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
From time to time, in the ordinary course of business, the Fund may
purchase securities on a when-issued or delayed delivery basis--i.e., delivery
and payment can take place a month or more after the date of the transactions.
The securities so purchased are subject to market fluctuation and no interest
accrues to the purchaser during this period. While the Fund will only purchase
securities on a when-issued, delayed delivery or forward commitment basis with
the intention of acquiring the securities, the Fund may sell the securities
before the settlement date, if it is deemed advisable. At the time the Fund
makes the commitment to purchase securities on a when-issued or delayed
delivery basis, the Fund will record the transaction and thereafter reflect
the value, each day, of such security in determining the net asset value of
the Fund. At the time of delivery of the securities, the value may be more
or less than the purchase price. The Fund will also establish a segregated
account with the Fund's custodian bank in which it will continuously
maintain cash, U.S. Government securities or other liquid high-grade debt
securities equal in value to commitments for such when-issued or delayed
delivery securities; subject to this requirement, the Fund may purchase
securities on such basis without limit. 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 net
asset value. The investment adviser does not believe that the Fund's net
asset value or income will be adversely affected by the Fund's purchase
of securities on such basis.
INTEREST RATE SWAP TRANSACTIONS
The Fund may enter into either asset-based interest rate swaps or
liability-based interest rate swaps, depending on whether it is hedging its
assets or its liabilities. The Fund will usually enter into interest rate swaps
on a net basis, i.e., 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. Inasmuch as these hedging transactions are entered into for good
faith hedging purposes, 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. 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 liquid high-grade debt securities having an
aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account 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 net basis, the amount
maintained in the 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. 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.
The use of interest rate swaps is highly speculative activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities 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.
The Fund may only enter into interest rate swaps to hedge its portfolio.
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 rates swaps is limited to the net amount of interest payments that the
Fund is contractually obligated to make. If the other party to an interest rate
swap defaults, the Fund's risk of loss consists of the net amount of interest
payments, if any, that the Fund is contractually entitled to receive. 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 Fund's
Board of Directors. The investment adviser will monitor the creditworthiness of
such parties under the supervision of the Board of Directors.
ILLIQUID SECURITIES
The Fund may not invest more than 15% of its net assets in repurchase
agreements which have a maturity of longer than seven days or in other illiquid
securities, including securities that are illiquid by virtue of the absence of
a readily available market or legal or contractual restrictions on resale.
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 which 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. 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
B-10
<PAGE> 51
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 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 of 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
will expand further as a result of this new regulation and the development of
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the NASD.
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. 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 (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics
of the transfer). Repurchase agreements subject to demand are deemed to
have a maturity equal to the notice period. 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 of comparable quality in the
view of the investment adviser; and (ii) it must not be ``traded flat''
(i.e., 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.
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,'' when used in this Statement of Additional
Information, means the lesser of (i) 67% of the voting shares represented at a
meeting at which more than 50% of the outstanding voting shares are present in
person or represented by proxy or (ii) more than 50% of the outstanding voting
shares.
The 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 inconnection
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 if, when
added together, more than 25% of the value of the Fund's net assets would be
(i) deposited as collateral for the obligation to replace securities borrowed to
effect short sales and (ii) allocated to segregated accounts in connection with
short sales. Short sales ``against-the-box'' are not subject to this limitation.
3. Issue senior securities, borrow money or pledge its assets, except that
the Fund may borrow from banks or through dollar rolls or reverse repurchase
agreements up to 33 1/3% of the value of its total assets (calculated when the
loan is made) for temporary, extraordinary or emergency purposes, to take
advantage of investment opportunities or for the clearance of transactions and
may pledge up to 33 1/3% of the value of its total assets to secure such
borrowings. For purposes of this restriction, the purchase or sale of
securities on a ``when-issued'' or delayed delivery basis and the purchase
and sale of futures contracts are not deemed to be a pledge of assets and
neither such arrangements nor the purchase or sale of futures contracts
nor the purchase and sale of related options, nor obligations of the Fund
to Directors pursuant to deferred compensation arrangements are deemed to
be the issuance of a senior security. To the extent permitted by the
Investment Company Act, the entry into ``covered'' dollar roll transactions
and collateral arrangements with respect thereto, will not be deemed to be
a pledge of assets or the issuance of a senior security.
4. Purchase any security (other than obligations of the U.S. Government,
its agencies and instrumentalities) if as a result: (i) with respect to 75% of
its total assets, more than 5% of the Fund's total assets (determined at the
time of investment) would then be invested
B-11
<PAGE> 52
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. Invest more than 5% of its total assets in securities of any issuer
having a record, together with predecessors, of less than three years of
continuous operations. This restriction shall not apply to mortgage-backed
securities, asset-backed securities or obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities.
6. Buy or sell real estate or interests in real estate, except that the
Fund may purchase and sell mortgaged-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. The Fund has not adopted a fundamental
investment policy with respect to investments in restricted securities. See
``Illiquid Securities.''
8. Make investments for the purpose of exercising control or management.
9. Invest in securities of other investment companies, except by purchases
in the open market involving only customary brokerage commissions and as a
result of which the Fund will not hold more than 3% of the outstanding voting
securities of any one investment company, will not have invested more than 5%
of its total assets in any one investment company and will not have invested
more than 10% of its total assets (determined at the time of investment) in
such securities or one or more investment company's, 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 33 1/3% of the value of the Fund's total
assets.
12. Purchase more than 10% of all outstanding voting securities of any one
issuer.
13. Buy or sell commodities or commodity contracts, except that the Fund
may purchase and sell financial futures contracts and options thereon.
The foregoing restrictions are fundamental policies that may not be changed
without the approval of a majority of the Fund's voting securities.
In order to comply with certain ``blue sky'' restrictions, the Fund will
not, as a matter of operating policy:
1. Invest in oil, gas and mineral leases.
2. Invest in securities of any issuer if, to the knowledge of the Fund,
any officer or director of the Fund or the Fund's Manager or Subadviser owns
more than 1/2 of 1% of the outstanding securities of such issuer, and such
officers and directors who own more than 1/2 of 1% own in the aggregate more
than 5% of the outstanding securities of such issuer.
3. Purchase warrants if as a result the Fund would then have more than 5%
of its assets (determined at the time of investment) invested in warrants.
Warrants will be valued at the lower of cost or market and investment in
warrants which are not listed on the New York Stock Exchange or American Stock
Exchange or a major foreign exchange will be limited to 2% of the Fund's net
assets (determined at the time of investment). For purposes of this limitation,
warrants acquired in units or attached to securities are deemed to be without
value.
4. Except with respect to short sales against the box, make short sales
provided that short sales will only be made in those securities that are listed
on a national securities exchange and the value of the short sales of the
securities of any one issuer shall not exceed the lesser of 2% of the value of
the Fund's net assets, or 2% of the securities of any one issuer.
5. Invest in securities of issuers which are restricted as to disposition,
if more than 15% of its total assets would be invested in such securities (this
restriction shall not apply to mortgage-backed securities, asset-backed
securities or obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities).
6. Invest more than 5% of its total assets in securities of unseasoned
issuers, including their predecessors, which have been in operation for less
than three years, and in equity securities of issuers which are not readily
marketable.
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
B-12
<PAGE> 53
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 borrowings falls below
300%, the Fund will take prompt action to reduce its borrowings, as required by
applicable law.
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE FUND DURING PAST 5 YEARS
- ---------------- ------------- ---------------------
<S> <C> <C>
Edward D. Beach Director President and Director of BMC Fund, Inc., prior
c/o Prudential Mutual thereto, Vice Chairman of Broyhill Furniture
Fund Industries, Inc.; Certified Public Accountant;
Management, Inc. Secretary and Treasurer of Broyhill Family
One Seaport Plaza Foundation Inc.; President, Treasurer and
New York, NY Director of First Financial Fund, Inc. and The
High Yield Plus Fund, Inc. Director of The Global
Government Plus Fund, Inc. and The Global Yield
Fund, Inc.,
Delayne Dedrick Gold Director Marketing and Management Consultant.
c/o Prudential Mutual
Fund
Management, Inc.
One Seaport Plaza
New York, NY
*Harry A. Jacobs, Jr. Director Senior Director (since January 1986) of Prudential
One Seaport Plaza Securities Incorporated (Prudential Securities);
New York, NY formerly interim Chairman and Chief Executive
Officer (June-September 1993) of PMF; formerly
Chairman of the Board of Prudential Securities
(1982-1985) and Chairman of the Board and Chief
Executive Officer of Bache Group Inc.
(1977-1982); Director of the Center for National
Policy, The First Australia Fund, Inc., The First
Australia Prime Income Fund, Inc., The Global
Government Plus Fund, Inc. and The Global Yield
Fund, Inc.; Trustee of The Trudeau Institute.
*Lawrence C. McQuade Director and Vice Chairman of PMF (since 1988); Managing
One Seaport Plaza President Director, Investment Banking, Prudential
New York, NY Securities (1988-1991); Director of Quixote
Corporation (since February 1992) and BUNZL,
P.L.C. (since June 1991); formerly Director of
Crazy Eddie Inc. (1987-1990) and Kaiser Tech.,
Ltd., Kaiser Aluminum and Chemical Corp. (March
1987-November 1988); formerly Executive Vice
President and Director of WR Grace & Company;
President and Director of The High Yield Income
Fund, Inc., The Global Government Plus Fund, Inc.
and The Global Yield Fund, Inc.
Thomas T. Mooney Director President of the Greater Rochester Metro Chamber of
c/o Prudential Mutual Commerce; former Rochester City Manager; Trustee
Fund of Center for Governmental Research, Inc.;
Management, Inc. Director of Blue Cross of Rochester, Monroe
One Seaport Plaza County Water Authority, Rochester Jobs, Inc.,
New York, NY Northeast-Midwest Institute, Executive Service
Corps of Rochester, Monroe County Industrial
Development Corporation, First Financial Fund,
Inc., The Global Government Plus Fund, Inc., The
Global Yield Fund, Inc. and The High Yield Plus
Fund, Inc.
</TABLE>
- ------------
* ``Interested'' Director, as defined in the Investment Company Act of 1940, by
reason of his affiliation with Prudential Securities or PMF.
B-13
<PAGE> 54
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE FUND DURING PAST 5 YEARS
- ---------------------- -------------------- ---------------------------------------------------
<S> <C> <C>
Thomas H. O'Brien Director President, O'Brien Associates (financial and
c/o Prudential Mutual management consultants) (since April 1984);
Fund formerly President of Jamaica Water Securities
Management, Inc. Corp. (holding company) (February 1989-August
One Seaport Plaza 1990); Director (September 1987-April 1991),
New York, NY Chairman and Chief Executive Officer (September
1987-February 1989) of Jamaica Water Supply
Company; Director of Yankee Energy System, Inc.
and Ridgewood Savings Bank; formerly Director of
TransCanada Pipelines U.S.A. Ltd. (1984-June
1989) and Winthrop University Hospital (November
1976-June 1988); Trustee of Hofstra University.
Thomas A. Owens, Jr. Director Consultant.
c/o Prudential Mutual
Fund
Management, Inc.
One Seaport Plaza
New York, NY
*Richard A. Redeker Director President, Chief Executive Officer and Director
One Seaport Plaza (since October 1993), PMF; Executive Vice
New York, NY President, Director and Member of the Operating
Committee (since October 1933), Prudential
Securities; Director (since October 1993) of
Prudential Securities Group, Inc. (PSG). Formerly
Senior Executive Vice President and Director of
Kemper Financial Services, Inc. (September
1978-September 1993); Director of The Global
Government Plus Fund, Inc. The Global Yield Fund,
Inc. and The High Yield Income Fund, Inc.
Stanley E. Shirk Director Certified Public Accountant and a former Senior
c/o Prudential Mutual Partner of the accounting firm of KPMG Peat
Fund Marwick; former Management and Accounting
Management, Inc. Consultant for the Association of Bank Holding
One Seaport Plaza Companies, Washington, D.C. and the Bank
New York, NY Administration Institute, Chicago, IL; Director
of The High Yield Income Fund, Inc.
Robert F. Gunia Vice President Chief Administrative Officer (since July 1990),
One Seaport Plaza Director (since January 1989), Executive Vice
New York, NY President, Treasurer and Chief Financial Officer
(since June 1987) of PMF; Senior Vice President
(since March 1987) of Prudential Securities; Vice
President and Director of The Asia Pacific Fund,
Inc. (since May 1989).
Susan C. Cote Treasurer and Senior Vice President (since January 1989) of PMF;
One Seaport Plaza Principal Senior Vice President (since January 1992) and
New York, NY Financial and Vice President (January 1986-December 1991) of
Accounting Officer Prudential Securities.
S. Jane Rose Secretary Senior Vice President (since January 1991), Senior
One Seaport Plaza Counsel (since June 1987) and First Vice
New York, NY President (June 1987-December 1990) of PMF;
Senior Vice President and Senior Counsel of
Prudential Securities (since July 1992); formerly
Vice President and Associate General Counsel of
Prudential Securities.
Domenick Pugliese Assistant Secretary Vice President (since July 1992) and Associate
One Seaport Plaza General Counsel (since March 1992) of PMF; Vice
New York, NY President and Associate General Counsel of
Prudential Securities (since July 1992); prior
thereto, associated with the law firm of Battle
Fowler.
</TABLE>
- ------------
* ``Interested'' Director, as defined in the Investment Company Act of 1940, by
reason of his affiliation with Prudential Securities or PMF.
Directors and officers of the Fund are also directors, trustees and
officers of some or all of the other investment companies distributed by
Prudential Securities or Prudential Mutual Fund Distributors, Inc. (PMFD).
B-14
<PAGE> 55
The officers conduct and supervise the daily business operations of the
Fund, while the Directors, in addition to their functions set forth under
``Manager'' and ``Distributor,'' review such actions and decide on general
policy.
The Fund pays each of its Directors who is not an affiliated person of the
Manager or the Fund's investment adviser annual compensation of $8,000 in
addition to certain out-of-pocket expenses.
Directors may receive their Director's fees pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of Director's fees which accrue interest at a rate equivalent
to the prevailing rate applicable to 90-day U.S. Treasury Bills at the
beginning of each calendar quarter or, pursuant to an SEC exemptive order,
at the daily rate of return of the Fund (the Fund rate). Payment of the
interest so accrued is also deferred and accruals become payable at the
option of the Director. The Fund's obligation to make payments of deferred
Directors' fees, together with interest thereon, is a general obligation
of the Fund.
As of August 5, 1994, the Directors and officers of the Fund, as a group,
owned beneficially less than 1% of the common stock of the Fund.
As of August 5, 1994, Paul G. Allen, 110 110th Ave, NE. Suite 550,
Bellevue, Washington was the beneficial owner of 2,064,276 Class A shares
(21.1% of the outstanding Class A shares) and James A. Colquitt, P.O. Box 1056,
Marietta Georgia, was the beneficial owner of 19,106 Class B shares (8.4% of
the outstanding Class B shares). As of August 5, 1994, Prudential Securities was
recordholder of 9,228,388 shares (or 94.3%) of the outstanding shares of the
Fund. In the event of any meetings of shareholders, Prudential Securities will
forward, or cause the forwarding of, proxy material to the beneficial owner for
which it is the recordholder.
MANAGER
The Manager of the Fund is Prudential Mutual Fund Management, Inc., (PMF or
the Manager), One Seaport Plaza, New York, New York 10292. PMF serves as
manager of all of the other open-end management investment companies that,
together with the Fund, comprise the Prudential Mutual Funds. See
``How the Fund is Managed'' in the Prospectus. As of July 31, 1994, PMF
managed and/or administered open-end and closed-end management investment
companies with assets of approximately $47 billion and, according to the
Investment Company Institute, as of April 30, 1994 the Prudential Mutual
Funds were the 12th largest family of mutual funds in the United States.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PMF, subject to the supervision of the Fund's Board of Directors
and in conformity with the stated policies of the Fund, manages both the
investment operations of the Fund and the composition of the Fund's
portfolio, including the purchase, retention, disposition and lending of
securities. In connection therewith, PMF is obligated to keep certain
books and records of the Fund. PMF also administers the Fund's corporate
affairs and, in connection therewith, furnishes the Fund with office
facilities, together with those ordinary clerical and bookkeeping services
which are not being furnished by State Street Bank and Trust Company, the
Fund's custodian and Prudential Mutual Fund Services, Inc. (PMFS or the
Transfer Agent), the Fund's transfer and dividend disbursing agent.
The management services of PMF for the Fund are not exclusive under the terms
of the Management Agreement and PMF is free to, and does, render management
services to others.
For its services, PMF receives, pursuant to the Management Agreement, a fee
at an annual rate of .50 of 1% of the Fund's average daily net assets. 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 PMF, but
excluding interest, taxes, brokerage commissions, distribution fees and
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business) for any fiscal year
exceed the lowest applicable annual expense limitation established and enforced
pursuant to the statutes or regulations of any jurisdiction in which the Fund's
shares are qualified for offer and sale, the compensation due to PMF will be
reduced by the amount of such excess. Reductions in excess of the total
compensation payable to PMF will be paid by PMF to the Fund. No such reductions
were required during the fiscal year ended February 28, 1994. Currently, the
Fund believes that the most restrictive expense limitation of state securities
commissions is 2 1/2% of the Fund's average daily net assets up to $30 million,
2% of the next $70 million of such assets and 1 1/2% of such assets in excess
of $100 million.
In connection with its management of the corporate affairs of the Fund, PMF
bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel except
the fees and expenses of Directors who are not affiliated persons of PMF or the
Fund's investment adviser;
(b) all expenses incurred, by PMF or by the Fund in connection with
managing the ordinary course of the Fund's business, other than those assumed
by the Fund as described below; and
(c) the costs and expenses payable to The Prudential Investment Corporation
(PIC) pursuant to the subadvisory agreement between PMF and PIC (the
Subadvisory Agreement).
B-15
<PAGE> 56
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 the Fund's sub-adviser, (c) the fees and certain expenses of the
Custodian and Transfer and Dividend Disbursing Agent, including the cost of
providing records to the Manager in connection with its obligation of
maintaining required records of the Fund and of pricing the Fund's shares,
(d) the charges and expenses of legal counsel and independent accountants for
the Fund, (e) brokerage commissions and any issue or transfer taxes chargeable
to the 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 Fund may be a member,
(h) the cost of share certificates representing shares of the Fund,
(i) the cost of fidelity and liability insurance,
(j) the fees and expenses involved in registering and maintaining registration
of the Fund and of its shares with the SEC, registering the Fund as a broker
or dealer and qualifying its shares under state securities laws, including the
preparation and printing of the Fund's registration statements and prospectuses
for such purposes, (k) allocable communications expenses with respect to
investor services and all expenses of shareholders' and Directors meetings
and of preparing, printing and mailing reports, proxy statements and
prospectuses to shareholders in the amount necessary for distribution to the
shareholders, (l) litigation and indemnification expensesand other
extraordinary expenses not incurred in the ordinary course of the Fund's
business and (m) distribution fees.
The Management Agreement provides that PMF will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the matters
to which the Management Agreement relates, except a loss resulting from willful
misfeasance, bad faith, gross negligence or reckless disregard of duty. The
Management Agreement provides that it will terminate automatically if assigned,
and that it may be terminated without penalty by either party upon not more
than 60 days' nor less than 30 days' written notice. The Management Agreement
will continue in effect for a period of more than two years from the date of
execution only so long as such continuance is specifically approved at least
annually in conformity with the Investment Company Act. The Management
Agreement was approved by the Board of Directors of the Fund, including all
of the Directors who are not parties to the contract or interested persons
of any such party as defined in the Investment Company Act on April 14, 1994
and by PMF, as initial shareholder of the Fund, on May 29, 1992.
For the period March 1, 1993 through April 14, 1993 PMF waived 100% of its
management fee of $150,690 (representing .50% of the average net assets of the
Fund) and for the period April 15, 1993 through February 28, 1994, the Fund
paid PMF management fees of $832,334 (representing 0.42% of average daily net
assets of the Fund). For the period from June 10, 1992 (commencement of
operations) to February 28, 1993, PMF waived 100% of its management fee of
$908,536 (representing .50% of the average net assets of the Fund).
PMF has entered into the Subadvisory Agreement with PIC (the Subadviser), a
wholly-owned subsidiary of The Prudential Insurance Company of America
(Prudential). The Subadvisory Agreement provides that PIC will furnish
investment advisory services in connection with the management of the Fund. In
connection therewith, PIC is obligated to keep certain books and records of the
Fund. PMF continues to have responsibility for all investment advisory services
pursuant to the Management Agreement and supervises PIC's performance of such
services. PIC is reimbursed by PMF for the reasonable costs and expenses
incurred by PIC in furnishing those services.
The Subadvisory Agreement was approved by the Board of Directors, including
a majority of the Directors who are not parties to such contract or interested
persons of any such parties as defined in the Investment Company Act, on April
14, 1994 and was approved by the initial shareholder of the Fund on May 29,
1992.
The Subadvisory Agreement provides that it will terminate in the event of
its assignment as defined in the Investment Company Act or upon the termination
of the Management Agreement. The Subadvisory Agreement may be terminated by the
Fund, PMF or PIC upon not more than 60 days', nor less than 30 days', written
notice. The Subadvisory Agreement provides that it will continue in effect for
a period of more than two years from its execution only so long as such
continuance is specifically approved at least annually in accordance with the
requirements of the Investment Company Act.
The Manager and the Subadviser (The Prudential Investment Corporation) are
indirect subsidiaries of The Prudential which, as of December 31, 1991, was the
largest insurance company in the United States and the second largest insurance
company in the world. Prudential has been engaged in the insurance business
since 1875. In July 1993, Institutional Investor ranked The Prudential the
third largest institutional money manager of the 300 largest money management
organizations in the United States as of December 31, 1992.
DISTRIBUTOR
Prudential Mutual Fund Distributors, Inc. (PMFD), One Seaport Plaza, New
York, New York 10292, acts as the distributor of the Class A shares of the
Fund. Prudential Securities, One Seaport Plaza, New York, New York 10292
(Prudential Securities or PSI), acts as the distributor of the Class B and
Class C shares of the Fund.
B-16
<PAGE> 57
Pursuant to separate Distribution and Service Plans (the Class A, the Class
B Plan and the Class C Plan, collectively the Plans) adopted by the Fund under
Rule 12b-1 under the Investment Company Act and separate distribution
agreements (the Distribution Agreements), PMFD and Prudential Securities
(collectively the Distributor) incur the expenses of distributing the
Fund's Class A, Class B and Class C shares, respectively. See ``How the
Fund is Managed--Distributor'' in the Prospectus.
On April 14, 1994, the Board of Directors, including a majority of the
Directors who are not interested persons of the Fund and who have no direct or
indirect financial interest in the operation of the Class A or Class B Plan or
in any agreement related to either Plan (the Rule 12b-1 Directors), at a
meeting called for the purpose of voting on the Class A and Class B Plan,
approved an amended and restated Class A Plan and an amended and restated
Class B Plan. The Class A Plan was last approved by the initial shareholder
of the Class A and Class B shares on May 29, 1992. The Fund does not intend
to hold shareholders meetings unless required by law. On August 17, 1994,
the Board of Directors, including a majority of the Rule 12b-1 Directors,
at a meeting called for the purpose of voting on the Class C Plan, approved
the Class C Plan. The Class C Plan was approved by the sole shareholder of the
Class C shares on November 1, 1994.
CLASS A PLAN. For the fiscal year ended February 28, 1994 PMFD incurred
distribution related expenses under the Class A Plan of $884,314. Of such
amount, PMFD waived $755,963 and was reimbursed $128,351 through the
distribution fee paid by the Fund to PMFD under the Class A Plan. This amount
was primarily expended on commission credits to Prudential Securities and Pruco
Securities Corporation, and affiliated broker-dealer (Prusec), for payments of
commissions and account servicing fees to financial advisers.
In addition, for the fiscal year ended February 28, 1994, PMFD received
approximately $7,900 in initial sales charges with respect to the sale of Class
A shares.
CLASS B PLAN. For the fiscal year ended February 28, 1994, Prudential
Securities received $44,677, net of waiver of $152,742 from the Fund under the
Class B Plan and spent approximately $64,300 in distributing the Class B shares
of the Fund. It is estimated that of this amount approximately $4,000 (6.2%)
was spent on printing and mailing of prospectuses to other than current
shareholders; $16,900 (26.3%) on compensation to Prusec for commissions to its
sales representatives and other expenses, including an allocation on account of
overhead and other branch office distribution-related expenses incurred by it
for distribution of Class B shares; $43,200 (67.2%) on commission credits to
Prudential Securities branch offices for payments of commissions and account
servicing fees to its financial advisers $15,400 (24.0%) and an allocation on
account of overhead and other branch office distribution-related expenses
$27,800 (43.2%) and $200 (0.3%) on interest and/or carrying costs. The term
``overhead and other branch office distribution-related expenses'' represents
(a) the expenses of operating Prusec's and Prudential Securities' branch
offices in connection with the sale of Fund shares, including lease costs,
the salaries and employee benefits of operations and sales support personnel,
utility costs, communications costs and the costs of stationery and supplies,
(b) the costs of client sales seminars, (c) travel expenses of mutual fund
sales coordinators to promote the sale of Fund shares and (d) other incidental
expenses relating to branch promotion of Fund sales.
Prudential Securities may also receive the proceeds of contingent deferred
sales charges paid by holders of Class B shares upon certain redemptions of
Class B shares. See ``Shareholder Guide--How to Sell Your Shares--Contingent
Deferred Sales Charges'' in the Prospectus. The amount of distribution expenses
reimbursable by the Class B shares of the Fund is reduced by the amount of
contingent deferred sales charges received. For the fiscal year ended February
28, 1994, Prudential Securities received approximately $33,100 in contingent
deferred sales charges. To the extent Prudential Securities no longer has any
distribution expenses reimbursable by the Class B shares of the Fund, all
contingent deferred sales charges will be paid to the Fund.
CLASS C PLAN. Prudential Securities receives the proceeds of contingent
deferred sales charges paid by investors upon certain redemptions of Class C
shares. See ``Shareholder Guide--How to Sell Your Shares--Contingent Deferred
Sales Charges'' in the Prospectus. Prior to the date of this Statement of
Additional Information, no distribution expenses were incurred under the Class
C Plan.
The Class A, Class B and Class C Plans continue in effect from year to
year, provided that each such continuance is approved at least annually by a
vote of the Board of Directors, including a majority vote of the Rule 12b-1
Directors, cast in person at a meeting called for the purpose of voting on such
continuance. The Plans each 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 Fund. Neither Plan may be
amended to increase materially the amounts to be spent for the services
described therein without approval by the shareholders of the applicable
Class, and all material amendments are required to be approved by the Board
of Directors in the manner described above. Each Plan will automatically
terminate in the event of its assignment. The Fund will not be contractually
obligated to pay expenses incurred under any Plan after 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 Directors who are not interested persons of the Fund shall be
committed to the Directors who are not interested persons of the Fund.
Pursuant to each Distribution Agreement, the Fund has agreed to indemnify
PMFD and Prudential Securities to the extent permitted by applicable law
against certain liabilities under the Securities Act. The Distribution
Agreements for the Class A and Class B shares was
B-17
<PAGE> 58
last approved by the Board of Directors, including a majority of the Rule 12b-1
Directors, on April 14, 1994 and by the initial shareholder of the Class A and
Class B shares on May 24, 1992 and for the Class C shares by the Board of
Directors, including a majority of the Rule 12b-1 Directors, on August 17, 1994
and by the initial shareholder of the Class C shares on November 1, 1994.
NASD MAXIMUM SALES CHARGE RULE. Pursuant to rules of the National
Association of Securities Dealers, Inc., the Distributor is required to limit
aggregate initial sales charges, deferred sales charges and asset-based sales
charges to 6.25% of total gross sales of each class of shares. 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%. The 6.25% limitation applies to the Fund rather than on a per
shareholder basis. If aggregate sales charges were to exceed 6.25% of total
gross sales of shares of either class, all sales charges on shares of that
class would be suspended.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities,
futures contracts and options thereon for the Fund, the selection of brokers,
dealers and futures commission merchants 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 securities 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. Broker-dealers may receive brokerage commissions on Fund portfolio
transactions, including options, futures, and options on futures transactions
and the purchase and sale of underlying securities upon the exercise of
options. Orders may be directed to any broker or futures commission merchant,
including to the extent and in the manner permitted by applicable law,
Prudential Securities and its affiliates. Portfolio securities may not be
purchased from any underwriting or selling syndicate of which Prudential
Securities (or an affiliate thereof), during the existence of the syndicate,
is a principal underwriter (as defined in the Investment Company Act),
except in accordance with rules of the SEC. The Fund will not deal with
Prudential Securities or its affiliates on a principal basis. This
limitation, in the opinion of the Fund, 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 most favorable price
and efficient execution. This means that the Manager will seek to execute each
transaction at a price and commission, if any, which provide the most favorable
total cost or proceeds reasonably attainable under the circumstances. While the
Manager generally seeks reasonably competitive spreads or commissions, the Fund
will not necessarily be paying the lowest spread or commission available.
Within the framework of this policy, the Manager may consider research and
investment services provided by brokers or dealers who effect or are parties
to portfolio transactions of the Fund, the Manager or the Manager's other
clients. Such research and investment services are those which brokerage
houses customarily provide to institutional investors and include statistical
and economic data and research reports on particular companies and industries.
Such services are used by the Manager in connection with all of its investment
activities, and some of such services obtained in connection with the execution
of transactions for the Fund may be used in managing other investment accounts.
Conversely, brokers, dealers or commission merchants 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, dealers or commission merchants may be used by the
Manager in providing investment management for the Fund. Commission rates are
established pursuant to negotiations with the broker, dealer or futures
commission merchant based on the quality and quantity of execution services
provided by the broker or futures commission merchant in the light of
generally prevailing rates. The Manager's policy is to pay higher commissions
to brokers and futures commission merchants, other than Prudential Securities,
for particular transactions than might be charged if a different broker had
been selected, on occasions when, in the Manager's opinion, this policy
furthers the objective of obtaining best price and execution. In addition,
the Manager is authorized to pay higher commissions on brokerage transactions
for the Fund to brokers and futures commission merchants other than Prudential
Securities in order to secure research and investment services described above,
subject to review by the Fund's Board of Directors from time to time as to
the extent and continuation of this practice. The allocation of orders
among brokers and futures commission merchants and the commission rates paid
are reviewed periodically by the Fund's Board of Directors. 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.
Subject to the above considerations, Prudential Securities may act as a
securities broker or futures commission merchant 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
B-18
<PAGE> 59
remuneration paid to other brokers in connection with comparable transactions
involving similar securities being purchased or sold during a comparable period
of time. This standard would allow Prudential Securities (or any affiliate) to
receive no more than the remuneration which would be expected to be received by
an unaffiliated broker in a commensurate arm's-length transaction. Furthermore,
the Board of Directors of the Fund, including a majority of the Directors who
are not ``interested'' persons, has adopted procedures which are reasonably
designed to provide that any commissions, fees or other remuneration paid to
Prudential Securities are consistent with the foregoing standard. In accordance
with Section 11(a) under the Securities Exchange Act of 1934, Prudential
Securities may not retain compensation for effecting transactions on a national
securities exchange for the Fund unless the Fund has expressly authorized the
retention of such compensation. Prudential Securities must furnish to the Fund
at least annually a statement setting forth the total amount of all
compensation retained by Prudential Securities for transactions effected
by the Fund during the applicable period. Brokerage transactions with
Prudential Securities (or any affiliate) are also subject to such fiduciary
standards as may be imposed upon Prudential Securities (or any affiliate)
by applicable law.
During the period from June 10, 1992 (commencement of operations) to
February 28, 1993 and for the fiscal year ended February 28, 1994 the Fund paid
no brokerage commissions to Prudential Securities.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share, plus a sales charge which, at the election of the
investor, may be imposed either (i) at the time of purchase (Class A shares),or
(ii) on a deferred basis (Class B or Class C shares). See ``Shareholder Guide--
How to Buy Shares of the Fund'' in the Prospectus.
Each Class of shares represents an interest in the same portfolio of
Investments of the Fund and has the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan and (iii)
only Class B shares have a conversion feature. See``Distributor.'' Each class
also has separate exchange privileges. See ``Shareholder Investment
Account--Exchange Privilege.''
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares are sold at a maximum sales charge of 1.00% and
Class B* and Class C* shares are sold at net asset value. Using the Fund's net
asset value at February 28, 1994, the maximum offering price of the Fund's
shares is as follows:
<TABLE>
<S> <C>
CLASS A
Net asset value and redemption price per Class A share................. $ 9.63
Maximum sales charge (1.00% of offering price)......................... .10
-------
Offering price to public............................................... $ 9.73
-------
-------
CLASS B
Net asset value, offering price and redemption price per Class B $ 9.67
share*.................................................................
-------
-------
CLASS C
Net asset value, offering price and redemption price per Class C $
share*.................................................................
-------
</TABLE>
-------
*Class B and Class C shares are subject to a contingent deferred
sales charge on certain redemptions for a period of one-year
after their purchase. See ``Shareholder Guide--How to Sell Your
Shares'' in the Prospectus. Class C shares did not exist on February
28, 1994.
REDUCED INITIAL SALES CHARGE--CLASS A SHARES
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential Mutual Funds, the
purchases may be combined to take advantage of the reduced sales charges
applicable to larger purchases. See the table of breakpoints under
``Shareholder Guide--Alternative Purchase Plan'' in the Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account (IRA);
B-19
<PAGE> 60
(d) any company controlled by the individual (a person, entity or group
that holds 25% or more of the outstanding voting securities of a
company will be deemed to control the company, and a partnership will
be deemed to be controlled by each of its general partners);
(e) a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse; and
(g) one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will be granted
subject to confirmation of the investor's holdings. The Combined Purchase and
Cumulative Purchase Privilege does not apply to individual participants in any
retirement or group plans.
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under ``Combined Purchase and Cumulative Purchase
Privilege,'' may aggregate the value of their existing holdings of shares of
the Fund and shares of other Prudential Mutual Funds to determine the reduced
sales charge. However, the value of shares held directly with the Transfer
Agent and through Prudential Securities will not be aggregated to determine
the reduced sales charge. All shares must be held either directly with the
Transfer Agent or through Prudential Securities. The value of existing holdings
for purposes of determining the reduced sales charge is calculated using the
maximum offering price (net asset value plus maximum sales charge) as of the
previous business day. See ``How the Fund Values its Shares'' in the
Prospectus. The Distributor must be notified at the time of purchase that the
investor is entitled to a reduced sales charge. The reduced sales charges will
be granted subject to confirmation of the investor's holdings. Rights of
accumulation are not available to individual participants in any retirement
or group plans.
LETTER 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. All shares of the Fund and
shares of other Prudential Mutual Funds which were previously purchased and are
still owned are also included in determining the applicable reduction. However,
the value of shares held directly with the Transfer Agent and through
Prudential Securities will not be aggregated to determine the reduced sales
charge. All shares must be held either directly with the Transfer Agent or
through Prudential Securities. Letters of Intent are not available to individual
participants in any retirement or group plans.
A Letter of Intent permits a purchaser to establish a total investment goal
to be achieved by any number of investments over a thirteen-month period. Each
investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. Escrowed Class A shares totaling 5% of the dollar amount of the
Letter of Intent will be held by the Transfer Agent in escrow in the name of
the purchaser. The effective date of a Letter of Intent may be back-dated up
to 90 days, in order that any investments made during this 90-day period,
valued at the purchaser's cost, can be applied to the fulfillment of the
Letter of Intent goal.
The Letter of Intent does not obligate the investor to purchase, nor the
Fund to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the thirteen-month period, the purchaser is required to pay
the difference between the sales charge otherwise applicable to the purchases
made during this period and sales charges actually paid. Such payment may be
made directly to the Distributor or, if not paid, the Distributor will
liquidate sufficient escrowed shares to obtain such difference. If the
goal is exceeded in an amount which qualifies for a lower sales charge, a
price adjustment is made by refunding to the purchaser the amount of excess
sales charge, if any, paid during the thirteen-month period. Investors electing
to purchase Class A shares of the Fund pursuant to a Letter of Intent should
carefully read such Letter of Intent.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, 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 share certificate is desired, it must be
requested in writing for each transaction. Certificates are issued only for
full shares and may be redeposited in the account at any time. There is no
charge to the investor for issuance of a certificate.
B-20
<PAGE> 61
The Fund makes available to its 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 on the payment date, unless the Board of Directors determines
otherwise. An investor may direct the Transfer Agent in writing not less than
five full business days prior to the payment date to have subsequent dividends
and/or distributions sent in cash rather than reinvested. In the case of
recently purchased shares for which registration instructions have not been
received on the payment date, cash payment will be made directly to the dealer.
Any shareholder who receives a cash payment representing a dividend or
distribution may reinvest such distribution at net asset value by returning the
check or the proceeds to the Transfer Agent within 30 days after the payment
date. Such investment will be made at the net asset value per share next
determined after receipt of the check or proceeds by the Transfer Agent.
EXCHANGE PRIVILEGE
CLASS A AND CLASS B. The Fund makes available to its shareholders the
privilege of exchanging their shares of the Fund for Class A shares of certain
other Prudential Mutual Funds, shares of Prudential Structured Maturity Fund
and Prudential Government Securities Trust (Intermediate Term Series) and
shares of the money market funds specified below. No fee or sales load will
be imposed on the exchange. All exchanges are made on the basis of relative
net asset value next determined after receipt of an order in proper form.
An exchange will be treated as a redemption and purchase for tax purposes.
Shares may be exchanged for shares of another fund only if shares of such
fund may legally be sold under applicable state laws. No fees or sales
load will be imposed upon the exchange.
Shareholders who acquired such shares upon the exchange of shares of the
Fund may subsequently use the Exchange Privilege only to acquire Class A shares
of the Prudential Mutual Funds (other than the Fund) participating in the
Exchange Privilege.
The following money market funds participate in the Exchange Privilege:
Prudential California Municipal Fund (California Money Market Series),
Prudential Government Securities Trust (Money Market Series and U.S.
Treasury Money Market Series), Prudential Municipal Series Fund
(Connecticut Money Market Series), (Massachusetts Money Market Series),
(New Jersey Money Market Series) and (New York Money Market Series),
Prudential MoneyMart Assets and Prudential Tax-Free Money Fund.
No contingent deferred sales charge will be payable upon an exchange of
Class B shares for Class A shares (or Money Market Fund shares) of the funds
participating in the Exchange Privilege, but any applicable contingent deferred
sales charge will be payable upon the redemption of Money Market Shares
acquired as a result of the exchange. The applicable sales charge will be that
imposed by the fund in which the shares were initially purchased and the
purchase date will be deemed to be the date of the initial purchase, rather
than the date of the exchange. In order to minimize the period of time in
which such shares are subject to a contingent deferred sales charge,
shares which are subsequently re-exchanged out of a fund which is
participating in the Exchange Privilege will be exchanged on the basis of
their remaining holding periods, with the longest holding periods being
transferred first.
At any time after acquiring Class A shares (or Money Market Fund shares) of
other funds participating in the Exchange Privilege, a Class B shareholder may
again exchange those shares (and any reinvested dividends and distributions)
for Class A shares of any other Prudential Mutual Funds (other than the Fund)
participating in the Exchange Privilege without subjecting such shares to any
contingent deferred sales charge at the time of exchange (however, as described
above, a contingent deferred sales may be payable upon the ultimate redemption
of such shares). Shares of any fund participating in the Exchange Privilege
that were acquired through reinvestment of dividends or distributions may be
exchanged for Class A shares of other funds without being subject to any
contingent deferred sales charge.
CLASS C. Shareholders of the Fund may exchange their Class C shares for
Class C shares of certain other Prudential Mutual Funds and shares of
Prudential Special Money Market Fund, a money market fund. No CDSC will
be payable upon such exchange, but a CDSC may be payable upon the redemption
of 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 date of the initial
purchase, rather than the date of the exchange.
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
Fund, 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
B-21
<PAGE> 62
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.
At any time after acquiring shares of other funds participating in the
Class C exchange privilege, a shareholder may again exchange those shares (and
any reinvested dividends and distributions) for Class C shares of the Fund,
without subjecting such shares to any CDSC. Shares of any fund participating in
the Class C Exchange Privilege that were acquired through reinvestment of
dividends or distributions may be exchanged for Class C shares of other funds
without being subject to any CDSC.
Additional details about the Exchange Privilege and prospectuses for each
of the funds participating in the Exchange Privilege are available from the
Fund's Transfer Agent, Prudential Securities or Prusec. 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 $4,800 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2007, the cost of four years at a private
college could reach $163,000 and over $97,000 at a public university.1
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.2
<TABLE>
<S> <C> <C> <C> <C>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- ----------------------------- -------- -------- -------- --------
25 Years..................... $ 110 $ 165 $ 220 $ 275
20 Years..................... 176 264 352 440
15 Years..................... 296 444 592 740
10 Years..................... 555 833 1,110 1,388
5 Years..................... 1,371 2,057 2,742 3,428
</TABLE>
See ``Automatic Savings Accumulation Plan.''
- ---------------
1Source information concerning the costs of education at public
universities is available from The College Board Annual Survey of Colleges,
1992. Information about the costs of private colleges is from the Digest of
Education Statistics, 1992; The National Center for Educational Statistics; and
the U.S. Department of Education. Average costs for private institutions
include tuition, fees, room and board.
2The 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 Fund.
The investment return and principal value of an investment will fluctuate so
that an investor's shares when redeemed may be worth more or less than their
original cost.
AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP, an investor may
arrange to have a fixed amount automatically invested in Class B ) and Class C
shares of the Fund monthly by authorizing his or her bank account or Prudential
Securities account (including a Command Account) to be debited to invest
specified dollar amounts in shares of the Fund. The investor's bank must be a
member of the Automatic Clearing House System. Share certificates are not
issued to ASAP participants. Further information about this program and an
application form can be obtained from the Transfer Agent, Prudential Securities
or Prusec. ASAP is not available for purchase of Class A shares.
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
Class A and Class C shareholders through Prudential Securities or the Transfer
Agent. Such withdrawal plan provides for monthly or quarterly checks in any
amount, except as provided below, up to the value of the shares in the
shareholder's account. Withdrawals of Class C shares may be subject to a CDSC.
See ``Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales
Charges'' in the Prospectus.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and (iii)
the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and
B-22
<PAGE> 63
fractional shares at net asset value on shares held under this plan. See
``Shareholder Investment Account--Automatic Reinvestment of Dividends and/or
Distributions.''
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may
be terminated at any time, and the Distributor reserves the right to initiate a
fee of up to $5 per withdrawal, upon 30 days' written notice to the
shareholder.
Withdrawal payments should not be considered as dividends, yield or
income. If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must generally be recognized for federal income tax
purposes. In addition, withdrawals made concurrently with purchases of
additional shares are inadvisable because of the sales charges applicable to
(i) the purchase of Class A shares and (ii) the withdrawal of 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 plans, including a
401(k) plan, 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 of these plans, the administration, custodial fees
and other details are available from Prudential Securities or the Transfer
Agent.
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.
INDIVIDUAL RETIREMENT ACCOUNTS
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 the IRA account will be subject to tax when withdrawn from the account.
NET ASSET VALUE
Under the Investment Company Act, the Board of Directors is responsible
for determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Board of Directors, the value of each
U.S. Government security for which quotations are available will be based on
the valuation provided by an independent broker/dealer or pricing service.
Pricing services consider such factors as security prices, yields, maturities,
call features, ratings and developments relating to specific securities in
arriving at securities valuations.
Securities for which market quotations are not readily available are
valued at fair value as determined in good faith under procedures established
by the Fund's Board of Directors. Short-term debt securities which mature in
more than 60 days are valued at current market quotations. Short-term debt
securities which mature in 60 days or less are valued at amortized cost if
their term to maturity from the date of purchase was 60 days or less, or by
amortizing their value on the 61st day prior to maturity, if their term to
maturity from the date of purchase exceeded 60 days, unless the Board of
Directors determines that such valuation does not represent fair value.
B-23
<PAGE> 64
TAXES, DIVIDENDS AND DISTRIBUTIONS
The Fund has qualified and intends to remain qualified as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the Internal Revenue Code). This relieves the Fund (but not its
shareholders) from paying federal income tax on income which is distributed to
shareholders, and permits net long-term capital gains of the Fund (i.e., the
excess of net long-term capital gains over net short-term capital losses) to be
treated as long-term capital gains of the shareholders, regardless of how long
shareholders have held their shares in the Fund.
Qualification as a regulated investment company 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 interest, dividends, payments with respect to securities loans and
gains from the sale or other disposition of securities, options thereon,
futures contracts, options thereon and forward contracts and foreign
currencies; (b) the Fund derive less than 30% of its gross income from gains
(without reduction for losses) from the sale or other disposition of
securities, options thereon, futures contracts, options thereon and forward
contracts held for less than three months (the 30% test); (c) the Fund
diversify its holdings so that, at the end of each quarter of the taxable year,
(i) at least 50% of the market value of the Fund's assets is represented by
cash, U.S. Government obligations and other securities limited in respect of
any one issuer to an amount not greater than 5% of the Fund's assets and 10% of
the outstanding voting securities of such issuer, and (ii) not more than 25% of
the value of its assets is invested in the securities of any one issuer (other
than U.S. Government obligations). In addition, in order to not be subject to
federal income tax, the Fund must distribute to its shareholders each year at
least 90% of its net investment income, including short-term capital gains but
not net long-term capital gains.
Gains or losses on sales of securities by the Fund will be treated as
long-term capital gains or losses if the securities have been held by it for
more than one year, except in certain cases where the Fund acquires a put or
writes a call thereon or makes a short sale against-the-box. Other gains or
losses on the sale of securities will be short-term capital gains or losses.
Gains and losses on the sale, lapse or other termination of options on
securities will generally be treated as gains and losses from the sale of
securities (assuming they do not qualify as ``Section 1256 contracts''). If an
option written by the Fund on securities lapses or is terminated through a
closing transaction, such as a repurchase by the Fund of the option from its
holder, the Fund will generally realize capital gain or loss. If securities are
sold by the Fund pursuant to the exercise of a call option written by it, the
Fund will include the premium received in the sale proceeds of the securities
delivered in determining the amount of gain or loss on the sale. Certain of the
Fund's transactions may be subject to wash sale and short sale provisions of
the Internal Revenue Code. In addition, debt securities acquired by the Fund
may be subject to original issue discount and market discount rules.
``Regulated futures contracts'' and certain listed options which are not
``equity options'' constitute ``Section 1256 contracts'' and 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 market value.
Sixty percent of any gain or loss recognized on such ``deemed sales'' and on
actual dispositions will be treated as long-term capital gain or loss, and the
remainder will be treated as short-term capital gain or loss. In addition,
positions which are part of a ``straddle'' are subject to rules which apply
certain wash sale and short sale provisions of the Internal Revenue Code. The
Fund may be required to defer the recognition of losses on positions it holds
to the extent of any unrecognized gain on offsetting positions held by the
Fund. The Fund's ability to enter into futures contracts, options thereon and
options on securities may be affected by the 30% test.
Distributions of net investment income and net short-term capital gains
will be taxable to the shareholder at ordinary income rates regardless of
whether the shareholder receives such distributions in additional shares or
cash. Distributions of net long-term capital gains, if any, are taxable as
long-term capital gains regardless of how long the investor has held his or her
Fund shares. However, if a shareholder holds shares in the Fund for not more
than six months, then any loss recognized on the sale of such shares will be
treated as long-term capital loss to the extent of any distribution on the
shares which was treated as long-term capital gain. Shareholders will be
notified annually by the Fund as to the federal tax status of distributions
made by the Fund.
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 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.
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale
B-24
<PAGE> 65
or exchange of shares of the Fund if the shareholder subsequently acquires
stock in the Fund or in another registered investment company and otherwise
applicable sales charges are reduced or eliminated.
The Fund declares dividends daily based on actual net investment income
determined in accordance with generally accepted accounting principles. A
portion of such dividend may also include projected net investment income. Such
dividends will be payable monthly in additional shares of the Fund unless
otherwise requested by the shareholder. The Fund's net capital gains, if any,
will be distributed at least annually. In determining the amount of capital
gains to be distributed, any capital loss carryforwards from prior years will
be offset against capital gains. Dividends and distributions will be paid in
additional Fund shares 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. To the extent that, in a given year, distributions to shareholders
exceed recognized net investment income and recognized short-term and long-term
capital gains for the year, shareholders will receive a return of capital in
respect of such year and, in an annual statement, will be notified of the
amount of any return of capital for such year.
Any 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 distributions. Furthermore, such 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 capital gains distributions which are expected
to be or have been announced. Distributions may be subject to additional state
and local taxes. See ``Taxes, Dividends and Distributions'' in the Prospectus.
The per share dividends on Class B and Class C shares may be lower than
the per share dividends on Class A shares as a result of the higher
distribution fee typically applicable with respect to the Class B and Class C
shares. To the extent no distribution fee is charged to the Class A or Class B
shares, the per share dividends on the Class A and Class B shares will be the
same.
PERFORMANCE INFORMATION
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 and
Class C 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 6
YIELD = 2 [(---------+ 1) - 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 shareon the last day of the period.
The yield for the 30-day period ended February 28, 1994 for the Fund's
Class A and Class B shares was 3.51% and 3.55%, respectively. Without the
distribution fee waiver, the yield would have been 3.05% for the Class A shares
and 2.62% for the Class B shares. During this period, no Class C shares were
outstanding.
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. Actual yields will depend upon not only changes in interest rates
generally during the period in which the investment in the Fund is held, but
also on any realized or unrealized gains and losses and changes in the Fund's
expenses.
Average Annual Total Return. The Fund may also advertise its average
annual total return. Average annual total return is determined separately for
Class A, Class B and Class C shares. See ``How the Fund Calculates
Performance'' in the Prospectus.
AVERAGE ANNUAL TOTAL RETURN is computed according to the following
formula: n
P ( 1 + T ) = ERV
Where: P = a hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1000 payment made at the
beginning of the 1, 5 or 10 year periods at
the end of the 1, 5 or 10 year periods (or fractional portion
thereof).
B-25
<PAGE> 66
Average annual return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal or
state income taxes that may be payable upon redemption.
The average annual total return for Class A shares for the one year and
one and two-thirds years ending February 28, 1994 was 0.22% and 1.82%,
respectively. The average annual total return with respect to the Class B
shares of the Fund for the one year and one and two-thirds years ending
February 28, 1994 was 0.58% and 2.41%, respectively. Without management fee
waiver (during the period June 10, 1992 through April 14, 1993) and without the
distribution fee waiver (during the period April 15, 1993 through February 28,
1994) the average annual total return for the one year and one and two-thirds
years ending February 28, 1994 would have been (0.31)% and 1.27% for Class A
shares and (0.17)% and 1.73% for Class B shares, respectively.
AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B
and Class C shares. See ``How the Fund Calculates Performance'' in the
Prospectus.
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed by the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $1000.
ERV = ending redeemable value of a hypothetical $1000 payment made at the
beginning of the 1, 5 or 10 year periods at the end of the 1, 5 or
10 year periods (or fractional portion thereof).
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
The aggregate total return for Class A shares for the one year and one and
two-thirds years ending February 28, 1994 was 1.24% and 4.20%, respectively.
The aggregate total return for Class B shares for the one year and one and
two-thirds years ending February 28, 1994 was 1.58% and 4.18%, respectively.
During these periods, no Class C shares were outstanding.
PERFORMANCE CHART. From time to time, the performance of the Fund may be
measured against various indices. Set forth below is a chart which compares the
performance of different types of investments over the long-term and the rate
of inflation.(3)
[INSERT GRAPHIC BAR CHART]
3 Source: Ibbotson Associates, ``Stocks, Bonds, Bills and Inflation--1993
Yearbook'' (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Common stock returns are based on the Standard & Poor's 500 Stock
Index, a market-weighted, unmanaged index of 500 common stocks in a variety of
industry sectors. It is a commonly used indicator of broad stock price
movements. This chart is for illustrative purposes only, and is not intended to
represent the performance of any particular investment or fund.
B-26
<PAGE> 67
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts, 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.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison,
New Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the
Fund. It is a wholly-owned subsidiary of PMF. PMFS provides customary transfer
agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, payment of dividends and distributions and related
functions. For these services, PMFS receives an annual fee per shareholder
account, a new account set-up fee for each manually established account and a
monthly inactive zero balance account fee per shareholder account. PMFS is also
reimbursed for its out-of-pocket expenses, including but not limited to
postage, stationery, printing, allocable communications and other costs. For
the year ended February 28, 1994, the Fund incurred fees of approximately
$60,400 for such services.
Deloitte & Touche LLP, 1633 Broadway, New York, New York 10019, serves as
the Fund's independent accountants and in that capacity will audit the Fund's
annual financial statements.
B-27
<PAGE> 68
<TABLE>
<CAPTION>
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC. PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1994
Principal Description (a) Value Principal Description (a) Value
Amount (Note 1) Amount (Note 1)
(000) (000)
<S> <C> <C> <C> <C> <C>
LONG-TERM INVESTMENTS--95.4% Federal National Mortgage
ADJUSTABLE RATE MORTGAGE PASS- Association,
THROUGHS--74.2% $ 6,000 8.00%, 2/01/09................ $ 6,268,125
Federal Home Loan Mortgage
6,143 11.00%, 11/01/20.............. 6,895,704
Corporation, Government National Mortgage
$ 4,755 4.22%, 6/01/23................ $ 4,921,720 Association,
7,290 4.50%, 5/01/23................ 7,622,296 4,140 11.50%, 2/15/13 - 12/15/15.... 4,770,896
3,911 5.38%, 7/01/22................ 4,033,534 ------------
7,873 5.64%, 11/01/22............... 8,153,357 Total U. S. Government Agency
12,322 5.77%, 1/01/23................ 12,891,997 Mortgage Pass-Throughs
(cost $27,245,121).......... 27,216,219
Federal National Mortgage ------------
Association, Total long-term investments
3,759 4.79%, 12/01/17............... 3,778,100 (cost $122,649,811)......... 122,323,590
10,112 5.21%, 4/01/18................ 10,440,557 ------------
4,471 5.46%, 10/01/20............... 4,655,081 SHORT-TERM INVESTMENTS--9.7%
5,279 5.53%, 6/01/18................ 5,496,925 REPURCHASE AGREEMENT
8,884 5.54%, 7/01/20................ 9,255,736 Joint Repurchase Agreement Account,
4,684 5.56%, 2/01/18................ 4,888,410
5,643 5.66%, 12/01/22............... 5,886,837 12,374 3.42%, 3/01/94
12,504 5.67%, 4/01/20................ 13,082,821 (cost $12,374,000; Note 5)..... 12,374,000
------------ ----------
Total Adjustable Rate Mortgage
Pass-Throughs TOTAL INVESTMENTS--105.1%
(cost $95,404,690).......... 95,107,371 (cost $135,023,811; Note 4)... 134,697,590
------------
Liabilities in excess of other
U. S. GOVERNMENT AGENCY MORTGAGE assets--(5.1%).............. (6,525,214)
PASS-THROUGHS--21.2% ------------
Federal Home Loan Mortgage NET ASSSETS--100%............. $128,172,376
Corporation, ============
4,180 8.50%, 5/01/98 - 8/01/98...... 4,367,828
4,685 9.00%, 12/01/97 - 11/01/98.... 4,913,666
B-28
See Notes to Financial Statements.
</TABLE>
<PAGE> 69
PRUDENTIAL ADJUSTABLE RATE
SECURITIES FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
ASSETS FEBRUARY 28, 1994
-----------------
<S> <C>
Investments, at value (cost $135,023,811)................................................ $ 134,697,590
Cash..................................................................................... 167,082
Receivable for investments sold.......................................................... 10,393,930
Interest receivable...................................................................... 748,431
Receivable for Fund shares sold.......................................................... 663,071
Due from Distributor..................................................................... 4,654
Deferred expenses and other assets....................................................... 239,375
-------------
Total assets........................................................................... 146,914,133
-------------
LIABILITIES
Payable for investments purchased........................................................ 16,333,750
Payable for Fund shares reacquired....................................................... 1,895,148
Dividends payable........................................................................ 100,896
Accrued expenses and other liabilities................................................... 363,694
Management fee payable................................................................... 48,269
-------------
Total liabilities...................................................................... 18,741,757
-------------
NET ASSETS............................................................................... $ 128,172,376
-------------
-------------
Net assets were comprised of:
Common stock, at par................................................................... $ 13,302
Paid-in capital in excess of par....................................................... 135,606,921
-------------
135,620,223
Accumulated distributions in excess of net investment income........................... (100,896)
Accumulated net realized loss on investments........................................... (7,020,730)
Net unrealized depreciation of investments............................................. (326,221)
-------------
Net assets, February 28, 1994........................................................ $ 128,172,376
-------------
-------------
Class A:
Net asset value and redemption price per share ($122,860,137 / 12,752,237 shares of
common stock issued and outstanding)................................................. $9.63
Maximum sales charge (1.0% of offering price).......................................... .10
-----
Maximum offering price to public....................................................... $9.73
-----
-----
Class B:
Net asset value, offering price and redemption price per share ($5,312,239 / 549,636
shares of common stock issued and outstanding)....................................... $9.67
-----
-----
</TABLE>
See Notes to Financial Statements.
B-29
<PAGE> 70
<TABLE>
<CAPTION>
PRUDENTIAL ADJUSTABLE RATE PRUDENTIAL ADJUSTABLE RATE
SECURITIES FUND, INC. SECURITIES FUND, INC.
Statement of Operations Statement of Changes in Net Assets
June 10,
1992*
Year Ended Year Ended through
February 28, Increase (Decrease) in February 28, February 28,
Net Investment Income 1994 Net Assets 1994 1993
------------ ------------- -------------
<S> <C> <S> <C>
Income Operations
Interest.............................. $ 9,801,079 Net investment income.......... $ 8,392,463 $ 8,612,412
------------ Net realized gain (loss)
Expenses on investment transactions... (7,020,730) 3,829
Management fee, net of waiver of Net change in unrealized
$150,690.............................. 832,334 appreciation/depreciation of
Distribution fee--Class A, net of investments........ 1,125,105 (1,451,326)
waiver of Net increase in net assets ------------- -------------
$755,963............................ 128,351 resulting from operations........ 2,496,838 7,164,915
Distribution fee--Class B, net of Contingent deferred sales charges ------------- -------------
waiver of collected (Note 2)............... 87,220 --
$152,742............................ 44,677 ------------- -------------
Custodian's fees and expenses......... 124,000 Dividends and distributions (Note1)
Dividends to shareholders from
Transfer agent's fees and expenses.... 69,000 net investment income
Registration fees..................... 55,000 Class A............... (7,557,640) (7,557,591)
Directors' fees....................... 48,000 Class B............... (834,823) (1,054,821)
------------- -------------
Audit fee............................. 40,000 (8,392,463) (8,612,412)
Amortization of deferred organization ------------- -------------
expenses.............................. 21,600 Dividends to shareholders in
Reports to shareholders............... 21,500 excess of net investment income
Legal fees............................ 13,000 Class A............... (262,362) (214,613)
Insurance expense..................... 7,600 Class B............... (28,982) (29,954)
Miscellaneous......................... 3,554 ------------- -------------
------------ (291,344) (244,567)
Total expenses...................... 1,408,616 ------------- -------------
------------ Distributions to
Net investment income................... 8,392,463 shareholders
------------ of net realized gain
Realized and Unrealized on investment
Gain (Loss) on Investments transactions
Net realized loss on investment Class A............... -- (3,360)
transactions.......................... (7,020,730) Class B............... -- (469)
Net change in unrealized appreciation of ------------- -------------
investments........................... 1,125,105 -- (3,829)
------------ ------------- -------------
Net loss on investments................. (5,895,625) Fund share transactions
------------ (Note 6)
Net Increase in Net Assets Net proceeds from shares
Resulting from Operations............... $ 2,496,838 subscribed............ 75,303,969 412,182,506
------------ Net asset value of
------------ shares issued to
shareholders in
reinvestment of
dividends and
distributions......... 6,959,698 6,776,072
Cost of shares
reacquired.............. (206,110,076) (159,244,151)
------------- -------------
Increase (decrease) in
net assets from Fund
share transactions.... (123,846,409) 259,714,427
------------- -------------
Total increase
(decrease).............. (129,946,158) 258,018,534
Net Assets
Beginning of period....... 258,118,534 100,000
------------- -------------
End of period............. $ 128,172,376 $ 258,118,534
------------- -------------
------------- -------------
---------------
*Commencement of investment operations.
See Notes to Financial Statements. See Notes to Financial Statements.
</TABLE>
B-30
<PAGE> 71
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS
The Prudential Adjustable Rate Securities Fund, Inc. (the ``Fund'') is
registered under the Investment Company Act of 1940 as a diversified, open-end
management investment company. The Fund was incorporated in Maryland on
December 23, 1991 and had no operations until the issuance of 5,000 shares of
Class A common stock and 5,000 shares of Class B common stock for $100,000 on
May 1, 1992 to Prudential Mutual Fund Management, Inc. (``PMF''). Investment
operations commenced on June 10, 1992. The Fund's investment objective is high
current income consistent with low volatility of principal by investing in
adjustable rate securities, including mortgage-backed securities issued or
guaranteed by private institutions or the U.S. Government, its agencies or
instrumentalities, asset-backed securities and corporate and other debt
obligations, most of which have interest rates which reset at periodic
intervals.
NOTE 1. ACCOUNTING The following is a summary
POLICIES of significant accounting poli
cies followed by the Fund in the preparation of
its financial statements.
Securities Valuation: The Fund values portfolio securities on the basis of
current market quotations provided by dealers or by a pricing service approved
by the Board of Directors, which uses information such as quotations from
dealers, market transactions in comparable securities, various relationships
between securities and calculations on yield to maturity in determining values.
If market quotations are not readily available, a security is valued at fair
value as determined under procedures established by the Board of Directors.
Short-term securities which mature in more than 60 days are valued at
current market quotations. Short-term securities which mature in 60 days or
less are valued at amortized cost.
In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian takes possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. If the seller defaults and the value
of the collateral declines or, if bankruptcy proceedings are commenced with
respect to the seller of the security, realization of the collateral by the
Fund may be delayed or limited.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Fund amortizes premiums and discounts paid on purchases of
portfolio securities as adjustments to interest income.
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.
Dollar Rolls: The Fund enters into mortgage dollar rolls in which the Fund
sells mortgage securities for delivery in the current month, realizing a gain
or loss and simultaneously contracts to repurchase somewhat similar (same type,
coupon and maturity) securities on a specified future date. During the roll
period the Fund forgoes principal and interest paid on the securities. The Fund
is compensated by the interest earned on the cash proceeds of the initial sale
and by the lower repurchase price at the future date. The difference between
the sale proceeds and the lower repurchase price is taken into income. The Fund
maintains a segregated account, the dollar value of which is equal to its
obligations, in respect of dollar rolls.
Federal Income Taxes: It is the Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income to its shareholders. Therefore, no
federal income tax provision is required.
Dividends and Distributions: The Fund declares daily and pays dividends monthly
from net investment income. Net capital gains, if any, will be distributed at
least annually. Dividends and distributions are recorded on the ex-dividend
date. Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to dividends in
excess of net investment income.
Reclassification of Capital Accounts: Effective March 1, 1993, the Fund began
accounting and reporting for distributions to shareholders in accordance with
A.I.C.P.A. Statement of Position 93-2: Determination, Disclosure, and Financial
Statement Presentation of Income, Capital Gain, and Return of Capital
Distributions by Investment Companies. As a result of this statement, the Fund
changed the classification of distributions to shareholders to better disclose
the differences between financial statement amounts and distributions
determined in accordance with income tax regulations. During the year ended
February 28, 1994, the Fund reclassed $435,015 of dividends in excess of net
B-31
<PAGE> 72
investment income to paid-in capital from accumulated distributions in excess
of net investment income. Net investment income, net realized gains and net
assets were not affected by this change.
DEFERRED ORGANIZATION EXPENSES: Approximately $162,000 of expenses were
incurred in connection with the organization of the Fund. These costs have been
deferred and are being amortized ratably over a period of sixty months from the
date the Fund commenced investment operations.
NOTE 2. AGREEMENTS The Fund has a management agreement with PMF.
Pursuant to this agreement, PMF has
responsibility for all investment advisory services and supervises the
subadviser's performance of such services. PMF has entered into a subadvisory
agreement with The Prudential Investment Corporation (``PIC''). PIC furnishes
investment advisory services in connection with the management of the Fund. PMF
pays for the services of PIC, the cost of compensation of officers of the Fund,
occupancy and certain clerical and bookkeeping costs of the Fund. The Fund
bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Fund. PMF
voluntarily waived its management fee until April 14, 1993. The amount of fees
waived for the year ended February 28, 1994, amounted to $150,690 ($0.011 per
share; .08% of average net assets).
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund, and with Prudential Securities Incorporated (``PSI'') which
acts as distributor of the Class B shares of the Fund (collectively the
``Distributors''). To reimburse the Distributors for their expenses incurred in
distributing and servicing the Fund's Class A and B shares, the Fund, pursuant
to plans of distribution, pays the Distributors a reimbursement, accrued daily
and payable monthly.
Pursuant to the Class A Plan, the Fund may reimburse PMFD for its expenses
with respect to Class A shares, at an annual rate of up to .50 of 1% of the
average daily net asset value of the Class A shares. PMFD pays various
broker-dealers, including PSI and Pruco Securities Corporation (``Prusec''),
affiliated broker-dealers, for account servicing fees and other expenses
incurred by such broker-dealers. Commencing April 15, 1993 PMFD agreed to
waive, temporarily and voluntarily, all payments to it under the Class A Plan.
The amount of fees waived for the year ended February 28, 1994, amounted to
$755,963 ($.06 per share; .38% of average net assets).
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to 1% of the average daily net assets of the Class B shares.
Effective April 14, 1993, PSI had no distribution costs reimbursable to it
under the Class B Plan and therefore, as of such date, the Fund discontinued
assessing distribution fees on the Class B shares and has discontinued the
payment to PSI of any contingent deferred sales charges collected on the
redemption of Class B shares. All such contingent deferred sales charges
collected on the redemption of Class B shares are being paid to the Fund.
During the year ended February 28, 1994 such payments totalled $87,220 ($.03
per Class B share; .44% of Class B average net assets). PSI has advised the
Fund that, for the fiscal year ended February 28, 1994, it received
approximately $33,100 in contingent deferred sales charges imposed upon certain
redemptions by investors.
The Class B distribution expenses include commission credits for payments
of commissions and account servicing fees to financial advisers and an
allocation for overhead and other distribution-related expenses, interest
and/or carrying charges, the cost of printing and mailing prospectuses to
potential investors and of advertising incurred in connection with the
distribution of shares.
PMFD has advised the Fund that it has received approximately $7,900 in
front-end sales charges resulting from sales of Class A shares during the
fiscal year ended February 28, 1994. From these fees, PMFD paid such sales
charges to dealers (PSI and Prusec) which in turn paid commissions to
salespersons.
In the event of termination or noncontinuation of the Class B Plan, the
Fund would not be contractually obligated to pay PSI, as distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
NOTE 3. OTHER TRANSACTIONS Prudential Mutual Fund Ser
WITH AFFILIATES vices, Inc. (``PMFS''), a
wholly-owned subsidiary of PMF, serves as the Fund's transfer agent. During
the fiscal year ended February 28, 1994, the Fund incurred fees of
approximately $60,400 for
B-32
<PAGE> 73
the services of PMFS. As of February 28, 1994, approximately $5,200 of such
fees
were due to PMFS. Transfer agent fees and expenses in the Statement of
Operations include certain out-of-pocket expenses paid to non-affiliates.
NOTE 4. PORTFOLIO Purchases and sales of invest
SECURITIES ment securities, other than
short-term investments, for the fiscal year ended
February 28, 1994 were $226,359,045 and $294,856,885, respectively.
The federal income tax basis of the Fund's investments at February 28,
1994 was substantially the same as the basis for financial reporting and,
accordingly, net unrealized depreciation for federal income tax purposes was
$326,221 (gross unrealized appreciation--$50,699; gross unrealized
depreciation--$376,920).
For federal income tax purposes, the Fund has a capital loss carryforward
as of February 28, 1994 of approximately $3,282,600 which expires in 2002.
Accordingly, no capital gains distribution is expected to be paid to
shareholders until net gains have been realized in excess of such carryforward.
The Fund will elect to treat net capital losses of approximately
$3,738,100 incurred in the four month period ended February 28, 1994 as having
been incurred in the following fiscal year.
NOTE 5. JOINT The Fund along with other
REPURCHASE affiliated registered invest
AGREEMENT ACCOUNT ment 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 February 28, 1994, the Fund has a 1.02% undivided interest
in the repurchase agreements in the joint account. The undivided interest for
the Fund represents $12,374,000 in the principal amount. As of such date, each
repurchase agreement in the joint account and the collateral therefor were as
follows:
B.T. Securities Corp., 3.45%, dated 2/28/94, in the principal amount of
$175,000,000, repurchase price $175,016,771, due 3/1/94; collateralized by
$31,050,000 U.S. Treasury Notes, 7.875%, due 8/15/01; $45,555,000 U.S. Treasury
Notes, 7.50%, due 11/15/01; $48,000,000 U.S. Treasury Notes, 6.375%, due
8/15/02 and $44,640,000 U.S. Treasury Notes, 6.25%, due 2/15/03; approximate
aggregate value including accrued interest-- $178,693,925.
Goldman, Sachs & Co., 3.43%, dated 2/28/94, in the principal amount of
$309,929,000, repurchase price $309,958,529, due 3/1/94; collateralized by
$281,745,000 U.S. Treasury Bonds, 7.875%, due 2/15/21; approximate value
including accrued interest-- $316,791,407.
Merrill Lynch, Pierce, Fenner & Smith Inc., 3.375%, dated 2/28/94, in the
principal amount of $325,000,000, repurchase price $325,030,469, due 3/1/94;
collateralized by $31,600,000 U.S. Treasury Bonds, 12.00%, due 8/15/13;
$48,515,000 U.S. Treasury Notes, 8.625%, due 1/15/95; $100,000,000 U.S.
Treasury Notes, 5.625%, due 1/31/98 and $132,800,000 U.S. Treasury Notes,
5.125%, due 6/30/98; approximate aggregate value including accrued
interest--$331,623,743.
Morgan (J.P.) Securities Inc., 3.45%, dated 2/28/94, in the principal
amount of $325,000,000, repurchase price $325,031,146, due 3/1/94;
collateralized by $50,000,000 U.S. Treasury Bonds, 12.00%, due 5/15/05;
$50,000,000 U.S. Treasury Bonds, 8.00%, due 11/15/21; $41,910,000 U.S. Treasury
Notes, 4.25%, due 1/31/95 and $50,000,000 U.S. Treasury Notes, 4.25%, due
7/31/95 and $100,000,000 U.S. Treasury Notes, 8.50%, due 5/15/95; approximate
aggregate value including accrued interest--$331,969,234.
Smith Barney Shearson Inc., 3.45%, dated 2/28/94, in the principal amount
of $75,000,000, repurchase price $75,007,188, due 3/1/94; collateralized by
$27,000,000 U.S. Treasury Bills, 3.45%, due 6/2/94 and $50,565,000 U.S.
Treasury Bills, 3.45%, due 8/4/94; approximate aggregate value including
accrued interest--$76,575,533.
NOTE 6. CAPITAL The Fund offers both Class A and Class B shares.
Class A shares are sold with a front-end sales
charge of up to 1.0%. Class B shares are sold with a contingent deferred sales
charge of 1.0% if they are redeemed within one year of purchase. Class B shares
will be automatically converted into Class A shares after the one-year
contingent deferred sales charge period has expired. Both classes of shares
have equal rights as to earnings, assets and voting privileges except that each
class bears different distribution expenses and has exclusive voting rights
with respect to its distribution plan.
There are 2 billion authorized shares of $.001 par value common stock
divided into two classes, designated Class A and Class B common stock, each of
which consists of 1 billion authorized shares. Of the 13,301,873 shares issued
and outstanding at February 28, 1994, PMF owned 10,015 Class A shares.
B-33
<PAGE> 74
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
------ ------
<S> <C> <C>
Year ended February 28, 1994:
Shares sold.................... 3,885,604 $ 38,096,534
Shares sold--conversion from
Class B...................... 3,195,365 31,329,562
Shares issued in reinvestment
of dividends................. 643,966 6,301,453
Shares reacquired.............. (17,047,153) (166,644,600)
------------ -------------
Net decrease in shares
outstanding.................. (9,322,218) $ (90,917,051)
------------ --------------
------------ --------------
Period ended February 28, 1993:
Shares sold.................... 33,536,475 $ 334,964,318
Shares sold--conversion from
Class B...................... 1,363,974 13,542,171+
Shares issued in reinvestment
of dividends and
distributions................ 600,620 5,976,831
Shares reacquired.............. (13,431,615) (133,763,185)
------------- -------------
Net increase in shares
outstanding.................. 22,069,454 $ 220,720,135
------------ -------------
------------ -------------
</TABLE>
<TABLE>
<CAPTION>
Class B Shares Amount
------ ------
<S> <C> <C>
Year ended February 28, 1994:
Shares sold.................... 597,901 $ 5,877,873
Shares issued in reinvestment
of
dividends.................... 66,872 658,245
Shares reacquired.............. (827,247) (8,135,914)
Shares reacquired--conversion
into Class A................. (3,188,039) (31,329,562)
----------- -------------
Net decrease in shares
outstanding.................. (3,350,513) $ (32,929,358)
----------- --------------
----------- --------------
Period ended February 28, 1993:
Shares sold.................... 6,378,464 $ 63,676,017
Shares issued in reinvestment
of dividends and
distributions................ 80,388 799,241
Shares reacquired.............. (1,199,774) (11,938,795)
Shares reacquired--conversion
into Class A................. (1,363,928) (13,542,171)+
----------- --------------
Net increase in shares
outstanding.................. 3,895,150 $ 38,994,292
---------- -------------
---------- -------------
- ---------------
</TABLE>
+ Reclassified
B-34
<PAGE> 75
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC.
Financial Highlights
<TABLE>
<CAPTION>
Class A Class B
--------------------------- ---------------------------
June 10, June 10,
Year 1992* Year 1992*
Ended through Ended through
February 28, February 28, February 28, February 28,
1994 1993 1994 1993
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $ 9.94 $ 10.00 $ 9.94 $ 10.00
---------- ---------- ---------- --------
Income from investment operations
Net investment income+................................................ 0.41 0.35 0.41 0.31
Net realized and unrealized loss on investment transactions........... (0.29) (0.05) (0.29) (0.05)
---------- ---------- ---------- --------
Total from investment operations.................................... 0.12 0.30 0.12 0.26
Less distributions
Dividends from net investment income.................................. (0.41) (0.35) (0.41) (0.31)
Distributions in excess of net investment income...................... (0.02) (0.01) (0.01) (0.01)
---------- ---------- ---------- --------
Total distributions................................................. (0.43) (0.36) (0.42) (0.32)
---------- ---------- ---------- --------
Contingent deferred sales charges collected........................... -- -- .03 --
---------- ---------- ---------- --------
Net asset value, end of period........................................ $ 9.63 $ 9.94 $ 9.67 $ 9.94
------------ ---------- ---------- --------
------------ ---------- ---------- --------
TOTAL RETURN#......................................................... 1.24% 2.92% 1.58% 2.56%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)....................................... $ 122,860 $ 219,352 $ 5,312 $ 38,766
Average net assets (000).............................................. $ 176,863 $ 217,329 $ 19,742 $ 33,895
Ratios to average net assets:+
Expenses, including distribution fees............................... 0.69% 0.77%** 0.75% 1.27%**
Expenses, excluding distribution fees............................... 0.63% 0.27%** 0.63% 0.27%**
Net investment income............................................... 4.29% 4.81%** 4.23% 4.31%**
Portfolio turnover rate............................................... 130% 45% 130% 45%
- ---------------
</TABLE>
* Commencement of investment operations.
** Annualized.
+ Net of management fee and/or distribution fee waivers.
# Total return does not consider the effect of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of each period reported and includes reinvestments of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.
See Notes to Financial Statements.
B-35
<PAGE> 76
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
Prudential Adjustable Rate Securities Fund, Inc.
We have audited the accompanying statement of assets and liabilities of
Prudential Adjustable Rate Securities Fund, Inc., including the portfolio of
investments, as of February 28, 1994, the related statements of operations for
the year then ended and of changes in net assets and financial highlights for
the year then ended and for the period June 10, 1992 (commencement of
operations) to February 28, 1993. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at
February 28, 1994 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential
Adjustable Rate Securities Fund, Inc. at February 28, 1994, the results of its
operations, the changes in its net assets and the financial highlights for the
respective stated periods, in conformity with generally accepted accounting
principles.
Deloitte & Touche
New York, New York
April 14, 1994
B-36
<PAGE> 77
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS:
(1) Financial Statements included in the Prospectus constituting Part A
of this Registration Statement:
Financial Highlights
(2) Financial Statements included in the Statement of Additional
Information constituting Part B of this Registration Statement:
Portfolio of Investments February 28, 1994
Statement of Assets and Liabilities at February 28, 1994.
Statement of Operations for the period June 10, 1992 through February
28, 1993 and for the fiscal year ended February 28, 1994.
Statement of Changes in Net Assets for the period June 10, 1992
through February 28, 1993 and for the fiscal year ended
February 28, 1994.
Notes to Financial Statements.
Financial Highlights with respect to the period ended February 28,
1993 and for the fiscal year ended February 28, 1994.
Independent Auditors' Report.
Portfolio of Investments at August 31, 1994 (unaudited).
Statements of Assets and Liabilities at August 31, 1994 (unaudited).
Statement of Operations for the six months ended August 31, 1994
(unaudited).
Statement of Changes in Net Assets for six months ended August 31,
1994 (unaudited).
Notes to Financial Statements (unaudited).
Financial Highlights (unaudited).
(B) EXHIBITS:
1. Articles of Incorporation of the Registrant, incorporated by
reference to Exhibit No. 1 to Pre-Effective Amendment No. 1
to the Registration Statement on Form N-1A (File No. 33-46658)
filed on May 4, 1992.
2. (a) By-Laws of the Registrant, incorporated by reference to
Exhibit No. 2 to the Registration Statement on Form N-1A (File
No. 33-46658) filed on March 25, 1992.
(b) Amended By-Laws of the Registrant; incorporated by reference
to Exhibit 2(b) to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A (File No. 33-46658) filed
on November 2, 1992.
3. Not Applicable.
4. Instruments defining rights of shareholders, incorporated by
reference to Exhibit 4 to Post-Effective Amendment No. 3 to
the Registration Statement on Form N-1A (File No. 33-46658)
filed via EDGAR on May 1, 1994.
5. (a) Management Agreement between the Registrant, and Prudential
Mutual Fund Management, Inc.; incorporated by reference to
Exhibit 5(a) to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A (File No. 33-46658) filed
on November 2, 1992.
(b) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and The Prudential Investment Corporation;
incorporated by reference to Exhibit 5(b) to Post-Effective
Amendment No. 1 to the Registration Statement on Form N-1A
(File No. 33-46658) filed on November 2, 1992.
6. (a) (i) Distribution Agreement between the Registrant and
Prudential Mutual Fund Distributors Inc. for Class A shares;
incorporated by reference to Exhibit 6(a) to Post-Effective
Amendment No. 1 to the Registration Statement on Form N-1A
(File No. 33-46658) filed on November 2, 1992.
C-1
<PAGE> 78
(ii) Restated Distribution Agreement between the Registrant and
Prudential Mutual Fund Distributors for Class A shares,
incorporated by reference to Exhibit 6(a)(ii) to Post-Effective
Amendment No. 3 to the Registration Statement on Form N-1A (File
No. 33-46658) filed via EDGAR on May 1, 1994.
(b) (i) Distribution Agreement between the Registrant and
Prudential Securities Incorporated for Class B shares;
incorporated by reference to Exhibit 6(b) to Post-Effective
Amendment No. 1 to the Registration Statement on Form N-1A (File
No. 33-46658) filed on November 2, 1992.
(ii) Restated Distribution Agreement between the Registrant and
Prudential Securities for Class B shares, incorporated by
reference to Exhibit 6(b)(ii) to Post-Effective Amendment No. 3
to the Registration Statement on Form N-1A (File No. 33-46658)
filed via EDGAR on May 1, 1994.
(c) Distribution Agreement between the Registrant and Prudential
Securities for Class C shares.*
7. Not Applicable.
8. Custodian Contract between the Registrant and State Street Bank
and Trust Company; incorporated by reference to Exhibit 8 to
Post-Effective Amendment No. 1 to the Registration Statement on
Form N-1A (File No. 33-46658) filed on November 2, 1992.
9. 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. 1 to the
Registration Statement on Form N-1A (File No. 33-46658) filed on
November 2, 1992.
10. (a) Opinion of Counsel, incorporated by reference to Exhibit
No. 10 to Pre-Effective Amendment No. 1 to the Registration
Statement on Form N-1A (File No. 33-46658) filed on May 4, 1992.
(b) Opinion of Counsel, incorporated by reference to Exhibit
10(b) to Post-Effective Amendment No. 3 to the Registration
Statement on Form N-1A (File No. 33-46658) filed via EDGAR on May
1, 1994.
11. Consent of Independent Auditors.*
12. Not Applicable.
13. Subscription Agreement between the Registrant and Prudential
Mutual Fund Management, Inc. incorporated by reference to Exhibit
13 to Post-Effective Amendment No. 1 to the Registration
Statement on Form N-1A (File No. 33-46658) filed on November 2,
1992.
14. Not Applicable.
15. (a) (i) Plan of Distribution pursuant to Rule 12b-1 for Class A
shares; incorporated by reference to Exhibit 15(a) to Post-
Effective Amendment No. 1 to the Registration Statement on Form
N-1A (File No. 33-46658) filed on November 2, 1992.
(ii) Amended and restated Distribution and Service Plan pursuant
to Rule 12b-1 for Class A shares, incorporated by reference to
Exhibit 15(a)(ii) to Post-Effective Amendment No. 3 to the
Registration Statement on Form N-1A (File No. 33-46658) filed via
EDGAR on May 1, 1994.
(b) (i) Plan of Distribution pursuant to Rule 12b-1 for Class B
shares; incorporated by reference to Exhibit 15(a) to Post-
Effective Amendment No. 1 to the Registration Statement on
Form N-1A (File No. 33-46658) filed on November 2, 1992.
(ii) Amended and restated Distribution and Service Plan pursuant
to Rule 12b-1 for Class B shares, incorporated by reference to
Exhibit 15(b)(ii) to Post-Effective Amendment No. 3 to the
Registration Statement on Form N-1A (File No. 33-46658) filed via
EDGAR on May 1, 1994.
(c) Distribution and Service Plan pursuant to Rule 12b-1 for
Class C shares.*
C-2
<PAGE> 79
16. (a) Schedule of Computation of Performance (Class A shares);
filed herewith and incorporated by reference to Exhibit 16(a) to
Post-Effective Amendment No. 1 to the Registration Statement on
Form N-1A (File No. 33-46658) filed on November 2, 1992.
(b) Schedule of Computation of Performance (Class B shares);
filed herewith and incorporated by reference to Exhibit 16(a) to
Post-Effective Amendment No. 1 to the Registration Statement on
Form N-1A (File No. 33-46658) filed on November 2, 1992.
- ----------------
*Filed herewith.
Item 25. Persons Controlled by or under Common Control with Registrant.
None.
Item 26. Number of Holders of Securities.
As of August 5, 1994, there were were 1,798 and 183 recordholders of Class
A and Class B shares, respectively, of common stock, $.001 par value per share,
of the Registrant.
Item 27. INDEMNIFICATION.
As permitted by Section 17(h) and (i) of the Investment Company Act of 1940
(the 1940 Act) and pursuant to Article VII of the Fund's By-Laws (Exhibit 2 to
the Registration Statement), officers, directors, employees and agents of the
Registrant will not be liable to the Registrant, any shareholder, officer,
director, employee, agent or other person for any action or failure to act,
except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
Section 2-418 of Maryland General Corporation Law permits indemnification of
directors who acted in good faith and reasonably believed that the conduct was
in the best interests of the Registrant. As permitted by Section 17(i) of the
1940 Act, pursuant to Section 10 of each Distribution Agreement (Exhibits 6(a)
and 6(b) to the Registration Statement), each Distributor of the Registrant may
be indemnified against liabilities which it may incur, except liabilities
arising from bad faith, gross negligence, willful misfeasance or reckless
disregard of duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (Securities Act) may be permitted to directors, officers and
controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise,
the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1940 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in connection with the successful defense of any
action, suit or proceeding) is asserted against the Registrant by such
director,
officer or controlling person in connection with the shares being registered,
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the 1940 Act and will be governed by the final adjudication of
such
issue.
The Registrant intends to purchase an insurance policy insuring its
officers and directors against liabilities, and certain costs of defending
claims against such officers and directors, to the extent such officers and
directors are not found to have committed conduct constituting willful
misfeasance, bad faith, gross negligence or reckless disregard in the
performance of their duties. The insurance policy also insures the Registrant
against the cost of indemnification payments to officers and directors under
certain circumstances.
Section 9 of the Management Agreement (Exhibit 5(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 5(b) to the
Registration Statement) limit the liability of Prudential Mutual Fund
Management, Inc. (PMF) and The Prudential Investment Corporation (PIC),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective duties or from reckless
disregard by them of their respective obligations and duties under the
agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and each Distribution Agreement in a manner
consistent
with Release No. 11330 of the Securities and Exchange Commission under the 1940
Act so long as the interpretation of Section 17(h) and 17(i) of such Act remain
in effect and are consistently applied.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) Prudential Mutual Fund Management, Inc.
See ``How the Fund is Managed--Manager'' in the Prospectus constituting
Part A of this Registration Statement and ``Manager'' in the Statement of
Additional Information constituting Part B of this Registration Statement.
C-3
<PAGE> 80
The business and other connections of the officers of PMF are listed in
Schedules A and D of Form ADV of PMF as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104 filed on November 13, 1987).
The business and other connections of PMF's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is One Seaport Plaza, New York, NY 10292.
<TABLE>
<CAPTION>
Name and Address Position with PMF Principal Occupations
- ---------------- ----------------- ---------------------
<S> <C> <C>
Brendan D. Boyle Executive Vice Executive Vice President, PMF; Senior Vice President,
President and Director Prudential Securities Incorporated
of Marketing
John D. Brookmeyer, Jr. Director Senior Vice President, The Prudential Insurance Company
Two Gateway Center of America (Prudential);
Newark, NJ 07102
Susan C. Cote Senior Vice President Senior Vice President, PMF; Senior Vice President,
Prudential Securities
Fred A. Fiandaca Executive Vice Executive Vice President, Chief Operating Officer and
Raritan Plaza One President, Chief Director, PMF; Chairman, Chief Executive Officer and
Edison, NJ 08847 Operating Officer and Director, Prudential Mutual Fund Services, Inc.
Director
Stephen P. Fisher Senior Vice President Senior Vice President, PMF; Senior Vice President,
Prudential Securities
Frank W. Giordano Executive Vice Executive Vice President, General Counsel and Secretary,
President, General PMF; Senior Vice President, Prudential Securities
Counsel and Secretary
Robert F. Gunia Executive Vice Executive Vice President, Chief Administrative Officer,
President, Chief Chief Financial Officer and Director, PMF; Senior Vice
Administrative President, Prudential Securities
Officer, Chief
Financial Officer, and
Director
Eugene B. Heimberg Director Senior Vice President, Prudential; President, Director
Prudential Plaza and Chief Investment Officer, PIC
Newark, NJ 07102
Lawrence C. McQuade Vice Chairman Vice Chairman, PMF
Leland B. Paton Director Executive Vice President and Director, Prudential
Securities; Director, Prudential Securities Group,
Inc.PSG)
Richard A. Redeker President, Chief President, Chief Executive Officer and Director, PMF;
Executive Officer and Executive Vice President, Director and Member of
Director Operating Committee, Prudential Securities; Director,
PSG
S. Jane Rose Senior Vice President, Senior Vice President and Senior Counsel, and Assistant
Senior Counsel and Secretary, PMF; Senior Vice President and Senior
Assistant Secretary Counsel, Prudential Securities
Donald G. Southwell Director Senior Vice President, Prudential; Director, PSG
213 Washington Street
Newark, NJ
07102-2992
</TABLE>
C-4
<PAGE> 81
(b) Prudential Investment Corporation
See ``How the Fund is Managed--Subadviser'' in the Prospectus constituting
Part A of this Registration Statement and ``Subadvisor'' 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 Prudential Plaza, Newark, NJ 07101.
<TABLE>
<CAPTION>
Name and Address Position with PIC Principal Occupations
- ---------------- ----------------- ---------------------
<S> <C> <C>
Martin A. Berkowitz Senior Vice President Senior Vice President and Chief Financial and Compliance
and Chief Financial Officer, PIC; Vice President, Prudential
and Compliance Officer
William M. Bethke Senior Vice President Senior Vice President, Prudential; Senior Vice President,
Two Gateway Center PIC
Newark, NJ 07102
John D. Brookmeyer, Jr. Senior Vice President Senior Vice President, Prudential; Senior Vice President,
Two Gateway Center PIC
Newark, NJ 07102
Eugene B. Heimberg President, Director Senior Vice President, Prudential; President, Director
and Chief Investment and Chief Investment Officer, PIC
Officer
Garnett L. Keith, Jr. Director Vice Chairman and Director, Prudential; Director, PIC
William P. Link Senior Vice President Executive Vice President, Prudential; Senior Vice
Four Gateway Center President, PIC
Newark, NJ 07102
James W. Stevens Executive Vice Executive Vice President, Prudential; Executive Vice
Four Gateway Center President President, PIC; Director, PSG
Newark, NJ 07102
Robert C. Winters Director Chairman of the Board and Chief Executive Officer,
Prudential; Chairman of the Board of Directors, PSG
Claude J. Zinngrabe, Jr. Executive Vice Vice President, Prudential; Executive Vice President, PIC
President
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a)(i) Prudential Securities Incorporated
Prudential Securities Incorporated is distributor for Prudential
Government Securities Trust (Intermediate Term Series), The Target Portfolio
Trust, and for Class B shares of The BlackRock Government Income Trust, Global
Utility Fund, Inc., Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth
Equity Fund), Prudential Adjustable Rate Securities Fund, Inc., Prudential
Allocation Fund, Prudential California Municipal Fund (California Income Series
and California Series), Prudential Equity Fund, Inc., Prudential Equity Income
Fund, Prudential Global Fund, Inc., Prudential Global Genesis Fund, Inc.,
Prudential Global Natural Resources Fund, Inc., Prudential GNMA Fund, Inc.,
Prudential Government Income Fund, Inc., Prudential Growth Opportunity Fund,
Inc., Prudential High Yield Fund, Inc., Prudential IncomeVertible(R) Fund,
Inc., Prudential Intermediate Global Income Fund, Inc., Prudential Multi-Sector
Fund, Inc., Prudential Municipal Bond Fund, Prudential Municipal Series Fund
(except Connecticut Money Market Series, Massachusetts Money Market Series, New
York Money Market Series and New Jersey Money Market Series), Prudential
National Municipals Fund, Inc., Prudential Pacific Growth Fund, Inc.,
Prudential Short-Term Global Income Fund, Inc., Prudential Strategist Fund,
Inc., Prudential Structured Maturity Fund, Inc., Prudential U.S. Government
Fund, and Prudential Utility Fund, Inc. Prudential Securities is also a
depositor for the following unit investment trusts:
C-5
<PAGE> 82
The Corporate Income Fund
Corporate Investment Trust Fund
Equity Income Fund
Government Securities Income Fund
International Bond Fund
Municipal Investment Trust
Prudential Equity Trust Shares
National Equity Trust
Prudential Unit Trusts
Government Securities Equity Trust
National Municipal Trust
(a)(ii) Prudential Mutual Fund Distributors, Inc.
Prudential Mutual Fund Distributors, Inc. is distributor for Command
Government Fund, Command Money Fund, Command Tax-Free Fund, Prudential
California Municipal Fund (California Money Market Series), Prudential
Government Securities Trust (Money Market Series and U.S. Treasury Money Market
Series), Prudential Institutional Liquidity Portfolio, Inc., Prudential-Bache
MoneyMart Assets Inc. (d/b/a Prudential MoneyMart Assets), Prudential Municipal
Series Fund (Connecticut Money Market Series, Massachusetts Money Market
Series, New York Money Market Series and New Jersey Money Market Series),
Prudential-Bache Special Money Market Fund, Inc. (d/b/a Prudential Special
Money Market Fund), Prudential-Bache Tax-Free Money Fund, Inc. (d/b/a
Prudential Tax-Free Money Fund), and for Class A shares of The BlackRock
Government Income Trust, Global Utility Fund, Inc., Nicholas-Applegate Fund,
Inc. (Nicholas-Applegate Growth Equity Fund), Prudential Adjustable Rate
Securities Fund, Inc., Prudential Allocation Fund, Prudential California
Municipal Fund (California Income Series and California Series), Prudential
Equity Fund, Inc., Prudential Equity Income Fund, Prudential Global Fund, Inc.,
Prudential Global Genesis Fund, Inc., Prudential Global Natural Resources Fund,
Inc., Prudential GNMA Fund, Inc., Prudential Government Income Fund, Inc.,
Prudential Growth Opportunity Fund, Inc., Prudential High Yield Fund, Inc.,
Prudential IncomeVertible(R) Fund, Inc., Prudential Intermediate Global Income
Fund, Inc., Prudential Multi-Sector Fund, Inc., Prudential Municipal Bond Fund,
Prudential Municipal Series Fund (Class A shares of all other Series not
mentioned above), Prudential National Municipals Fund, Inc., Prudential Pacific
Growth Fund, Inc., Prudential Short-Term Global Income Fund, Inc., Prudential
Strategist Fund, Inc., Prudential Structured Maturity Fund, Inc., Prudential
U.S. Government Fund, and Prudential Utility Fund, Inc.
(b)(i) Information concerning the directors and officers of Prudential
Securities Incorporated is set forth below:
<TABLE>
<CAPTION>
Positions and Positions and
Offices with Offices with
Name(1) Underwriter Registrant
- ------- ------------- -------------
<S> <C> <C>
Alan D. Hogan.................... Executive Vice President, Chief None
Administrative Officer and
Director
Howard A. Knight................. Executive Vice President, Director, None
Corporate Strategy and New Business
Development
George A. Murray................. Executive Vice President and Director None
John P. Murray................... Executive Vice President and Director None
of Risk Management
Leland B. Paton.................. Executive Vice President and None
Director
Richard A. Redeker............... Director Director
Hardwick Simmons................. Chief Executive Officer, President None
and Director
Lee B. Spencer, Jr............... General Counsel; Exeuctive Vice None
President and Director
</TABLE>
C-6
<PAGE> 83
(b)(ii) Information concerning the directors and officers of Prudential
Mutual Fund Distributors, Inc. is set forth below:
<TABLE>
<CAPTION>
Positions and Positions and
Offices with Offices with
Name(1) Underwriter Registrant
- ------- ------------- -------------
<S> <C> <C>
Joanne Accurso-Soto.............. Vice President None
Dennis Annarumma................. Vice President, Assistant Treasurer None
and Assistant Comptroller
Phyllis J. Berman................ Vice President None
Fred A. Fiandaca................. President, Chief Executive Officer and None
Raritan Plaza One Director
Edison, NJ 08847
Stephen P. Fisher................ Vice President None
Frank W. Giordano................ Executive Vice President, General None
Counsel, Secretary and Director
Robert F. Gunia.................. Executive Vice President, Treasurer, Vice President
Comptroller and Director
Andrew J. Varley................. Vice President None
Anita L. Whelan.................. Vice President and Assistant Secretary None
- ------------------
</TABLE>
(1)The address of each person named is One Seaport Plaza, New York, NY 10292
unless otherwise indicated.
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the Rules thereunder are maintained at the
offices of State Street Bank and Trust Company, One Heritage Drive, North
Quincy, Massachusetts, The Prudential Investment Corporation, Prudential Plaza,
751 Broad Street, Newark, New Jersey, the Registrant, One Seaport Plaza, New
York, New York, and Prudential Mutual Fund Services, Inc., Raritan Plaza One,
Edison, New Jersey. Documents required by Rules 31a-1 (b)(5), (6), (7), (9),
(10) and (11) and 31a-1(f) will be kept at Three Gateway Center, documents
required by Rules 31a-1(b)(4) and (11) and 31a-1(d) at One Seaport Plaza and
the
remaining accounts, books and other documents required by such other pertinent
provisions of Section 31(a) and the rules promulgated thereunder will be kept
by
State Street Bank and Trust Company and Prudential Mutual Fund Services, Inc.
ITEM 31. MANAGEMENT SERVICES
Other than as set forth under the captions ``How the Fund is
Managed--Manager'' and ``Management of the Fund--Distributor'' in the
Prospectus
and the captions ``Manager'' and ``Distributor'' in the Statement of Additional
Information, constituting Parts A and B, respectively, of this Registration
Statement, Registrant is not a party to any management-related service
contract.
ITEM 32. UNDERTAKINGS
The Registrant hereby undertakes to furnish each person to whom a
Prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
C-7
<PAGE> 84
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
and the State of New York, on the 31st day of August, 1994.
PRUDENTIAL ADJUSTABLE RATE
SECURITIES FUND, INC.
/s/ Lawrence C. McQuade
-------------------------------------
(Lawrence C. McQuade, President)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Susan CotE Treasurer, Controller and Principal August 31, 1994
- -------------------------------------- Financial and Accounting Officer
Susan CotE
/s/ Edward D. Beach Director August 31, 1994
- --------------------------------------
Edward D. Beach
/s/ Delayne D. Gold Director August 31, 1994
- --------------------------------------
Delayne D. Gold
/s/ Harry A. Jacobs, Jr. Director August 31, 1994
- --------------------------------------
Harry A. Jacobs, Jr.
/s/ Lawrence C. McQuade President and Director August 31, 1994
- --------------------------------------
Lawrence C. McQuade
/s/ Thomas T. Mooney Director August 31, 1994
- --------------------------------------
Thomas T. Mooney
/s/ Thomas H. O'Brien Director August 31, 1994
- --------------------------------------
Thomas H. O'Brien
/s/ Thomas A. Owens, Jr. Director August 31, 1994
- --------------------------------------
Thomas A. Owens, Jr.
/s/ Richard A. Redeker Director August 31, 1994
- --------------------------------------
Richard A. Redeker
/s/ Stanley E. Shirk Director August 31, 1994
- --------------------------------------
Stanley E. Shirk
</TABLE>
<PAGE> 85
EXHIBIT INDEX
1. Articles of Incorporation of the Registrant, incorporated by reference to
Exhibit No. 1 to Pre-Effective Amendment No. 1 to the Registration Statement
on Form N-1A (File No. 33-46658) filed on May 4, 1992.
2. (a) By-Laws of the Registrant, incorporated by reference to Exhibit No. 2 to
the Registration Statement on Form N-1A (File No. 33-46658) filed on March
25, 1992.
(b) Amended By-Laws of the Registrant; incorporated by reference to Exhibit
2(b) to Post-Effective Amendment No. 1 to the Registration Statement on Form
N-1A (File No. 33-46658) filed on November 2, 1992.
3. Not Applicable.
4. Instruments defining rights of shareholders, incorporated by reference to
Exhibit 4 to Post-Effective Amendment No. 3 to the Registration Statement on
Form N-1A (File No. 33-46658) filed via EDGAR on May 1, 1994.
5. (a) Management Agreement between the Registrant, and Prudential Mutual Fund
Management, Inc.; incorporated by reference to Exhibit 5(a) to
Post-Effective Amendment No. 1 to the Registration Statement on Form N-1A
(File No. 33-46658) filed on November 2, 1992.
(b) Subadvisory Agreement between Prudential Mutual Fund Management, Inc.
and The Prudential Investment Corporation; incorporated by reference to
Exhibit 5(b) to Post-Effective Amendment No. 1 to the Registration Statement
on Form N-1A (File No. 33-46658) filed on November 2, 1992.
6. (a) (i) Distribution Agreement between the Registrant and Prudential Mutual
Fund Distributors Inc. for Class A shares; incorporated by reference to
Exhibit 6(a) to Post-Effective Amendment No. 1 to the Registration Statement
on Form N-1A (File No. 33-46658) filed on November 2, 1992.
(ii) Restated Distribution Agreement between the Registrant and Prudential
Mutual Fund Distributors for Class A shares, incorporated by reference to
Exhibit 6(a)(ii) to Post-Effective Amendment No. 3 to the Registration
Statement on Form N-1A (File No. 33-46658) filed via EDGAR on May 1, 1994.
(b) (i) Distribution Agreement between the Registrant and Prudential
Securities Incorporated for Class B shares; incorporated by reference to
Exhibit 6(b) to Post-Effective Amendment No. 1 to the Registration Statement
on Form N-1A (File No. 33-46658) filed on November 2, 1992.
(ii) Restated Distribution Agreement between the Registrant and Prudential
Securities for Class B shares, incorporated by reference to Exhibit 6(b)(ii)
to Post-Effective Amendment No. 3 to the Registration Statement on Form N-1A
(File No. 33-46658) filed via EDGAR on May 1, 1994.
(c)_Distribution Agreement between the Registrant and Prudential Securities
Incorporated for Class C shares.*
7. Not Applicable.
8. Custodian Contract between the Registrant and State Street Bank and Trust
Company; incorporated by reference to Exhibit 8 to Post-Effective Amendment
No. 1 to the Registration Statement on Form N-1A (File No. 33-46658) filed
on November 2, 1992.
9. 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. 1 to the Registration Statement on Form N-1A
(File No. 33-46658) filed on November 2, 1992.
10. (a) Opinion of Counsel, incorporated by reference to Exhibit No. 10 to
Pre-Effective Amendment No. 1 to the Registration Statement on Form N-1A
(File No. 33-46658) filed on May 4, 1992.
(b) Opinion of Counsel, incorporated by reference to Exhibit 10(b) to
Post-Effective Amendment No. 3 to the Registration Statement on Form N-1A
(File No. 33-46658) filed via EDGAR on May 1, 1994.
11. Consent of Independent Auditors.*
12. Not Applicable.
13. Subscription Agreement between the Registrant and Prudential Mutual Fund
Management, Inc. incorporated by reference to Exhibit 13 to Post-Effective
Amendment No. 1 to the Registration Statement on Form N-1A (File No.
33-46658) filed on November 2, 1992.
14. Not Applicable.
15. (a) (i) Plan of Distribution pursuant to Rule 12b-1 for Class A shares;
incorporated by reference to Exhibit 15(a) to Post-Effective Amendment No. 1
to the Registration Statement on Form N-1A (File No. 33-46658) filed on
November 2, 1992.
(ii) Amended and restated Distribution and Service Plan pursuant to Rule
12b-1 for Class A shares, incorporated by reference to Exhibit 15(a)(ii) to
Post-Effective Amendment No. 3 to the Registration Statement on Form N-1A
(File No. 33-46658) filed via EDGAR on May 1, 1994.
(b) (i) Plan of Distribution pursuant to Rule 12b-1 for Class B shares;
incorporated by reference to Exhibit 15(a) to Post-Effective Amendment No. 1
to the Registration Statement on Form N-1A (File No. 33-46658) filed on
November 2, 1992.
<PAGE> 86
(ii) Amended and restated Distribution and Service Plan pursuant to Rule
12b-1 for Class B shares, incorporated by reference to Exhibit 15(b)(ii) to
Post-Effective Amendment No. 3 to the Registration Statement on Form N-1A
(File No. 33-46658) filed via EDGAR on May 1, 1994.
(c)_Distribution and Service Plan pursuant to Rule 12b-1 for Class C
shares.*
16. (a) Schedule of Computation of Performance (Class A shares); filed herewith
and incorporated by reference to Exhibit 16(a) to Post-Effective Amendment
No. 1 to the Registration Statement on Form N-1A (File No. 33-46658) filed
on November 2, 1992.
(b) Schedule of Computation of Performance (Class B shares); filed herewith
and incorporated by reference to Exhibit 16(a) to Post-Effective Amendment
No. 1 to the Registration Statement on Form N-1A (File No. 33-46658) filed
on November 2, 1992.
- ---------------------
*Filed herewith.
<PAGE> 1
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Post-Effective Amendment No. 4 to Registration
Statment No. 33-46658 of Prudential Adjustable Rate Securities Fund, Inc. of
our report dated April 14, 1994, appearing in the Statement of Additional
Information, which is part of such Registration Statement, and to the
references to us under the headings "Financial Highlights" in the Prospectus,
which is a part of such Registration Statement, and "Custodian, Transfer and
Dividend Disbursing Agent and Independent Accountants" in the Statement of
Additional Information.
/s/ Deloitte & Touche L.L.P.
- ----------------------------
Deloitte & Touche L.L.P.
New York, New York
August 25, 1994
<PAGE> 1
EXHIBIT 99.6(c)
THE PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC.
Form of
Distribution Agreement
(Class C Shares)
Agreement made as of ______ __, 199_, between The Prudential
Adjustable Rate Securities Fund, Inc., a Delaware corporation (the Fund) and
Prudential Securities Incorporated, a Delaware Corporation (the Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company
Act of 1940, as amended (the Investment Company Act), as a diversified,
open-end, management investment company and it is in the interest of the Fund
to offer its Class C shares for sale continuously;
WHEREAS, the Distributor is a broker-dealer registered under
the Securities Exchange Act of 1934, as amended, and is engaged in the business
of selling shares of registered investment companies either directly or through
other broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into an
agreement with each other, with respect to the continuous offering of the
Fund's Class C shares from and after the date hereof in order to promote the
growth of the Fund and facilitate the distribution of its Class C shares; and
WHEREAS, the Fund has adopted a distribution and service plan
pursuant to Rule 12b-1 under the Investment Company Act (the Plan) authorizing
payments by the Fund to the Distributor with respect to the distribution of
Class C shares of the Fund and the maintenance of Class C shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor
The Fund hereby appoints the Distributor as the principal
underwriter and distributor of the Class C shares of the Fund to sell Class C
shares to the public and the Distributor hereby accepts such appointment and
agrees to act hereunder. The Fund hereby agrees during the term of this
Agreement to sell Class C shares of the Fund to the Distributor on the terms
and conditions set forth below.
Section 2. Exclusive Nature of Duties
The Distributor shall be the exclusive representative of the
Fund to act as principal underwriter and distributor of the Fund's Class C
shares, except that:
<PAGE> 2
2.1 The exclusive rights granted to the Distributor to
purchase Class C shares from the Fund shall not apply to Class C shares of the
Fund issued in connection with the merger or consolidation of any other
investment company or personal holding company with the Fund or the acquisition
by purchase or otherwise of all (or substantially all) the assets or the
outstanding shares of any such company by the Fund.
2.2 Such exclusive rights shall not apply to Class C shares
issued by the Fund pursuant to reinvestment of dividends or capital gains
distributions.
2.3 Such exclusive rights shall not apply to Class C shares
issued by the Fund pursuant to the reinstatement privilege afforded redeeming
shareholders.
2.4 Such exclusive rights shall not apply to purchases made
through the Fund's transfer and dividend disbursing agent in the manner set
forth in the currently effective Prospectus of the Fund. The term "Prospectus"
shall mean the Prospectus and Statement of Additional Information included as
part of the Fund's Registration Statement, as such Prospectus and Statement of
Additional Information may be amended or supplemented from time to time, and
the term "Registration Statement" shall mean the Registration Statement filed
by the Fund with the Securities and Exchange Commission and effective under the
Securities Act of 1933, as amended (the Securities Act), and the Investment
Company Act, as such Registration Statement is amended from time to time.
Section 3. Purchase of Class C Shares from the Fund
3.1 The Distributor shall have the right to buy from the Fund
the Class C shares needed, but not more than the Class C shares needed (except
for clerical errors in transmission) to fill unconditional orders for Class C
shares placed with the Distributor by investors or registered and qualified
securities dealers and other financial institutions (selected dealers). The
price which the Distributor shall pay for the Class C shares so purchased from
the Fund shall be the net asset value, determined as set forth in the
Prospectus.
3.2 The Class C shares are to be resold by the Distributor or
selected dealers, as described in Section 6.4 hereof, to investors at the
offering price as set forth in the Prospectus.
3.3 The Fund shall have the right to suspend the sale of its
Class C shares at times when redemption is suspended pursuant to the conditions
in Section 4.3 hereof or at such other times as may be determined by the
Trustees. The Fund shall also have the right to suspend the sale of its Class
C shares if a banking moratorium shall have been declared by federal or New
York authorities.
<PAGE> 3
3.4 The Fund, or any agent of the Fund designated in writing
by the Fund, shall be promptly advised of all purchase orders for Class C
shares received by the Distributor. Any order may be rejected by the Fund;
provided, however, that the Fund will not arbitrarily or without reasonable
cause refuse to accept or confirm orders for the purchase of Class C shares.
The Fund (or its agent) will confirm orders upon their receipt, will make
appropriate book entries and upon receipt by the Fund (or its agent) of payment
therefor, will deliver deposit receipts for such Class C shares pursuant to the
instructions of the Distributor. Payment shall be made to the Fund in New York
Clearing House funds or federal funds. The Distributor agrees to cause such
payment and such instructions to be delivered promptly to the Fund (or its
agent).
Section 4. Repurchase or Redemption of Class C Shares by the Fund
4.1 Any of the outstanding Class C shares may be tendered for
redemption at any time, and the Fund agrees to repurchase or redeem the Class C
shares so tendered in accordance with its Articles of Incorporation as amended
from time to time, and in accordance with the applicable provisions of the
Prospectus. The price to be paid to redeem or repurchase the Class C shares
shall be equal to the net asset value determined as set forth in the
Prospectus. All payments by the Fund hereunder shall be made in the manner set
forth in Section 4.2 below.
4.2 The Fund shall pay the total amount of the redemption
price as defined in the above paragraph pursuant to the instructions of the
Distributor on or before the seventh day subsequent to its having received the
notice of redemption in proper form. The proceeds of any redemption of Class C
shares shall be paid by the Fund as follows: (a) any applicable contingent
deferred sales charge shall be paid to the Distributor and (b) the balance
shall be paid to or for the account of the redeeming shareholder, in each case
in accordance with applicable provisions of the Prospectus.
4.3 Redemption of Class C shares or payment may be suspended
at times when the New York Stock Exchange is closed for other than customary
weekends and holidays, when trading on said Exchange is restricted, when an
emergency exists as a result of which disposal by the Fund of securities owned
by it is not reasonably practicable or it is not reasonably practicable for the
Fund fairly to determine the value of its net assets, or during any other
period when the Securities and Exchange Commission, by order, so permits.
Section 5. Duties of the Fund
5.1 Subject to the possible suspension of the sale of Class C
shares as provided herein, the Fund agrees to sell its Class C shares so long
as it has Class C shares available.
<PAGE> 4
5.2 The Fund shall furnish the Distributor copies of all
information, financial statements and other papers which the Distributor may
reasonably request for use in connection with the distribution of Class C
shares, and this shall include one certified copy, upon request by the
Distributor, of all financial statements prepared for the Fund by independent
public accountants. The Fund shall make available to the Distributor such
number of copies of its Prospectus and annual and interim reports as the
Distributor shall reasonably request.
5.3 The Fund shall take, from time to time, but subject to
the necessary approval of the Trustees and the shareholders, all necessary
action to fix the number of authorized Class C shares and such steps as may be
necessary to register the same under the Securities Act, to the end that there
will be available for sale such number of Class C shares as the Distributor
reasonably may expect to sell. The Fund agrees to file from time to time such
amendments, reports and other documents as may be necessary in order that there
will be no untrue statement of a material fact in the Registration Statement,
or necessary in order that there will be no omission to state a material fact
in the Registration Statement which omission would make the statements therein
misleading.
5.4 The Fund shall use its best efforts to qualify and
maintain the qualification of any appropriate number of its Class C shares for
sales under the securities laws of such states as the Distributor and the Fund
may approve; provided that the Fund shall not be required to amend its Articles
of Incorporation or By-Laws to comply with the laws of any state, to maintain
an office in any state, to change the terms of the offering of its Class C
shares in any state from the terms set forth in its Registration Statement, to
qualify as a foreign corporation in any state or to consent to service of
process in any state other than with respect to claims arising out of the
offering of its Class C shares. Any such qualification may be withheld,
terminated or withdrawn by the Fund at any time in its discretion. As provided
in Section 9.1 hereof, the expense of qualification and maintenance of
qualification shall be borne by the Fund. The Distributor shall furnish such
information and other material relating to its affairs and activities as may be
required by the Fund in connection with such qualifications.
Section 6. Duties of the Distributor
6.1 The Distributor shall devote reasonable time and effort
to effect sales of Class C shares of the Fund, but shall not be obligated to
sell any specific number of Class C shares. Sales of the Class C shares shall
be on the terms described in the Prospectus. The Distributor may enter into
like arrangements with other investment companies. The Distributor shall
compensate the selected dealers as set forth in the Prospectus.
6.2 In selling the Class C shares, the Distributor shall
<PAGE> 5
use its best efforts in all respects duly to conform with the requirements of
all federal and state laws relating to the sale of such securities. Neither
the Distributor nor any selected dealer nor any other person is authorized by
the Fund to give any information or to make any representations, other than
those contained in the Registration Statement or Prospectus and any sales
literature approved by appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the
confirmation of sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales and the
cancellation of unsettled transactions, as may be necessary to comply with the
requirements of the National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into
selected dealer agreements with registered and qualified securities dealers and
other financial institutions of its choice for the sale of Class C shares,
provided that the Fund shall approve the forms of such agreements. Within the
United States, the Distributor shall offer and sell Class C shares only to such
selected dealers as are members in good standing of the NASD. Class C shares
sold to selected dealers shall be for resale by such dealers only at the
offering price determined as set forth in the Prospectus.
Section 7. Payments to the Distributor
The Distributor shall receive and may retain any contingent
deferred sales charge which is imposed with respect to repurchases and
redemptions of Class C shares as set forth in the Prospectus, subject to the
limitations of Article III, Section 26 of the NASD Rules of Fair Practice.
Payment of these amounts to the Distributor is not contingent upon the adoption
or continuation of the Plan.
Section 8. Payment of the Distributor under the Plan
8.1 The Fund shall pay to the Distributor as compensation for
services under the Distribution and Service Plan and this Agreement a fee of 1%
(including an asset-based sales charge of .75 of 1% and a service fee of .25 of
1%) per annum of the average daily net assets of the Class C shares of the
Fund. Amounts payable under the Plan shall be accrued daily and paid monthly
or at such other intervals as the Trustees may determine. Amounts payable
under the Plan shall be subject to the limitations of Article III, Section 26
of the NASD Rules of Fair Practice.
8.2 So long as the Plan or any amendment thereto is in
effect, the Distributor shall inform the Trustees of the commissions (including
trailer commissions) and account servicing fees to be paid by the Distributor
to account executives of the Distributor and to broker-dealers and financial
institutions which have selected dealer agreements with the Distributor. So
long as the Plan (or any amendment thereto) is in effect, at the request of
<PAGE> 6
the Trustees or any agent or representative of the Fund, the Distributor shall
provide such additional information as may reasonably be requested concerning
the activities of the Distributor hereunder and the costs incurred in
performing such activities.
8.3 Expenses of distribution with respect to the Class C
shares of the Fund include, among others:
(a) sales commissions (including trailer commissions) paid to, or
on account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of distribution activities, including central
office and branch expenses;
(c) amounts paid to Prusec for performing services under a
selected dealer agreement between Prusec and the Distributor
for sale of Class C shares of the Fund, including sales
commissions and trailer commissions paid to, or on account of,
agents and indirect and overhead costs associated with
distribution activities;
(d) sales commissions (including trailer commissions) paid to, or
on account of, broker-dealers and financial institutions
(other than Prusec) which have entered into selected dealer
agreements with the Distributor with respect to Class C shares
of the Fund;
(e) amounts paid to, or an account of, account executives of the
Distributor or of other broker-dealers or financial
institutions for personal service and/or the maintenance of
shareholder accounts; and
(f) advertising for the Fund in various forms through any
available medium, including the cost of printing and mailing
Fund Prospectuses, and periodic financial reports and sales
literature to persons other than current shareholders of the
Fund.
Indirect and overhead costs referred to in clauses (b) and (c)
of the foregoing sentence include (i) lease expenses, (ii) salaries and
benefits of personnel including operations and sales support personnel, (iii)
utility expenses, (iv) communications expenses, (v) sales promotion expenses,
(vi) expenses of postage, stationery and supplies and (vii) general overhead.
<PAGE> 7
Section 9. Allocation of Expenses
9.1 The Fund shall bear all costs and expenses of the
continuous offering of its Class C shares, including fees and disbursements of
its counsel and auditors, in connection with the preparation and filing of any
required Registration Statements and/or Prospectuses under the Investment
Company Act or the Securities Act, and preparing and mailing annual and
periodic reports and proxy materials to shareholders (including but not limited
to the expense of setting in type any such Registration Statements,
Prospectuses, annual or periodic reports or proxy materials). The Fund shall
also bear the cost of expenses of qualification of the Class C shares for sale,
and, if necessary or advisable in connection therewith, of qualifying the Fund
as a broker or dealer, in such states of the United States or other
jurisdictions as shall be selected by the Fund and the Distributor pursuant to
Section 5.4 hereof and the cost and expense payable to each such state for
continuing qualification therein until the Fund decides to discontinue such
qualification pursuant to Section 5.4 hereof. As set forth in Section 8 above,
the Fund shall also bear the expenses it assumes pursuant to the Plan with
respect to Class C shares, so long as the Plan is in effect.
Section 10. Indemnification
10.1 The Fund agrees to indemnify, defend and hold the
Distributor, its officers and Trustees and any person who controls the
Distributor within the meaning of Section 15 of the Securities Act, free and
harmless from and against any and all claims, demands, liabilities and expenses
(including the cost of investigating or defending such claims, demands or
liabilities and any counsel fees incurred in connection therewith) which the
Distributor, its officers, Trustees or any such controlling person may incur
under the Securities Act, or under common law or otherwise, arising out of or
based upon any untrue statement of a material fact contained in the
Registration Statement or Prospectus or arising out of or based upon any
alleged omission to state a material fact required to be stated in either
thereof or necessary to make the statements in either thereof not misleading,
except insofar as such claims, demands, liabilities or expenses arise out of or
are based upon any such untrue statement or omission or alleged untrue
statement or omission made in reliance upon and in conformity with information
furnished in writing by the Distributor to the Fund for use in the Registration
Statement or Prospectus; provided, however, that this indemnity agreement shall
not inure to the benefit of any such officer, Director or controlling person
unless a court of competent jurisdiction shall determine in a final decision on
the merits, that the person to be indemnified was not liable by reason of
willful misfeasance, bad faith or gross negligence in the performance of its
duties, or by reason of its reckless disregard of its obligations under this
Agreement (disabling conduct), or, in the absence of such a decision, a
reasonable determination, based upon a review of the facts, that the
indemnified person was not liable by reason of disabling
<PAGE> 8
conduct, by (a) a vote of a majority of a quorum of Trustees who are neither
"interested persons" of the Fund as defined in Section 2(a)(19) of the
Investment Company Act nor parties to the proceeding, or (b) an independent
legal counsel in a written opinion. The Fund's agreement to indemnify the
Distributor, its officers and Trustees and any such controlling person as
aforesaid is expressly conditioned upon the Fund's being promptly notified of
any action brought against the Distributor, its officers or Trustees, or any
such controlling person, such notification to be given in writing addressed to
the Fund at its principal business office. The Fund agrees promptly to notify
the Distributor of the commencement of any litigation or proceedings against
it or any of its officers or Trustees in connection with the issue and sale of
any Class C shares.
10.2 The Distributor agrees to indemnify, defend and hold the
Fund, its officers and Trustees and any person who controls the Fund, if any,
within the meaning of Section 15 of the Securities Act, free and harmless from
and against any and all claims, demands, liabilities and expenses (including
the cost of investigating or defending against such claims, demands or
liabilities and any counsel fees incurred in connection therewith) which the
Fund, its officers and Trustees or any such controlling person may incur under
the Securities Act or under common law or otherwise, but only to the extent
that such liability or expense incurred by the Fund, its Trustees or officers
or such controlling person resulting from such claims or demands shall arise
out of or be based upon any alleged untrue statement of a material fact
contained in information furnished in writing by the Distributor to the Fund
for use in the Registration Statement or Prospectus or shall arise out of or be
based upon any alleged omission to state a material fact in connection with
such information required to be stated in the Registration Statement or
Prospectus or necessary to make such information not misleading. The
Distributor's agreement to indemnify the Fund, its officers and Trustees and
any such controlling person as aforesaid, is expressly conditioned upon the
Distributor's being promptly notified of any action brought against the Fund,
its officers and Trustees or any such controlling person, such notification to
be given to the Distributor in writing at its principal business office.
Section 11. Duration and Termination of this Agreement
11.1 This Agreement shall become effective as of the date
first above written and shall remain in force for two years from the date
hereof and thereafter, but only so long as such continuance is specifically
approved at least annually by (a) the Trustees of the Fund, or by the vote of a
majority of the outstanding voting securities of the Class C shares of the
Fund, and (b) by the vote of a majority of those Trustees who are not parties
to this Agreement or interested persons of any such parties and who have no
direct or indirect financial interest in this Agreement or in the operation of
the Fund's Plan or in any
<PAGE> 9
agreement related thereto (Rule 12b-1 Trustees), cast in person at a meeting
called for the purpose of voting upon such approval.
11.2 This Agreement may be terminated at any time, without
the payment of any penalty, by a majority of the Rule 12b-1 Trustees or by vote
of a majority of the outstanding voting securities of the Class C shares of the
Fund, or by the Distributor, on sixty (60) days' written notice to the other
party. This Agreement shall automatically terminate in the event of its
assignment.
11.3 The terms "affiliated person," "assignment," "interested
person" and "vote of a majority of the outstanding voting securities," when
used in this Agreement, shall have the respective meanings specified in the
Investment Company Act.
Section 12. Amendments to this Agreement
This Agreement may be amended by the parties only if such
amendment is specifically approved by (a) the Trustees of the Fund, or by the
vote of a majority of the outstanding voting securities of the Class C shares
of the Fund, and (b) by the vote of a majority of the Rule 12b-1 Trustees cast
in person at a meeting called for the purpose of voting on such amendment.
Section 13. Governing Law
The provisions of this Agreement shall be construed and
interpreted in accordance with the laws of the State of New York as at the time
in effect and the applicable provisions of the Investment Company Act. To the
extent that the applicable law of the State of New York, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year above written.
Prudential Securities
Incorporated
By:
------------------------
------------------------
(Title)
The Prudential Adjustable Rate
Securities Fund, Inc.
By:
------------------------
(Name)
(Title)
<PAGE> 1
EXHIBIT 99.15(c)
. . . . . . . THE PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC.
DISTRIBUTION AND SERVICE PLAN
(CLASS C SHARES)
INTRODUCTION
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Article III, Section 26 of
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. (NASD) has been adopted by The Prudential Adjustable Rate Securities Fund,
Inc.(the Fund) and by Prudential Securities Incorporated (Prudential
Securities), the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which
the Fund will employ the Distributor to distribute Class C shares issued by the
Fund (Class C shares). Under the Plan, the Fund wishes to pay to the
Distributor, as compensation for its services, a distribution and service fee
with respect to Class C shares.
A majority of the Board of Directors of the Fund, including a majority
who are not "interested persons" of the Fund (as defined in the Investment
Company Act) and who have no direct or indirect financial interest in the
operation of this Plan or any agreements related to it (the Rule 12b-1
Directors), have determined by votes cast in person at a meeting called for the
purpose of voting on this Plan that there is a reasonable likelihood that
adoption of this Plan will benefit the Fund and its shareholders. Expenditures
under this Plan by the Fund for Distribution Activities (defined below) are
primarily intended to result in the sale of Class C shares of the Fund within
the meaning of paragraph (a)(2) of Rule 12b-1 promulgated under the Investment
Company Act.
The purpose of the Plan is to create incentives to the Distributor
and/or other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
THE PLAN
The material aspects of the Plan are as follows:
1. Distribution Activities
The Fund shall engage the Distributor to distribute Class C shares
of the Fund and to service shareholder accounts using all of the
facilities of the Prudential Securities distribution network including
sales personnel and branch office and central support systems, and
also using such other qualified broker-dealers and financial
institutions as the Distributor may select, including Pruco Securities
Corporation (Prusec). Services provided and activities undertaken to
distribute Class C shares
<PAGE> 2
of the Fund are referred to herein as "Distribution Activities."
2. Payment of Service Fee
The Fund shall pay to the Distributor as compensation for
providing personal service and/or maintaining shareholder accounts a
service fee of .25 of 1% per annum of the average daily net assets of
the Class C shares (service fee). The Fund shall calculate and accrue
daily amounts payable by the Class C shares of the Fund hereunder and
shall pay such amounts monthly or at such other intervals as the Board
of Directors may determine.
3. Payment for Distribution Activities
The Fund shall pay to the Distributor as compensation for its
services a distribution fee of .75 of 1% per annum of the average
daily net assets of the Class C shares for the performance of
Distribution Activities. The Fund shall calculate and accrue daily
amounts payable by the Class C shares of the Fund hereunder and shall
pay such amounts monthly or at such other intervals as the Board of
Directors may determine. Amounts payable under the Plan shall be
subject to the limitations of Article III, Section 26 of the NASD
Rules of Fair Practice.
Amounts paid to the Distributor by the Class C shares of
the Fund will not be used to pay the distribution expenses
incurred with respect to any other class of shares of the Fund
except that distribution expenses attributable to the Fund as
a whole will be allocated to the Class C shares according to
the ratio of the sale of Class C shares to the total sales of
the Fund's shares over the Fund's fiscal year or such other
allocation method approved by the Board of Directors. The
allocation of distribution expenses among classes will be
subject to the review of the Board of Directors.
The Distributor shall spend such amounts as it deems
appropriate on Distribution Activities which include, among
others:
(a) sales commissions (including trailer commissions) paid to, or
on account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of Distribution Activities including central office and branch
expenses;
(c) amounts paid to Prusec for performing services under a
selected dealer agreement between Prusec and the Distributor for sale of Class
C shares of the Fund, including sales commissions and trailer commissions paid
to, or on account of, agents and indirect and overhead costs associated with
Distribution Activities;
(d) advertising for the Fund in various forms through any
available medium, including the cost of printing and mailing Fund prospectuses,
statements of additional information and periodic
<PAGE> 3
financial reports and sales literature to persons other than current
shareholders of the Fund; and
(e) sales commissions (including trailer commissions) paid to, or
on account of, broker-dealers and other financial institutions (other than
Prusec) which have entered into selected dealer agreements with the Distributor
with respect to Class C shares of the Fund.
4. Quarterly Reports; Additional Information
An appropriate officer of the Fund will provide to the Board of
Directors of the Fund for review, at least quarterly, a written report
specifying in reasonable detail the amounts expended for Distribution
Activities (including payment of the service fee) and the purposes for
which such expenditures were made in compliance with the requirements
of the Rule 12b-1. The Distributor will provide to the Board of
Directors of the Fund such additional information as they shall from
time to time reasonably request, including information about
Distribution Activities undertaken or to be undertaken by the
Distributor.
The Distributor will inform the Board of Directors of the
Fund of the commissions and account servicing fees to be paid
by the Distributor to account executives of the Distributor
and to broker-dealers and other financial institutions which
have selected dealer agreements with the Distributor.
5. Effectiveness; Continuation
The Plan shall not take effect until it has been approved by a
vote of a majority of the outstanding voting securities (as defined in
the Investment Company Act) of the Class C shares of the Fund.
If approved by a vote of a majority of the outstanding
voting securities of the Class C shares of the Fund, the Plan
shall, unless earlier terminated in accordance with its terms,
continue in full force and effect thereafter for so long as
such continuance is specifically approved at least annually by
a majority of the Board of Directors of the Fund and a
majority of the Rule 12b-1 Directors by votes cast in person
at a meeting called for the purpose of voting on the
continuation of the Plan.
6. Termination
This Plan may be terminated at any time by vote of a majority of
the Rule 12b-1 Directors, or by vote of a majority of the outstanding
voting securities (as defined in the Investment Company Act) of the
Class C shares of the Fund.
7. Amendments
The Plan may not be amended to change the combined service and
distribution fees to be paid as provided for in Sections 2 and 3
hereof so as to increase materially the amounts payable
<PAGE> 4
under this Plan unless such amendment shall be approved by the vote of
a majority of the outstanding voting securities (as defined in the
Investment Company Act) of the Class C shares of the Fund. All
material amendments of the Plan shall be approved by a majority of the
Board of Directors of the Fund and a majority of the Rule 12b-1
Directors by votes cast in person at a meeting called for the purpose
of voting on the Plan.
8. Rule 12b-1 Directors
While the Plan is in effect, the selection and nomination of the
Rule 12b-1 Directors shall be committed to the discretion of the Rule
12b-1 Directors.
9. Records
The Fund shall preserve copies of the Plan and any related
agreements and all reports made pursuant to Section 4 hereof, for a
period of not less than six years from the date of effectiveness of
the Plan, such agreements or reports, and for at least the first two
years in an easily accessible place.
Dated:
