<PAGE> 1
As filed with the Securities and Exchange Commission
on May 1, 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. 3 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 4 [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):
[x] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)
[ ] on (date) pursuant to paragraph (a), of Rule 485
<TABLE>
<CAPTION>
===================================================================================================================
Proposed Maximum Proposed Maximum
Title of Securities Amount Being Offering Price Aggregate Amount of
Being Registered Registered Per Unit Offering Price* Registration
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Common Stock, par
value $.001 per share 13,451,594 $9.67 $290,000 $ 100
===================================================================================================================
</TABLE>
* The calculation of the maximum aggregate offering price was made
pursuant to Rule 24e-2 and was based upon an offering price of $9.67
per share as of the close of business on April 22, 1994 pursuant to
Rule 457(d). The total number of shares redeemed during the fiscal
year ended February 28, 1994 amounted to 21,273,029 shares. Of this
number, no shares have been used for reduction pursuant to paragraph
(a) of Rule 24e-2 in all previous filings of post-effective amendments
during the current year and 7,851,424 shares have been used for
reduction pursuant to paragraph (c) of Rule 24f-2 in all previous
filings during the current year. 13,421,605 of the redeemed shares for
the fiscal year ended February 28, 1994 are being used for the
reductions in the post-effective amendment being filed herein.
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, 1994 ON OR BEFORE APRIL 29, 1994.
============================================================================
<PAGE> 2
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- ------------- --------
<S> <C> <C>
PART A
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. Pending Legal Proceedings . . . . . . . . . . . . . . . . . . . Not Applicable
PART B
Item 10. Cover Page . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover Page
Item 11. Table of Contents . . . . . . . . . . . . . . . . . . . . . . . Table of Contents
Item 12. General Information and History . . . . . . . . . . . . . . . . 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 and Other Practices . . . . . . . . . . . . Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities . . . . . . . . . . . . . . . Not Applicable
Item 19. Purchase, Redemption and Pricing of Securities Being Offered . . Purchase and Redemption of Fund
Shares; Shareholder Investment
Account
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 Registration
Statement.
<PAGE> 3
PRUDENTIAL ADJUSTABLE RATE
SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
PROSPECTUS DATED MAY 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 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 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. 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 ought to know before investing. Additional information
about the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated May 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.
- --------------------------------------------------------------------------------
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
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. See "How the Fund Invests--Investment
Objectives and Policies" at page 6.
WHAT ARE THE FUND'S SPECIAL CHARACTERISTICS AND RISKS?
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
short selling and use leverage, including reverse repurchase agreements, dollar
rolls and bank borrowings, which entails 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 March 31, 1994 PMF served as
manager or administrator to 66 investment companies, including 37 mutual funds,
with aggregate assets of approximately $49 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. The Class A Plan of Distribution 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%. PMFD is currently waiving all payments to it under the
Class A Plan of Distribution.
2
<PAGE> 5
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 shares. Prudential Securities may be
reimbursed for its expenses related to the distribution of Class B shares at an
annual rate of up to .75 of 1% of the average daily net assets of the Class B
shares. The Fund may also pay Prudential Securities a service fee of up to .25
of 1% of the average daily net assets of the Class B 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. The subsequent minimum investment
is $1,000. There is no minimum investment requirement for certain retirement and
employee savings plans or custodial accounts for the benefit of minors. For
purchases made through the Automatic Savings Accumulation Plan, the minimum
initial and subsequent investment is $50. See "Shareholder Guide--How to Buy
Shares of the Fund" at page 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 at the time of purchase or on a deferred basis. 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 two classes of shares which may be purchased at the next
determined NAV plus a sales charge which, at your election, may be imposed
either at the time of purchase (Class A shares) or on a deferred basis (Class B
shares).
- Class A shares are sold with an initial sales charge of up to 1.00% of
the offering price.
- Class B shares are sold without an initial sales charge but are subject
to a contingent deferred sales charge or CDSC of 1% which will be imposed
on redemptions made within one year of purchase. Class B shares will be
converted automatically into Class A shares after the one year contingent
deferred sales charge period has expired.
See "Shareholder Guide--Alternative Purchase Plan" at page 28 and
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales
Charge--Class B Shares" at page 32.
HOW DO I SELL MY SHARES?
You may redeem shares of the Fund at any time at the NAV next determined
after Prudential Securities or the Transfer Agent receives your sell order.
Although Class B shares are sold without an initial sales charge, the proceeds
or redemptions of Class B shares held for less than one year may be subject to a
contingent deferred sales charge of 1%. 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 dividends of net investment
income monthly 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
(INITIAL SALES (DEFERRED SALES
CHARGE CHARGE
ALTERNATIVE) ALTERNATIVE)
-------------- ---------------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price).................................. 1.00% None
Maximum Sales Load or Deferred Sales Load Imposed on Reinvested
Dividends............................................................ None None
Deferred Sales Load (as a percentage of original purchase price or
redemption proceeds, whichever is lower)*............................ None 1% during the
first year and
0% thereafter
Redemption Fees........................................................ None None
Exchange Fee........................................................... None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees........................................................ .50% .50%
12b-1 Fees* + (Before fee waiver)...................................... .50% 1.00%
Other Expenses......................................................... .21% .21%
---- ----
Total Fund Operating Expenses (Before fee waiver)**.................... 1.21% 1.71%
---- ----
---- ----
</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............................................................ $ 22 $48 $76 $155
Class B*........................................................... $ 27 $54 $93 $202
You would pay the following expenses on the same investment, assuming
no redemption:
Class A............................................................ $ 22 $48 $76 $155
Class B*........................................................... $ 17 $54 $93 $202
</TABLE>
The above example is based on restated data for the Fund's fiscal year ending
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 Distribution and Service Plan (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 Distribution and Service Plan (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. Class B shares will be automatically converted to Class A shares after
the one year contingent deferred sales charge has expired. See "Shareholder
Guide--Alternative Purchase Plan."
** 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."
+ 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. See "How the Fund is
Managed--Distributor".
4
<PAGE> 7
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIOD)
THE FOLLOWING FINANCIAL HIGHLIGHTS HAVE BEEN AUDITED BY DELOITTE & TOUCHE,
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.
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------ ------------------------------------
FISCAL JUNE 10, 1992* FISCAL JUNE 10, 1992*
YEAR ENDED THROUGH YEAR ENDED THROUGH
FEBRUARY 28, 1994 FEBRUARY 28, 1993 FEBRUARY 28, 1994 FEBRUARY 28, 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 in-
vestment 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 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.
5
<PAGE> 8
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 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 SHORT SELLING AND USE LEVERAGE, INCLUDING REVERSE
REPURCHASE AGREEMENTS, DOLLAR ROLLS AND BANK BORROWINGS.
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.
6
<PAGE> 9
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 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.
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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.
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 --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.
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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
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
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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.
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
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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 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 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.
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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 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 prepay-
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ment 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.
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
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 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
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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. 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.
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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 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.
SPECIAL 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
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<PAGE> 18
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.
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,
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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.
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
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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.
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) 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."
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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 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. SEE "FINANCIAL HIGHLIGHTS" AND
"FEE WAIVERS AND SUBSIDY."
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 March 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 $49 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.
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PMF and PIC are indirect, 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 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.
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
SHARES OF THE FUND. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN AND THE
CLASS B 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 AND CLASS B
SHARES, RESPECTIVELY. These expenses include commissions and account servicing
fees paid to, or on account of, financial advisers of Prudential Securities and
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 A PLAN, THE FUND MAY REIMBURSE 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%. 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
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<PAGE> 24
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 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 Charge--Class B Shares. 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 foward
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.
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.
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.
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<PAGE> 25
Distribution expenses attributable to the sale of both Class A and Class B
shares 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 initial
sales charge in the case of Class A shares will not be used to subsidize the
sale of Class B shares. Similarly, the distribution fee and contingent deferred
sales charge in the case of Class B shares will not be used to subsidize the
sale of Class A shares.
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 and Class B Plans, the Manager (or one of its affiliates) may make
payments 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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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 Class A and Class B 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 and B 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 between the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE ITS "TOTAL RETURN" (INCLUDING
"AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE TOTAL RETURN") IN ADVERTISEMENTS
AND SALES LITERATURE. TOTAL RETURN IS CALCULATED SEPARATELY FOR CLASS A AND
CLASS B SHARES. These figures are based on historical earnings and are not
intended to indicate future performance. The "total return" shows how much an
investment in the 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 may also
from time to time advertise its 30-day yield. See "Performance Information" in
the Statement of Additional Information. 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
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<PAGE> 27
investment. The income earned on the investment is also assumed to be reinvested
at the end of the sixth 30-day period. The Fund also may include comparative
performance information in advertising or marketing the Fund's shares. Such
performance information may include data from Lipper Analytical Services, 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 both Class A and Class B 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."
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 an opinion of counsel to the effect that the
conversion of Class B shares into Class A shares does not constitute a taxable
event for U.S. income tax purposes. However, such opinion is not binding on the
Internal Revenue Service.
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. THE PER SHARE DIVIDENDS ON CLASS B SHARES WOULD GENERALLY BE LOWER THAN
THE PER SHARE DIVIDENDS ON CLASS A SHARES, IF DISTRIBUTION FEES FOR BOTH CLASSES
WERE BEING ASSESSED, AS A RESULT OF THE HIGHER DISTRIBUTION FEE APPLICABLE WITH
RESPECT TO CLASS B SHARES. DISTRIBUTIONS OF CAPITAL GAINS WILL BE IN THE SAME
AMOUNT FOR CLASS A AND CLASS B SHARES. SEE "HOW THE FUND VALUES ITS SHARES."
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<PAGE> 28
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. 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.
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 TWO CLASSES, DESIGNATED CLASS A AND CLASS B COMMON STOCK, EACH OF
WHICH CONSISTS OF 1 BILLION AUTHORIZED SHARES. Both Class A and Class B common
stock represent an interest in the same assets of the Fund and are identical in
all respects except that each class bears certain distribution expenses and has
exclusive voting rights with respect to its distribution fee. 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 only two classes, designated as Class A and Class B 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 Class A and Class B 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 shares bear higher distribution expenses, the liquidation
proceeds to Class B shareholders 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 THE ELECTION OF DIRECTORS IS REQUIRED TO BE ACTED ON BY
SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT.
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<PAGE> 29
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.
SHAREHOLDERS' 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. The minimum subsequent investment is $1,000. 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 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 AT THE TIME OF PURCHASE OR ON A DEFERRED BASIS, AS
DESCRIBED BELOW.
Application forms can be obtained from PMFS, Prudential Securities or
Prusec. If a stock certificate is desired, it must be requested in writing for
each transaction. Certificates are issued only for full shares. Shareholders who
hold their shares through Prudential Securities will not receive stock
certificates.
The Fund reserves the right to reject any purchase order or exchange order
or to suspend or modify the continuous offering of its shares. See "How to Sell
Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the 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
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<PAGE> 30
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 or Class B 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 or Class B shares and your name and individual
account number. It is not necessary to call PMFS to make subsequent purchase
orders utilizing Federal Funds. The minimum amount which may be invested by wire
is $1,000.
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS TWO CLASSES OF 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. You may purchase shares at the next determined NAV
plus a sales charge which, at your election, may be imposed either at the time
of purchase (the Class A shares or the initial sales charge alternative) or on a
deferred basis (the Class B shares or the deferred sales charge alternative)
(the Alternative Purchase Plan).
CLASS A SHARES ARE SUBJECT TO AN INITIAL SALES CHARGE OF UP TO 1.00% OF THE
OFFERING PRICE AND AN ANNUAL DISTRIBUTION AND SERVICE FEE WHICH MAY BE CHARGED
AT A RATE OF UP TO .50 TO 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A
SHARES. Certain purchases of Class A shares may qualify for reduction or waiver
of initial sales charges. The Distributor is currently waiving all payments to
it under the Class A Plan. Therefore, the Fund is currently not assessing any
12b-1 fees on the Class A shares. See "How the Fund is Managed--Distributor."
See also "Initial Sales Charge Alternative--Class A Shares--Reduction or Waiver
of Initial Sales Charges" below.
CLASS B SHARES DO NOT INCUR A SALES CHARGE WHEN THEY ARE PURCHASED BUT ARE
SUBJECT TO A CONTINGENT DEFERRED SALES CHARGE FOR ONE YEAR FROM THE DATE OF
PURCHASE OF THE LESSER OF THE AMOUNT INVESTED OR THE REDEMPTION PROCEEDS AND AN
ANNUAL DISTRIBUTION FEE (INCLUDING AN ASSET-BASED SALES CHARGE OF UP TO .75 OF
1% AND A SERVICE FEE OF UP TO .25 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE
CLASS B SHARES) OF UP TO 1% OF THE AVERAGE DAILY NET ASSET VALUE OF THE CLASS B
SHARES. CLASS B SHARES WILL CONVERT AUTOMATICALLY TO CLASS A SHARES AFTER THE
ONE-YEAR CDSC PERIOD HAS EXPIRED. THE FUND IS CURRENTLY NOT ASSESSING ANY 12B-1
FEES ON THE CLASS B SHARES AS THE DISTRIBUTOR NO LONGER HAS ANY COSTS
REIMBURSABLE TO IT UNDER THE CLASS B PLAN. SEE "HOW THE FUND IS
MANAGED--DISTRIBUTOR."
The two classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that each class bears
the separate expenses of its Rule 12b-1 distribution plan and has exclusive
voting rights with respect to such a plan. The net income attributable to each
class and the dividends payable on the shares of each class will be reduced by
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<PAGE> 31
the amount of the distribution and service fees of each class. Class B shares
generally bear the expenses of higher distribution and service fees, when
distribution fees are being fully assessed, which will cause the Class B shares
to typically have a higher expense ratio 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, the Class A and Class B shares, in such circumstances, will
have the same expense ratio and to pay the same dividends.
Financial advisers will receive different compensation for selling Class A
and Class B shares.
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 the initial
sales charge alternative because a similar sales charge reduction is not
available for purchases under the deferred sales charge alternative and because
Class A shares are typically subject to lower distribution and service fees than
are Class B shares. However, because the initial sales charge 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
the initial sales charge alternative 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 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 of 1% 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 Portfolio for more than one year, you
should consider purchasing Class B shares since Class B shares will be converted
automatically into Class A shares after the one year contingent deferred sales
charge period has expired. You will thereafter become a Class A shareholder and,
as such, will be subject to the distribution and service fees (which is
typically lower for Class A shares) applicable to Class A shareholders.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The offering price of Class A shares 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.
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<PAGE> 32
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Sales charges are reduced
under Rights of Accumulation and Letters of Intent. Class A shares are offered
at NAV to participants in certain retirement and deferred compensation plans
including qualified or non-qualified plans under the Internal Revenue Code and
certain affinity group and group savings plans, provided that the plan has
existing assets of at least $10 million or 2,500 eligible employees or members.
Additional information concerning the reduction and waiver of initial sales
charges is set forth in the Statement of Additional Information. In the case of
pension, profit-sharing or stock bonus plans under Section 401 of the Internal
Revenue Code and deferred compensation and annuity plans under Sections 457 and
403(b)(7) of the Internal Revenue Code (Benefit Plans) whose accounts are held
directly with the Transfer Agent and for which the Transfer Agent 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 are offered at NAV to participants who are repaying loans
made from such plans to the participant.
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 Prudential Mutual Fund
Services, Inc., the Fund's transfer agent, provides recordkeeping services,
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 those
acquired pursuant to the exchange privilege) held at the transfer agent 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.
Class A shares are offered at NAV to Directors and officers of the Fund and
other Prudential Mutual Funds, to employees of Prudential Securities and PMF and
their subsidiaries and to members of the families of such persons who maintain
an "employee related" account at Prudential Securities or the Transfer Agent.
Class A shares are offered at NAV to employees and special agents of The
Prudential Insurance Company of America and its subsidiaries and to all persons
who have retired directly from active service with Prudential or one of its
subsidiaries.
Class A shares are offered at NAV to an investor who has 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 investment company sponsored by the financial adviser's previous
employer (other than a money market fund or other no-load 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 and (iii) the financial
adviser served as the client's broker on the previous purchase.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
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.
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<PAGE> 33
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
The offering price of Class B shares for investors choosing the deferred
sales charge alternative is the NAV next determined following receipt of an
order by the Transfer Agent or Prudential Securities. There is no sales charge
imposed at the time of purchase; however redemption of Class B shares may be
subject to a contingent deferred sales charge. An account servicing fee is also
paid by the Fund to financial advisers and sales representatives whose customers
hold shares of the Fund. See "How to Sell Your Shares--Contingent Deferred Sales
Charge--Class B Shares."
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 from the Class B shares will be
reduced by the amount of any applicable contingent deferred sales charge, as
described below. See "Contingent Deferred Sales Charge--Class B Shares."
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 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. 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
31
<PAGE> 34
Securities and Exchange Commission, 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 CHECKS.
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.
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 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 CHARGE--CLASS B SHARES
If you have elected to purchase shares without an initial sales charge
(Class B), a contingent deferred sales charge or CDSC of 1% will be imposed on
all redemptions made within one year of purchase. The CDSC will be deducted 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. Increases in the value of your shares purchased through
reinvestment of dividends or distributions are not subject to a CDSC. The amount
of any CDSC is currently being
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<PAGE> 35
paid to the Fund. In the event the Distributor incurs additional costs
reimbursable to it under the Class B Plan, the CDSC will be paid to and retained
by the Distributor. See "How the Fund is Managed--Distributor."
In determining the contingent deferred sales charge applicable to a
redemption, 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 for the longest period of time within the one-year period. For
purposes of calculating the one-year period, all payments for the purchase of
shares during a month will be aggregated and deemed to have been made on the
last day of the month. No contingent deferred sales charge will be applicable
after the one-year period.
For example, assume you purchased 1,000 shares at $2 per share for a cost
of $2,000. 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 $2.20
per share, the proceeds of the redemption would be $440. 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 $2 per
share and not to the increase in net asset value per share of $.20. Therefore,
$300 of the $440 redemption proceeds 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 SHAREHOLDERS OF THE FUND HAVE AN EXCHANGE PRIVILEGE WITH THE CLASS
A SHARES OF PRUDENTIAL SHORT-TERM GLOBAL INCOME FUND--GLOBAL ASSETS PORTFOLIO,
SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS OF THAT FUND. CLASS A
SHAREHOLDERS OF THE FUND MAY EXCHANGE THEIR SHARES FOR CLASS A SHARES OF
PRUDENTIAL SHORT-TERM GLOBAL INCOME FUND--GLOBAL ASSETS PORTFOLIO ON THE BASIS
OF THE RELATIVE NAV. 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. An exchange will be treated as a redemption
and purchase for tax purposes.
In addition, 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. An exchange will be treated as a redemption and purchase
for tax purposes. Class A shares and shares of money market funds that are
acquired as a result of an exchange of Class B shares of the Fund, as described
above, will continue to be subject to any contingent deferred sales charge
previously applicable to the Class B shares subject to the exchange. See
"Exchange Privilege" in the Statement of Additional Information. Except for
exchanges into the Global Assets Portfolio of the Prudential Short-Term Global
Income Fund, once shares are exchanged out of the Fund pursuant to the Exchange
Privilege, they may not be re-exchanged for shares of the Fund.
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<PAGE> 36
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.
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.
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.
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.
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.
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 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
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<PAGE> 37
Prudential Securities financial adviser, Prusec registered representative or the
Transfer Agent directly.
- 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 shares of the Fund with a minimum value of
$10,000. Such withdrawal plan provides for monthly or quarterly checks. 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.
35
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<PAGE> 41
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 registered representative or telephone
the Fund at 1 (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 Prudential Equity Fund
Prudential Government Plus Fund Prudential Equity Income Fund
Prudential Government Securities Trust Prudential FlexiFund
Intermediate Term Series Conservatively Managed Portfolio
Prudential High Yield Fund Strategy Portfolio
Prudential Structured Maturity Fund Prudential Growth Fund, Inc.
Income Portfolio Prudential Growth Opportunity Fund
Prudential U.S. Government Fund Prudential IncomeVertible(R) Fund, Inc.
The BlackRock Government Income Trust Prudential Multi-Sector Fund, Inc.
Prudential Utility Fund
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
- Command Funds
GLOBAL FUNDS Command Money Fund
Command Government Fund
Prudential Global Fund Inc. Command Tax-Free Fund
Prudential Global Genesis Fund
Prudential Global Natural Resources Fund - Institutional Money Market Funds
Prudential Intermediate Global Income Fund, Inc. Prudential Institutional Liquidity Portfolio, Inc.
Prudential Pacific Growth Fund, Inc. Institutional Money Market Series
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
</TABLE>
A-1
<PAGE> 42
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 conjunction.
- ------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS....................... 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
</TABLE>
<TABLE>
<S> <C>
HOW THE FUND IS MANAGED............... 20
Manager............................. 20
Fee Waivers and Subsidy............. 21
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......... 33
Shareholder Services................ 34
THE PRUDENTIAL MUTUAL FUND FAMILY... A-1
</TABLE>
- ------------------------------------------------
MF 156A 4445901
CUSIP NOS.: Class A: 74429J106
Class B: 74429J205
PROSPECTUS MAY 1, 1994
PRUDENTIAL
ADJUSTABLE RATE
SECURITIES
FUND, INC.
---------------
PRUDENTIAL MUTUAL FUNDS
BUILDING YOUR FUTURE [LOGO]
ON OUR STRENGTH
<PAGE> 43
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC.
Statement of Additional Information
dated May 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 offers two classes of shares which may be purchased at the
next determined net asset value per share plus a sales charge which, at the
election of the investor, may be imposed (i) at the time of purchase (Class A
shares) or (ii) on a deferred basis (Class B shares). These alternatives
permit an investor to choose the method of purchasing shares that is most
beneficial given the amount of the purchase, the length of time the investor
expects to hold the shares and other circumstances.
Each share of Class A and Class B common stock represents an identical
interest in the investment portfolio of the Fund and has the same rights,
except that the Class B shares may bear the expenses of a higher distribution
plan which, if so assessed, would cause the Class B shares to have a higher
expense ratio and to pay lower dividends than the Class A shares. Each class
will have exclusive voting rights with respect to its distribution plan.
Although the legal rights of holders of Class A and Class B shares are
identical, the different expenses borne by each class may result in different
dividends. The two classes also have different exchange privileges. Class B
shares will be automatically converted into Class A shares after the one year
contingent deferred sales charge period has expired. See "Shareholder
Guide--Alternative Purchase Plan" in the Prospectus.
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 May 1, 1994, a
copy of which may be obtained from the Fund at One Seaport Plaza, New York, New
York 10292 upon request.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
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-12 20
Manager . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-14 20
Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-16 21
Portfolio Transactions and Brokerage . . . . . . . . . . . . . . . . . . . . B-17 23
Purchase and Redemption of Fund Shares . . . . . . . . . . . . . . . . . . . B-18 27
Shareholder Investment Account . . . . . . . . . . . . . . . . . . . . . . . B-20 33
Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-22 23
Taxes, Dividends and Distributions . . . . . . . . . . . . . . . . . . . . . B-23 25
Performance Information . . . . . . . . . . . . . . . . . . . . . . . . . . . B-24 24
Custodian, Transfer and Dividend Disbursing
Agent and Independent Accountants . . . . . . . . . . . . . . . . . . . . . B-26 23
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-27 --
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . B-35 --
</TABLE>
<PAGE> 44
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is high current income consistent
with low volatility of principal. 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. 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
B-2
<PAGE> 45
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.
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
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<PAGE> 46
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.
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.
B-4
<PAGE> 47
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.
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
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<PAGE> 48
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 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
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<PAGE> 49
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 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
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<PAGE> 50
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.
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
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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 Securities and Exchange Commission.
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 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.
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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 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
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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 of 1933 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 of 1933 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.
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 shares represented at a meeting
at which more than 50% of the outstanding shares are present in person or
represented by proxy or (ii) more than 50% of the outstanding 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
in connection with options or futures contracts is not considered the purchase
of a security on margin.
2. Make short sales of securities, or maintain a short position 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 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
B-11
<PAGE> 54
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% 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.
Whenever any fundamental investment policy or investment restriction
states a maximum percentage of the Fund's assets, it is intended that if the
percentage limitation is met at the time the investment is made, a later change
in percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that the Fund's
asset coverage for borrowings falls below 300%, the Fund will take prompt
action to reduce its borrowings, as required by applicable law.
DIRECTORS AND OFFICERS
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE FUND DURING PAST 5 YEARS
- ---------------- ------------- ---------------------
Edward D. Beach Director President and Director of BMC
c/o Prudential Mutual Fund Fund, Inc., prior thereto, Vice
Management, Inc. Chairman of Broyhill Furniture
One Seaport Plaza Industries, Inc.; Certified
New York, NY Public Accountant; Secretary
and Treasurer of Broyhill
Family Foundation Inc.;
President, Treasurer and
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.,
B-12
<PAGE> 55
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE FUND DURING PAST 5 YEARS
- ---------------- ------------- ---------------------
Delayne Dedrick Gold Director Marketing and Management
c/o Prudential Mutual Fund Consultant.
Management, Inc.
One Seaport Plaza
New York, NY
*Harry A. Jacobs, Jr. Director Senior Director (since January
One Seaport Plaza 1986) of Prudential Securities
New York, NY Incorporated (Prudential
Securities); 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);
One Seaport Plaza President Managing Director, Investment
New York, NY Banking, Prudential 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
c/o Prudential Mutual Fund Metro Chamber of Commerce;
Management, Inc. former Rochester City Manager;
One Seaport Plaza Trustee of Center for
New York, NY Governmental Research, Inc.;
Director of Blue Cross of
Rochester, Monroe County Water
Authority, Rochester Jobs,
Inc., 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.
Thomas H. O'Brien Director President, O'Brien Associates
c/o Prudential Mutual Fund (financial and management
Management, Inc. consultants)(since April 1984);
One Seaport Plaza formerly President of Jamaica
New York, NY Water Securities Corp. (holding
company) (February 1989-August
1990); Director (September
1987-April 1991), 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
_____________________
* "Interested" Director, as defined in the Investment Company Act of 1940.
B-13
<PAGE> 56
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE FUND DURING PAST 5 YEARS
- ---------------- ------------- ---------------------
Stanley E. Shirk Director Certified Public Accountant and
c/o Prudential Mutual Fund a former Senior Partner of the
Management, Inc. accounting firm of KPMG Peat
One Seaport Plaza Marwick; former Management and
New York, NY Accounting Consultant for the
Association of Bank Holding
Companies, Washington, D.C. and
the Bank Administration
Institute, Chicago, IL;
Director of The High Yield
Income Fund, Inc.
Robert F. Gunia Vice President Chief Administrative Officer
One Seaport Plaza (since July 1990), Director
New York, NY (since January 1989), Executive
Vice 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
One Seaport Plaza Principal January 1989) of PMF; Senior
New York, NY Financial and Vice President (since January
Accounting 1992) and Vice President
Officer (January 1986-December 1991) of
Prudential Securities.
S. Jane Rose Secretary Senior Vice President (since
One Seaport Plaza January 1991), Senior Counsel
New York, NY (since June 1987) and First
Vice 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 Vice President (since July 1992)
One Seaport Plaza Secretary and Associate General Counsel
New York, NY (since March 1992) of PMF; Vice
President and Associate General
Counsel of Prudential
Securities (since July 1992);
prior thereto, associated with
the law firm of Battle Fowler.
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).
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 April 18, 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 April 18, 1994, Paul G. Allen, 110 110th Ave, NE. Suite 550,
Bellevue, Washington was the beneficial owner of 2,038,507 Class A shares (17%
of the outstanding Class A shares).
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 March 31, 1994, PMF managed and/or
administered open-end and closed-end management investment companies with
assets of approximately $49 billion and, according to the Investment Company
Institute, as of December 31, 1993 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,
B-14
<PAGE> 57
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% of the Fund's average daily net assets up to $30 million, 2%
of the next $70 million of such assets and 1% 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).
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 expenses and other extraordinary expenses not incurred in the
ordinary course of the Fund's business and (m) distribution fees.
The Management Agreement provides that 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
B-15
<PAGE> 58
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, 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 shares
of the Fund.
Pursuant to separate Distribution and Service Plans (the Class A and
the Class B Plan, collectively the Plans) adopted by the Fund under Rule 12b-1
under the Investment Company Act and separate distribution agreements (the
Distribution Agreements), PFD and Prudential Securities (collectively the
Distributor) incur the expenses of distributing the Fund's Class A and Class B
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 Distribution and Service Plans of the Class A
shares of the Fund (the Class A Plan) and the Class B shares of the Fund (the
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.
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 Charge--Class
B-16
<PAGE> 59
B Shares" 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.
The Class A and Class B 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 Class A and Class B 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 either the Class A or
Class B 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
the Class A and Class B shares of the Fund by PMFD and Prudential Securities,
respectively. 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 of 1933, as amended.
Each Distribution Agreement was 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.
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. In the case of
Class B 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 Class B 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
B-17
<PAGE> 60
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 to effect any portfolio transactions for the Fund, the
commissions, fees or other remuneration received by Prudential Securities must
be reasonable and fair compared to the commissions, fees or other remuneration
paid to other brokers in connection with comparable transactions involving
similar securities being purchased or sold during a comparable period of time.
This standard would allow Prudential Securities 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. Section 11(a) provides
that 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 are also
subject to such fiduciary standards as may be imposed 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
(the initial sales charge alternative),or (ii) on a deferred basis (the
deferred sales charge alternative). See "Shareholder Guide--How to Buy Shares
of the Fund" in the Prospectus.
The Fund issues two classes of shares: Class A shares are sold to
investors choosing the initial sales charge alternative and Class B shares are
sold to investors choosing the deferred sales charge alternative. The two
classes of shares represent an interest in the same portfolio of investments of
the Fund and have the same rights, except that each class bears the separate
expenses of its Rule 12b-1 distribution plan and has exclusive voting rights
with respect to such plan. See "Distributor." The two classes also have
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 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:
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
======
B-18
<PAGE> 61
CLASS B
Net asset value, offering price and redemption
price per Class B share* . . . . . . . . . . . . $ 9.67
------
________________________
*Class B 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.
REDUCED INITIAL SALES CHARGE--CLASS A SHARES
RETIREMENT AND GROUP PLANS. Class A shares are offered at net asset
value to participants in certain retirement, deferred compensation, affinity
group and group savings plans, provided the plan has existing assets of at
least $10 million or 2,500 eligible employees or members. The term "existing
assets" includes transferable cash, shares of Prudential Mutual Funds held at
the Transfer Agent and GICs maturing within three years. The retirement and
group plans eligible for this waiver of the initial sales charge include, but
are not limited to, pension, profit-sharing or stock bonus plans qualified or
non-qualified within the meaning of Section 401 of the Internal Revenue Code of
1986, as amended (the Internal Revenue Code), deferred compensation and annuity
plans within the meaning of Sections 403(b)(7) and 457 of the Internal Revenue
Code, certain affinity group plans such as plans of credit unions and trade
associations and certain group savings plans.
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);
(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 Combined Purchase and Cumulative Purchase Privilege does not apply
to individual participants in the retirement and group plans described above
under "Retirement and Group Plans."
RIGHTS OF ACCUMULATION. Reduced sales charges are also available
through Rights of Accumulation, under which an investor or an eligible group of
related investors, as described above under "Combined Purchase and Cumulative
Purchase Privilege," may aggregate the value of their existing holdings of the
Class A shares of the Fund and Class A 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 the retirement and group plans described above under "Retirement and 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 Class A
shares of the Fund and Class A shares of other Prudential Mutual Funds. All
Class A shares of the Fund and Class A 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
B-19
<PAGE> 62
held either directly with the Transfer Agent or through Prudential Securities.
Letters of Intent are not available to individual participants in retirement
and group plans described above under "Retirement and 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. 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 Class A or Class B shares of the Fund, a
Shareholder Investment Account is established for each investor under which a
record of the shares held is maintained by the Transfer Agent. If a 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.
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. The Fund makes available to its Class A
shareholders the privilege of exchanging their shares of the Fund for Class A
shares of the Global Assets Portfolio of the Prudential Short-Term Global
Income Fund. Shares of the Global Assets Portfolio of the Prudential
Short-Term Global Income Fund may also be exchanged for Class A and Class B
shares, respectively, of the Fund. 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.
In addition, Class A and Class B shareholders of the Fund may exchange
their shares 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.
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 Class A shares (or 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
B-20
<PAGE> 63
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.
Additional details about the Exchange Privilege and prospectuses for
each of the fund's 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 day's 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>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
----------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
25 Years . . . . . . . . . $ 110 $ 165 $ 220 $ 275
20 Years . . . . . . . . . 176 264 352 440
15 Years . . . . . . . . . 296 444 592 740
10 Years . . . . . . . . . 555 833 1,110 1,388
5 Years . . . . . . . . . 1,371 2,057 2,742 3,428
</TABLE>
See "Automatic Savings Accumulation Plan."
- ----------------------
(1) Source information concerning the costs of education at public
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.
(2) The chart assumes an effective rate of return of 8% (assuming
monthly compounding). This example is for illustrative purposes only and is not
intended to reflect the performance of an investment in shares of the 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 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 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.
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-21
<PAGE> 64
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
the purchase of Class A 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.
<TABLE>
<CAPTION>
TAX-DEFERRED COMPOUNDING(1)
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-22
<PAGE> 65
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-23
<PAGE> 66
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 shares may be lower than the per
share dividends on Class A shares if distribution fees are fully assessed on
the Class A and Class B shares, as a result of the higher distribution fee
typically applicable with respect to the Class B 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
and Class B 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]
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
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.
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 and Class B 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-24
<PAGE> 67
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 and
Class B 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.
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)
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-25
<PAGE> 68
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
AND INDEPENDENT ACCOUNTS
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, 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-26
<PAGE> 69
<TABLE>
<CAPTION>
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC. PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1994
PRINCIPAL DESCRIPTION(A) VALUE
AMOUNT (NOTE 1)
(000)
<S> <C> <C>
LONG-TERM INVESTMENTS--95.4%
ADJUSTABLE RATE MORTGAGE PASS-
THROUGHS--74.2%
Federal Home Loan Mortgage
Corporation,
$ 4,755 4.22%, 6/01/23 . . . . . . . . . . . . . $ 4,921,720
7,290 4.50%, 5/01/23 . . . . . . . . . . . . . 7,622,296
3,911 5.38%, 7/01/22 . . . . . . . . . . . . . 4,033,534
7,873 5.64%, 11/01/22 . . . . . . . . . . . . 8,153,357
12,322 5.77%, 1/01/23 . . . . . . . . . . . . . 12,891,997
Federal National Mortgage
Association,
3,759 4.79%, 12/01/17 . . . . . . . . . . . . 3,778,100
10,112 5.21%, 4/01/18 . . . . . . . . . . . . . 10,440,557
4,471 5.46%, 10/01/20 . . . . . . . . . . . . 4,655,081
5,279 5.53%, 6/01/18 . . . . . . . . . . . . . 5,496,925
8,884 5.54%, 7/01/20 . . . . . . . . . . . . . 9,255,736
4,684 5.56%, 2/01/18 . . . . . . . . . . . . . 4,888,410
5,643 5.66%, 12/01/22 . . . . . . . . . . . . 5,886,837
12,504 5.67%, 4/01/20 . . . . . . . . . . . . . 13,082,821
--------------
Total Adjustable Rate Mortgage
Pass-Throughs
(cost $95,404,690) . . . . . . . . . . . 95,107,371
--------------
U. S. GOVERNMENT AGENCY MORTGAGE
PASS-THROUGHS--21.2%
Federal Home Loan Mortgage
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
Federal National Mortgage
Association,
$6,000 8.00%, 2/01/09 . . . . . . . . . . . . . $ 6,268,125
6,143 11.00%, 11/01/20 . . . . . . . . . . . . 6,895,704
Government National Mortgage
Association,
4,140 11.50%, 2/15/13 - 12/15/15 . . . . . . . 4,770,896
--------------
Total U. S. Government Agency
Mortgage Pass-Throughs
(cost $27,245,121) . . . . . . . . . . . 27,216,219
--------------
Total long-term investments
(cost $122,649,811) . . . . . . . . . . 122,323,590
--------------
SHORT-TERM INVESTMENTS--9.7%
REPURCHASE AGREEMENT
Joint Repurchase Agreement Account,
12,374 3.42%, 3/01/94
(cost $12,374,000; Note 5) . . . . . . . 12,374,000
--------------
TOTAL INVESTMENTS--105.1%
(cost $135,023,811; Note 4) . . . . . . 134,697,590
Liabilities in excess of other
assets--(5.1%) . . . . . . . . . . . . . (6,525,214)
--------------
NET ASSETS--100% . . . . . . . . . . . . . $128,172,376
--------------
--------------
</TABLE>
See Notes to Financial Statements
B-27
<PAGE> 70
<TABLE>
<CAPTION>
PRUDENTIAL ADJUSTABLE RATE
SECURITIES FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
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 Statments.
B-28
<PAGE> 71
<TABLE>
<CAPTION>
PRUDENTIAL ADJUSTABLE RATE
SECURITIES FUND, INC.
STATEMENT OF OPERATIONS
YEAR ENDED
FEBRUARY 28,
NET INVESTMENT INCOME 1994
-------------
<S> <C>
Income
Interest . . . . . . . . . . . . . . . . . . . . . . $ 9,801,079
-------------
Expenses
Management fee, net of waiver of $150,690 . . . . . 832,334
Distribution fee--Class A, net of waiver of $755,963 128,351
Distribution fee--Class B, net of waiver of $152,742 44,677
Custodian's fees and expenses . . . . . . . . . . . 124,000
Transfer agent's fees and expenses . . . . . . . . 69,000
Registration fees . . . . . . . . . . . . . . . . . 55,000
Directors' fees . . . . . . . . . . . . . . . . . . 48,000
Audit fee . . . . . . . . . . . . . . . . . . . . . 40,000
Amortization of deferred organization expenses . . 21,600
Reports to shareholders . . . . . . . . . . . . . . 21,500
Legal fees . . . . . . . . . . . . . . . . . . . . 13,000
Insurance expense . . . . . . . . . . . . . . . . . 7,600
Miscellaneous . . . . . . . . . . . . . . . . . . . 3,554
-------------
Total expenses . . . . . . . . . . . . . . . . . 1,408,616
-------------
Net investment income . . . . . . . . . . . . . . . . . 8,392,463
-------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net realized loss on investment transactions . . . . . (7,020,730)
Net change in unrealized appreciation of investments . 1,125,105
-------------
Net loss on investments . . . . . . . . . . . . . . . . (5,895,625)
-------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS . . . . . . . . . . . . . . . $2,496,838
-------------
-------------
</TABLE>
<TABLE>
<CAPTION>
PRUDENTIAL ADJUSTABLE RATE
SECURITIES FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
JUNE 10, 1992*
INCREASE (DECREASE) YEAR ENDED THOUGH
IN NET ASSETS FEBRUARY 28, 1994 FEBRUARY 28, 1993
------------------- -------------------
<S> <C> <C>
Operations
Net investment income . . . . . . . . . . . . . . . $ 8,392,463 $ 8,612,412
Net realized gain (loss) on investment transactions . (7,020,730) 3,829
Net change in unrealized appreciation/depreciation of
investments . . . . . . . . . . . . . . . . . . . 1,125,105 (1,451,326)
------------ ------------
Net increase in net assets resulting from operations 2,496,838 7,164,915
------------ ------------
Contingent deferred sales charges collected (Note 2) 87,220 --
------------ ------------
Dividends and distributions (Note 1)
Dividends to shareholders from net investment income
Class A . . . . . . . . . . . . . . . . . . . . . (7,557,640) (7,557,591)
Class B . . . . . . . . . . . . . . . . . . . . . (834,823) (1,054,821)
------------ ------------
(8,392,463) (8,612,412)
------------ ------------
Dividends to shareholders in excess of net investment
income
Class A . . . . . . . . . . . . . . . . . . . . . (262,362) (214,613)
Class B . . . . . . . . . . . . . . . . . . . . . (28,982) (29,954)
------------ ------------
(291,344) (244,567)
------------ ------------
Distributions to shareholders of net realized gain on
investment transactions
Class A . . . . . . . . . . . . . . . . . . . . . -- (3,360)
Class B . . . . . . . . . . . . . . . . . . . . . -- (469)
------------ ------------
-- (3,829)
------------ ------------
Fund share transactions (Note 6)
Net proceeds from shares 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) . . . . . . . . . . . . . . . . (129,946,166) 258,018,534
NET ASSETS
Beginning of period . . . . . . . . . . . . . . . . . . . 258,118,534 100,000
------------ ------------
End of period . . . . . . . . . . . . . . . . . . . . . . $128,172,376 $258,118,534
------------ ------------
------------ ------------
</TABLE>
- -----------------
*Commencement of investment operations.
See Notes to Financial Statement.
B-29
<PAGE> 72
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 POLICIES
The following is a summary of significant accounting policies 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-30
<PAGE> 73
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 WITH AFFILIATES
Prudential Mutual Fund Services, 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-31
<PAGE> 74
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 SECURITIES
Purchases and sales of investment 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 REPURCHASE AGREEMENT ACCOUNT
The Fund along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements
collateralized by U.S. Treasury or Federal agency obligations. As of 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-32
<PAGE> 75
<TABLE>
<CAPTION>
Transactions in shares of common stock were as follows:
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 ofdividends . . . . 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-33
<PAGE> 76
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-34
<PAGE> 77
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-35
<PAGE> 78
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.
(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 FormN-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.*
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.*
(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.*
7. Not Applicable.
C-1
<PAGE> 79
8. Custodian Contract between the Registrant and State Street
Bank and Trust Company; incorporated by reference to Exhibit
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.*
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.*
(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.*
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 April 18, 1994, there were were 1,956 and 297 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.
C-2
<PAGE> 80
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.
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 and Director of Marketing, PMF
President and
Director of Marketing
John D. Brookmeyer, Jr. Director Senior Vice President, PIC; Senior Vice President,
Two Gateway Center The Prudential Insurance Company 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 Director, PMF;
Raritan Plaza One President, Chief Chairman, Chief Executive Officer and Director, Prudential Mutual Fund
Edison, NJ 08847 Operating Officer Services, Inc.
and 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, PMF; Senior Vice
President, General President, Prudential Securities
Counsel and
Secretary
</TABLE>
C-3
<PAGE> 81
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PMF PRINCIPAL OCCUPATIONS
- ---------------- ----------------- ---------------------
<S> <C> <C>
Robert F. Gunia Executive Vice Executive Vice President, Chief Administrative Officer, Chief Financial Officer
President, Chief and Director, PMF; Senior Vice President, Prudential Securities
Administrative
Officer, Chief
Financial Officer, and
Director
Eugene B. Heimberg Director Senior Vice President, Prudential; President, Director and Chief Investment
Prudential Plaza 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 Vice
Executive Officer and President, Director and Member of Operating Committee, Prudential
Director Securities; Director, PSG
S. Jane Rose Senior Vice Senior Vice President and Senior Counsel, and Assistant Secretary, PMF;
President, Senior Senior Vice President and Senior Counsel, Prudential Securities
Counsel and
Assistant Secretary
Donald G. Southwell Director Senior Vice President, Prudential; Director, PSG
213 Washington Street
Newark, NJ 07102-2992
</TABLE>
(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 Officer, PIC;
and Chief Financial Vice President, Prudential
and Compliance Officer
William M. Bethke Senior Vice President Senior Vice President, Prudential; Senior Vice President, PIC
Two Gateway Center
Newark, NJ 07102
John D. Brookmeyer, Jr. Senior Vice President Senior Vice President, Prudential; Senior Vice President, PIC
Two Gateway Center
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
</TABLE>
C-4
<PAGE> 82
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ---------------- ----------------- ---------------------
<S> <C> <C>
Harry E. Knapp, Jr. Vice President Vice President, Prudential; Vice President, PIC
Four Gateway Center
Newark, NJ 07102
William P. Link Senior Vice President Executive Vice President, Prudential; Senior Vice President, PIC
Four Gateway Center
Newark, NJ 07102
Robert E. Riley Executive Vice President Executive Vice President, Prudential; Executive Vice President, PIC; Director,
800 Boylstar Ave. PSG
Boston, MA 62149
James W. Stevens Executive Vice President Executive Vice President, Prudential; Executive Vice President, PIC; Director,
Four Gateway Center 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) and the Target Portfolio
Trust and for Class B shares of Prudential Adjustable Rate Securities Fund,
Inc., The BlackRock Government Income Trust, Prudential California Municipal
Fund (California Series and California Income Series), Prudential Equity Fund,
Inc. Prudential Equity Income Fund, Prudential FlexiFund, Prudential Global
Fund, Inc., Prudential-Bache Global Genesis Fund, Inc. (d/b/a Prudential Global
Genesis Fund), Prudential-Bache Global Natural Resources Fund, Inc. (d/b/a
Prudential Global Natural Resources Fund), Prudential-Bache GNMA Fund, Inc.
(d/b/a Prudential GNMA Fund), Prudential-Bache Government Plus Fund, Inc.
(d/b/a Prudential Government Plus Fund), Prudential Growth Fund, Inc.,
Prudential-Bache Growth Opportunity Fund, Inc. (d/b/a Prudential Growth
Opportunity Fund), Prudential-Bache High Yield Fund, Inc. (d/b/a Prudential
High Yield Fund), 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, New Jersey Money Market Series and Florida Series),
Prudential-Bache National Municipals Fund, Inc. (d/b/a Prudential National
Municipals Fund), Prudential Pacific Growth Fund, Inc., Prudential Short-Term
Global Income Fund, Inc., Prudential U.S. Government Fund, Prudential-Bache
Utility Fund, Inc. (d/b/a Prudential Utility Fund), Global Utility Fund, Inc.
and Nicholas-Applegate Fund, Inc., (Nicholas-Applegate Growth Equity Fund.
Prudential Securities is also a depositor for the following unit investment
trusts:
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, and Class A Shares
of the California Income Series and California 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 Fund), Prudential Municipal
Series Fund (Connecticut Money Market Series, Massachusetts Money Market
Series, New York Money Market Series, New
C-5
<PAGE> 83
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
Prudential Adjustable Rate Securities Fund, Inc., The BlackRock Government
Income Trust, Prudential California Municipal Fund (California Series),
Prudential Equity Fund, Inc. Prudential Equity Income Fund, Prudential
FlexiFund, Prudential Global Fund, Inc., Prudential-Bache Global Genesis Fund,
Inc. (d/b/a Prudential Global Genesis Fund), Prudential-Bache Global Natural
Resources Fund, Inc. (d/b/a Prudential Global Natural Resources Fund),
Prudential-Bache GNMA Fund, Inc. (d/b/a Prudential GNMA Fund), Prudential-Bache
Government Plus Fund, Inc. (d/b/a Prudential Government Plus Fund), Prudential
Growth Fund, Inc., Prudential-Bache Growth Opportunity Fund, Inc. (d/b/a
Prudential Growth Opportunity Fund), Prudential-Bache High Yield Fund, Inc.
(d/b/a Prudential High Yield Fund), Prudential-Bache IncomeVertible Fund, Inc.,
Prudential Intermediate Global Income Fund, Inc., Prudential-Bache MoneyMart
Assets Inc. (d/b/a Prudential MoneyMart Assets), Prudential Multi-Sector Fund,
Inc., Prudential Municipal Bond Fund, Prudential Municipal Series Fund (Arizona
Series, Florida Series, Georgia Series, Maryland Series, Massachusetts Series,
Michigan Series, Minnesota Series, New Jersey Series, North Carolina Series,
Ohio Series and Pennsylvania Series). Prudential-Bache National Municipals
Fund, Inc. (d/b/a Prudential National Municipals Fund), Prudential-Bache
Short-Term Global Income Fund, Inc. (d/b/a Prudential Short-Term Global Income
Fund), Prudential-Bache Structured Maturity Fund, Inc. (/b/a Prudential
Structured Maturity Fund), Prudential U.S. Government Fund and Prudential-Bache
Utility Fund, Inc. (d/b/a Prudential Utility Fund), Global Utility Fund, Inc.
and Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth Equity Fund).
(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, Corporate None
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 Spencer............ Interim General Counsel None
</TABLE>
(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>
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 Director None
Raritan Plaza One
Edison, NJ 08847
Stephen P. Fisher...... Vice President None
</TABLE>
C-6
<PAGE> 84
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
- ------- ------------ ------------
<S> <C> <C>
Frank W. Giordano...... Executive Vice President, General Counsel, None
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> 85
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
and the State of New York, on the 1st day of May, 1994.
PRUDENTIAL ADJUSTBLE 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 Financial and May 1, 1994
- -------------------------- Accounting Officer
SUSAN COTE
/s/ Edward D. Beach Director May 1, 1994
- --------------------------
EDWARD D. BEACH
/s/ Delayne D. Gold Director May 1, 1994
- --------------------------
DELAYNE D. GOLD
/s/ Harry A. Jacobs, Jr. Director May 1, 1994
- -------------------------
HARRY A. JACOBS, JR.
/s/ Lawrence C. McQuade President and Director May 1, 1994
- -------------------------
LAWRENCE C. MCQUADE
/s/ Thomas T. Mooney Director May 1, 1994
- -------------------------
THOMAS T. MOONEY
/s/ Thomas H. O'Brien Director May 1, 1994
- -------------------------
THOMAS H. O'BRIEN
/s/ Thomas A. Owens, Jr. Director May 1, 1994
- -------------------------
THOMAS A. OWENS, JR.
/s/ Richard A. Redeker Director May 1, 1994
- -------------------------
RICHARD A. REDEKER
/s/ Stanley E. Shirk Director May 1, 1994
- -------------------------
STANLEY E. SHIRK
</TABLE>
<PAGE> 86
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 FormN-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.*
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.*
(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.*
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.*
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.
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.*
(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.*
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
Exhibit 99.4(c)
Prudential Adjustable Rate Securities Fund, Inc.
INSTRUMENTS DEFINING RIGHTS OF SHAREHOLDERS
The following is a list of the provisions of the Articles of
Incorporation, as amended, and By-Laws of Prudential Adjustable Rate Securities
Fund, Inc. setting forth the rights of shareholders:
I. Articles of Incorporation
Article IV -- Common Stock
Article VII -- Miscellaneous
Article VIII -- Amendments
--------------------------------------------
II. By-Laws
Article I -- Stockholders
Article IV -- Capital Stock
Article VII - Indemnification
Article IX -- Amendment of By-Laws
<PAGE> 1
Exhibit 99.6(a)(ii)
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC.
Distribution Agreement
(Class A Shares)
Agreement, dated as of June 1, 1992 and amended and restated as of
July 1, 1993, between Prudential Adjustable Rate Securities Fund, Inc. a
Maryland Corporation (the Fund) and Prudential Mutual Fund Distributors, Inc.,
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 A 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 A
shares from and after the date hereof in order to promote the growth of the
Fund and facilitate the distribution of its Class A 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 A
shares of the Fund and the maintenance of Class A 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 A shares of the Fund to sell Class A 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 A shares of the Fund to the Distributor on the terms and conditions set
forth below.
2
<PAGE> 2
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 A shares,
except that:
2.1 The exclusive rights granted to the Distributor to purchase
Class A shares from the Fund shall not apply to Class A 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 A shares issued
by the Fund pursuant to reinvestment of dividends or capital gains
distributions.
2.3 Such exclusive rights shall not apply to Class A 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 (Securities Act), and the Investment Company
Act, as such Registration Statement is amended from time to time.
Section 3. Purchase of Class A Shares from the Fund
3.1 The Distributor shall have the right to buy from the Fund the
Class A shares needed, but not more than the Class A shares needed (except for
clerical errors in transmission) to fill unconditional orders for Class A
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 A shares so purchased from
the Fund shall be the net asset value, determined as set forth in the
Prospectus.
3.2 The Class A 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
<PAGE> 3
3.3 The Fund shall have the right to suspend the sale of its Class
A 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 Board of
Directors. The Fund shall also have the right to suspend the sale of its Class
A shares if a banking moratorium shall have been declared by federal or New
York authorities.
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 A 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 A 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 A 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 A Shares by the
Fund
4.1 Any of the outstanding Class A shares may be tendered for
redemption at any time, and the Fund agrees to repurchase or redeem the Class A
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 A 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 calendar day subsequent to its having received the
notice of redemption in proper form. The proceeds of any redemption of Class A
shares shall be paid by the Fund 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 A 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
4
<PAGE> 4
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 A
shares as provided herein, the Fund agrees to sell its Class A shares so long
as it has Class A shares available.
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 A
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 Board of Directors and the shareholders, all
necessary action to fix the number of authorized Class A 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 A 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 A 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 A 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 A 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.
5
<PAGE> 5
Section 6. Duties of the Distributor
6.1 The Distributor shall devote reasonable time and effort to
effect sales of Class A shares of the Fund, but shall not be obligated to sell
any specific number of Class A shares. Sales of the Class A 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 A shares, the Distributor shall 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 A shares, provided
that the Fund shall approve the forms of such agreements. Within the United
States, the Distributor shall offer and sell Class A shares only to such
selected dealers as are members in good standing of the NASD. Class A 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 portion of any
front-end sales charge which is imposed on sales of Class A shares and not
reallocated to selected dealers 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. Reimbursement of the Distributor under the Plan
8.1 The Fund shall reimburse the Distributor for costs incurred by
it in performing its duties under the Distribution and Service Plan and this
Agreement including amounts paid on a
6
<PAGE> 6
reimbursement basis to Prudential Securities Incorporated (Prudential
Securities) and Pruco Securities Corporation (Prusec), affiliates of the
Distributor, under the selected dealer agreements between the Distributor and
Prudential Securities and Prusec, respectively, amounts paid to other
securities dealers or financial institutions under selected dealer agreements
between the Distributor and such dealers and institutions and amounts paid for
personal service and/or the maintenance of shareholder accounts. Amounts
reimbursable under the Plan shall be accrued daily and paid monthly or at such
other intervals as the Board of Directors may determine but shall not be paid
at a rate that exceeds .50 of 1%, which amount includes a service fee of up to
.25 of 1%, per annum of the average daily net assets of the Class A shares of
the Fund. Payment of the distribution and service fee 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 Board of Directors of the 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 dealer
agreements with the Distributor. So long as the Plan (or any amendment
thereto) is in effect, at the request of the Board of Directors 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 Costs of the Distributor subject to reimbursement hereunder
are costs of performing distribution activities with respect to the Class A
shares of the Fund and may include, among others:
(a) amounts paid to Prudential Securities in reimbursement of
costs incurred by Prudential Securities in performing services
under a selected dealer agreement between Prudential
Securities and the Distributor for sale of Class A shares of
the Fund, including sales commissions and trailer commissions
paid to, or on account of, account executives and indirect and
overhead costs associated with distribution activities,
including central office and branch expenses;
(b) amounts paid to Prusec in reimbursement of costs incurred by
Prusec in performing services under a selected dealer
agreement between Prusec and the Distributor for sale of
7
<PAGE> 7
Class A 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;
(c) sales commissions and trailer commissions paid to, or on
account of, broker-dealers and financial institutions (other
than Prudential Securities and Prusec) which have entered into
selected dealer agreements with the Distributor with respect
to Class A shares of the Fund;
(d) amounts paid to, or an account of, account executives of
Prudential Securities, Prusec, or of other broker-dealers or
financial institutions for personal service and/or the
maintenance of shareholder accounts; and
(e) 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 (a) and (b) 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.
Section 9. Allocation of Expenses
9.1 The Fund shall bear all costs and expenses of the continuous
offering of its Class A 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 A 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
8
<PAGE> 8
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 A shares, so long as the Plan is in effect.
9.2 If the Plan is terminated or discontinued, the costs
previously incurred by the Distributor in performing the duties set forth in
Section 6 hereof shall be borne by the Distributor and will not be subject to
reimbursement by the Fund.
Section 10. Indemnification
10.1 The Fund agrees to indemnify, defend and hold the Distributor,
its officers and directors 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, directors 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, trustee 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 conduct, by (a) a vote of a majority of a quorum of
directors or 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 directors or
trustees and any such
9
<PAGE> 9
controlling person as aforesaid is expressly conditioned upon the Fund's being
promptly notified of any action brought against the Distributor, its officers
or directors or trustees, or any such controlling person, such notification to
be given by letter or telegram 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 directors
in connection with the issue and sale of any Class A shares.
10.2 The Distributor agrees to indemnify, defend and hold the Fund,
its officers and Directors 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 Directors 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 Directors 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 Directors 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 Directors or any such controlling person, such notification
being given to the Distributor 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 Board of Directors of the Fund, or by the vote of a
majority of the outstanding voting securities of the Class A shares of the
Fund, and (b) by the vote of a majority of those Directors 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 agreement related thereto (Rule 12b-1 Directors),
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 Directors or by vote of
a majority of the outstanding voting securities of
10
<PAGE> 10
the Class A 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 Board of Directors of the Fund, or by the vote
of a majority of the outstanding voting securities of the Class A shares of the
Fund, and (b) by the vote of a majority of the Rule 12b-1 Directors 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.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year above written.
Prudential Mutual Fund
Distributors, Inc.
By:
---------------------------------
---------------------------------
(Title)
Prudential Adjustable Rate Securities
Fund, Inc.
By:
---------------------------------
(Name)
(Title)
11
<PAGE> 1
Exhibit 99.6(b)(ii)
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC.
Distribution Agreement
(Class B Shares)
Agreement, dated June 1, 1992 and amended and restated as of July 1,
1993, between Prudential Adjustable Rate Securities Fund, Inc., a Maryland
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 B 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 B
shares from and after the date hereof in order to promote the growth of the
Fund and facilitate the distribution of its Class B 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 B
shares of the Fund and the maintenance of Class B 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 B shares of the Fund to sell Class B 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 B shares of the Fund to the Distributor on the terms and conditions set
forth below.
12
<PAGE> 2
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 B shares,
except that:
2.1 The exclusive rights granted to the Distributor to purchase
Class B shares from the Fund shall not apply to Class B 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 B shares issued
by the Fund pursuant to reinvestment of dividends or capital gains
distributions.
2.3 Such exclusive rights shall not apply to Class B 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 B Shares from the Fund
3.1 The Distributor shall have the right to buy from the Fund the
Class B shares needed, but not more than the Class B shares needed (except for
clerical errors in transmission) to fill unconditional orders for Class B
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 B shares so purchased from
the Fund shall be the net asset value, determined as set forth in the
Prospectus.
3.2 The Class B 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.
13
<PAGE> 3
3.3 The Fund shall have the right to suspend the sale of its Class
B 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 Board of
Directors. The Fund shall also have the right to suspend the sale of its Class
B shares if a banking moratorium shall have been declared by federal or New
York authorities.
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 B 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 B 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 B 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 B Shares by the
Fund
4.1 Any of the outstanding Class B shares may be tendered for
redemption at any time, and the Fund agrees to repurchase or redeem the Class B
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 B 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 B 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 B 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
14
<PAGE> 4
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 B
shares as provided herein, the Fund agrees to sell its Class B shares so long
as it has Class B shares available.
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 B
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 Board of Directors and the shareholders, all
necessary action to fix the number of authorized Class B 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 B 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 B 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 B 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 B 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
15
<PAGE> 5
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 B shares of the Fund, but shall not be obligated to sell
any specific number of Class B shares. Sales of the Class B 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 B shares, the Distributor shall 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 B shares, provided
that the Fund shall approve the forms of such agreements. Within the United
States, the Distributor shall offer and sell Class B shares only to such
selected dealers as are members in good standing of the NASD. Class B 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 B 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.
16
<PAGE> 6
Section 8. Reimbursement of the Distributor under the Plan
8.1 The Fund shall reimburse the Distributor for all costs
incurred by it in performing its duties under the Distribution and Service Plan
and this Agreement including amounts paid on a reimbursement basis to Pruco
Securities Corporation (Prusec), an affiliate of the Distributor, under the
selected dealer agreement between the Distributor and Prusec, amounts paid to
other securities dealers or financial institutions under selected dealer
agreements between the Distributor and such dealers and institutions and
amounts paid for personal service and/or the maintenance of shareholder
accounts. Reimbursement shall only be made to the extent that payments by
investors pursuant to Section 7 hereof are not sufficient to cover such costs.
Amounts reimbursable under the Plan shall be accrued daily and paid monthly or
at such other intervals as the Board of Directors may determine but shall not
be paid at a rate that exceeds the annual distribution and service fee of 1%
(including an asset-based sales charge of up to .75 of 1% and a service fee of
up to .25 of 1%) per annum of the average daily net assets of the Class B
shares of the Fund. Amounts reimbursable under the Plan that are not paid
because they exceed .75 of 1% per annum of the average daily net assets of the
Class B shares (Carry Forward Amounts) shall be carried forward and paid by the
Fund as permitted within such payment limitation so long as the Plan, including
any amendments thereto, is in effect, 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 Board of Directors 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 the
Board of Directors 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 Costs of the Distributor subject to reimbursement hereunder
are all costs of performing distribution activities with respect to the Class B
shares of the Fund and include, among others:
(a) sales commissions (including trailer commissions) paid to, or
on account of, account executives of the Distributor;
17
<PAGE> 7
(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 in reimbursement of all costs incurred
by Prusec in performing services under a selected dealer
agreement between Prusec and the Distributor for sale of Class
B 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 B 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;
(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;
(g) to the extent permitted by applicable law, interest on
unreimbursed Carry Forward Amounts as defined in Section 8.1
at a rate equal to that paid by Prudential Securities for bank
borrowings as such rate may vary from day to day, not to
exceed that permitted under Article III, Section 26, of the
NASD Rules of Fair Practice; and
(h) to the extent permitted by applicable law, unreimbursed
distribution expenses incurred with respect to the sale of
Class B shares that have been exchanged into the Fund.
18
<PAGE> 8
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.
Section 9. Allocation of Expenses
9.1 The Fund shall bear all costs and expenses of the continuous
offering of its Class B 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 B 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 B shares, so
long as the Plan is in effect.
9.2 Although the Fund is not liable for unreimbursed distribution
expenses, in the event of termination of the Plan, the Board of Directors of
the Fund may consider the appropriateness of having the Class B shares of the
Fund reimburse the Distributor for the then outstanding balance of all
unreimbursed distribution expenses plus interest thereon to the extent
permitted by applicable law from the date of this Agreement.
Section 10. Indemnification
10.1 The Fund agrees to indemnify, defend and hold the Distributor,
its officers and Directors 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, Directors 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
19
<PAGE> 9
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
conduct, by (a) a vote of a majority of a quorum of Directors 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 Directors 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 Directors, 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 Directors in connection with the issue and sale of
any Class B shares.
10.2 The Distributor agrees to indemnify, defend and hold the Fund,
its officers and Directors 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 Directors 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 Directors 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
20
<PAGE> 10
make such information not misleading. The Distributor's agreement to indemnify
the Fund, its officers and Directors 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 Directors 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 Board of Directors of the Fund, or by the vote of a
majority of the outstanding voting securities of the Class B shares of the
Fund, and (b) by the vote of a majority of those Directors 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 agreement related thereto (Rule 12b-1 Directors),
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 Directors or by vote of
a majority of the outstanding voting securities of the Class B 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 Board of Directors of the Fund, or by the vote
of a majority of the outstanding voting securities of the Class B shares of the
Fund, and (b) by the vote of a majority of the Rule 12b-1 Board of Directors
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
21
<PAGE> 11
with the applicable provisions of the Investment Company Act, the latter shall
control.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year above written.
Prudential Securities Incorporated
By:
--------------------------------
--------------------------------
(Title)
Prudential Adjustable Rate Securities
Fund, Inc.
By:
--------------------------------
(Name)
(Title)
22
<PAGE> 1
Exhibit 99.10(b)
SHEREFF, FRIEDMAN, HOFFMAN & GOODMAN
919 Third Avenue
New York, New York 10022
April 28, 1994
Prudential Adjustable Rate Securities
Fund, Inc.
One Seaport Plaza
New York, New York 10292
Gentlemen and Ladies:
Prudential Adjustable Rate Securities Fund, Inc. (the "Fund"), is
filing with the Securities and Exchange Commission Post-Effective Amendment
No. 3 to its Registration Statement under the Securities Act of 1933 (the "1933
Act") on Form N-1A (File No. 33-46658), relating to the registration under the
1933 Act of 13,451,594 additional shares of its Common Stock, par value $.001
per share (the "Additional Shares"), which are to be offered and sold by the
Fund in the manner and on the terms set forth in the prospectus of the Fund
current and effective under the 1933 Act at the time of sale. Of the
Additional Shares, 13,421,605 are previously outstanding shares of the Fund's
Common Stock, par value $.001 per share, which were redeemed by the Fund during
its fiscal year ended February 28, 1994. According to Post-Effective Amendment
No. 3 to the Fund's Registration Statement, none of the Additional Shares have
previously been used by the Fund for reduction pursuant to paragraph (a) of
Rule 24e-2 under the Investment Company Act of 1940 (the "1940 Act") in
previous filings of post-effective amendments to the Fund's Registration
Statement during the current year, and 7,851,424 shares were used for reduction
pursuant to paragraph (c) of Rule 24f-2 under the 1940 Act in all previous
filings during the Fund's current fiscal year, of the registration fee payable
by the Fund for the registration of shares for sale under the 1933 Act.
We have, as counsel, participated in various proceedings relating to
the Fund and to the proposed issuance of the Additional Shares. We have
examined copies, either certified or otherwise proven to our satisfaction to be
genuine, of the Fund's Articles of Incorporation and By-laws, as currently in
effect, and a certificate issued by the State Department of Assessments and
Taxation of the State of Maryland, certifying the existence and good standing
of the Fund. We are generally familiar with the
23
<PAGE> 2
corporate affairs of the Fund.
Based upon the foregoing, it is our opinion that:
1. The Fund has been duly organized and is validly existing under
the laws of the State of Maryland.
2. The Fund is authorized to issue two billion (2,000,000,000)
shares of Common Stock, par value $.001 per share. Under Maryland law, (a) the
number of authorized shares may be increased or decreased by action of the
Board of Directors and (b) shares which are issued and subsequently redeemed by
the Fund are, by virtue of such redemption, restored to the status of
authorized and unissued shares.
3. Subject to the effectiveness of the above-mentioned
Post-Effective Amendment No. 3 to the Fund's Registration Statement and
compliance with applicable state securities laws, upon the issuance of the
Additional Shares for a consideration not less than the par value thereof as
required by the laws of Maryland, and not less than the net asset value thereof
as required by the 1940 Act and in accordance with the terms of the
Registration Statement, such shares will be legally issued and outstanding and
fully paid and non-assessable.
We hereby consent to the filing of this opinion with the Securities
and Exchange Commission as a part of the above- mentioned Post-Effective
Amendment No. 3 to the Registration Statement and with any state securities
commission where such filing is required. In giving this consent we do not
admit that we come within the category of persons whose consent is required
under Section 7 of the 1933 Act.
We are members of the Bar of the State of New York and do not hold
ourselves out as being conversant with the laws of any jurisdiction other than
those of the United States of America and the State of New York. We note that
we are not licensed to practice law in the State of Maryland, and to the extent
that any opinion herein involves the laws of the State of Maryland, such
24
<PAGE> 3
opinion should be understood to be based solely upon our review of the
documents referred to above, the published statutes of the State of Maryland
and, where applicable, published cases, rules or regulations of regulatory
bodies of that State.
Very truly yours,
/s/ Shereff, Friedman, Hoffman & Goodman
Shereff, Friedman, Hoffman & Goodman
25
<PAGE> 1
Exhibit 99.11
CONSENT OF THE INDEPENDENT AUDITORS
We consent to the use in Post-Effective Amendment No. 3 to Registration
Statement 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 part of such Registration Statement, and "Custodian, Transfer and
Dividend Disbursing Agent and Independent Accountants" in the Statement of
Additional Information.
/s/ Deloitte & Touche
Deloitte & Touche
New York, New York
April 26, 1994
26
<PAGE> 1
Exhibit 99.15(a)(ii)
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC.
Distribution and Service Plan
(Class A 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 Prudential Adjustable Rate Securities Fund,
Inc., (the Fund) and by Prudential Mutual Fund Distributors, Inc., the Fund's
distributor (the Distributor).
The Fund has entered into a distribution agreement (the Distribution
Agreement) pursuant to which the Fund will employ the Distributor to distribute
Class A shares issued by the Fund (Class A shares). Under the Distribution
Agreement, the Distributor will be entitled to receive payments from investors
of front-end sales charges with respect to the sale of Class A shares. Under
the Plan, the Fund intends to reimburse the Distributor for costs incurred by
the Distributor in distributing Class A shares of the Fund and to pay the
Distributor a service fee for the maintenance of Class A shareholder accounts.
A majority of the Board of Directors of the Fund, including a majority
of those Directors who are not "interested persons" of the
27
<PAGE> 2
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 A 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 A shares of
the Fund and to service shareholder accounts using all of the facilities of the
distribution networks of Prudential Securities Incorporated (Prudential
Securities) and Pruco
28
<PAGE> 3
Securities Corporation (Prusec), 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. Services provided
and activities undertaken to distribute Class A shares of the Fund are referred
to herein as "Distribution Activities."
2. Payment of Service Fee
The Fund shall reimburse the Distributor for costs incurred by it in
providing personal service and/or maintaining shareholder accounts at a rate
not to exceed .25 of 1% per annum of the average daily net assets of the Class
A shares (service fee). The Fund shall calculate and accrue daily amounts
reimbursable by the Class A shares of the Fund hereunder and shall pay such
amounts monthly or at such other intervals as the Board of Directors may
determine. Costs of the Distributor subject to reimbursement hereunder include
account servicing fees and indirect and overhead costs associated with
providing personal service and/or maintaining shareholder accounts.
3. Payment for Distribution Activities
The Fund shall reimburse the Distributor for costs incurred by it in
performing Distribution Activities at a rate which, together with the service
fee (described in Section 2 hereof), shall not exceed .50% per annum of the
average daily net assets of the Class A shares of the Fund. The Fund shall
calculate and accrue daily amounts reimbursable by the Class A shares of the
Fund hereunder and shall pay such amounts monthly or at such other intervals as
29
<PAGE> 4
the Board of Directors may determine.
30
<PAGE> 5
Amounts paid to the Distributor by the Class A shares of the Fund will
not be used to pay the distribution expenses incurred with respect to the Class
B shares of the Fund except that distribution expenses attributable to the Fund
as a whole will be allocated to the Class A shares according to the ratio of
the sales of Class A 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. Payments hereunder will be
applied to distribution expenses in the order in which they are incurred,
unless otherwise determined by the Board of Directors.
Costs of the Distributor subject to reimbursement hereunder are costs
of performing Distribution Activities and may include, among others:
(a) amounts paid to Prudential Securities in reimbursement of
costs incurred by Prudential Securities in performing services
under a selected dealer agreement between Prudential
Securities and the Distributor for sale of Class A shares of
the Fund, including sales commissions and trailer commissions
paid to, or on account of, account executives and indirect and
overhead costs associated with Distribution Activities,
including central office and branch expenses;
(b) amounts paid to Prusec in reimbursement of costs incurred by
Prusec in performing services under a selected dealer
agreement between Prusec and the Distributor for sale of Class
A 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;
31
<PAGE> 6
(c) 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 financial reports and sales literature to persons
other than current shareholders of the Fund; and
(d) sales commissions (including trailer commissions) paid to, or
on account of, broker-dealers and financial institutions
(other than Prudential Securities and Prusec) which have
entered into selected dealer agreements with the Distributor
with respect to 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 Rule 12b-1.
The Distributor will provide to the Board of Directors of the Fund such
additional information as the Board 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 financial institutions
which have selected dealer agreements with the Distributor.
32
<PAGE> 7
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 A shares of the Fund.
If approved by a vote of a majority of the outstanding voting
securities of the Class A 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 A shares of
the Fund.
7. Amendments
The Plan may not be amended to change the distribution expenses to be
paid as provided for in Section 3 hereof so as to increase materially the
amounts payable 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 A shares of the Fund. All material
amendments of the Plan, including the addition or deletion of categories of
33
<PAGE> 8
expenditures which are reimbursable hereunder, 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. Non-interested Directors
While the Plan is in effect, the selection and nomination of the
Directors who are not "interested persons" of the Fund (non-interested
Directors) shall be committed to the discretion of the non-interested
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 as of June 1, 1992 and
amended and restated as of July 1, 1993.
34
<PAGE> 1
Exhibit 99.15(b)(ii)
PRUDENTIAL ADJUSTABLE RATE SECURITIES PLUS FUND, INC.
Distribution and Service Plan
(Class B 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 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 (the Distribution
Agreement) pursuant to which the Fund will continue to employ the Distributor
to distribute Class B shares issued by the Fund (Class B shares). Under the
Distribution Agreement, the Distributor will be entitled to receive payments
from investors of contingent deferred sales charges imposed with respect to
certain repurchases and redemptions of Class B shares. Under the Plan, the
Fund wishes to reimburse the Distributor for costs incurred by the Distributor
in distributing Class B shares of the Fund and to pay the Distributor a service
fee for the maintenance of Class B shareholder accounts. 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
<PAGE> 2
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 B 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 B 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
36
<PAGE> 3
Pruco Securities Corporation (Prusec). Services provided and activities
undertaken to distribute Class B shares of the Fund are referred to herein as
"Distribution Activities."
2. Payment of Service Fee
The Fund shall reimburse the Distributor for costs incurred by it in
providing personal service and/or maintaining shareholder accounts at a rate
not to exceed .25 of 1% per annum of the average daily net assets of the Class
B shares (service fee). The Fund shall calculate and accrue daily amounts
reimbursable by the Class B shares of the Fund hereunder and shall pay such
amounts monthly or at such other intervals as the Board of Directors may
determine. Costs of the Distributor subject to reimbursement hereunder include
account servicing fees and indirect and overhead costs associated with
providing personal service and/or maintaining shareholder accounts.
3. Payment for Distribution Activities
The Fund shall reimburse the Distributor at a rate which, together
with the service fee (described in Section 2 hereof), shall not exceed 1% per
annum of the average daily net assets of the Class B shares of the Fund for
costs incurred by it in performing Distribution Activities. The Fund shall
calculate and accrue daily amounts reimbursable by the Class B shares of the
Fund hereunder and shall pay such amounts monthly or at such other intervals as
the Board of Directors may determine. Proceeds from contingent deferred sales
charges will be applied to reduce the costs incurred in performing Distribution
Activities. The Fund
37
<PAGE> 4
shall carry forward amounts reimbursable that are not paid because they exceed
.75 of 1% per annum of the average daily net assets of the Class B shares of
the Fund (Carry Forward Amounts) and shall pay such amounts within the .75 of
1% per annum payment rate limitation so long as this Plan, including any
amendments hereto, is in effect, subject to the limitations of Article III,
Section 26 of the NASD Rules of Fair Practice. Although the Fund is not liable
for unreimbursed distribution expenses, in the event of termination or
discontinuation of the Plan, the Board of Directors may consider the
appropriateness of having the Class B shares of the Fund reimburse the
Distributor for the then outstanding Carry Forward Amounts plus interest
thereon to the extent permitted by applicable law or regulation from the
effective date of the Plan.
Amounts paid to the Distributor by the Class B shares of the Fund will
not be used to pay the distribution expenses incurred with respect to the Class
A shares of the Fund except that distribution expenses attributable to the Fund
as a whole will be allocated to the Class B shares according to the ratio of
the sale of Class B 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. Payments hereunder will be
applied to distribution expenses in the order in which they are incurred,
unless otherwise determined by the Board of Directors.
38
<PAGE> 5
Costs of the Distributor subject to reimbursement hereunder are all
costs of performing Distribution Activities and 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 in reimbursement of all costs incurred
by Prusec in performing services under a selected dealer
agreement between Prusec and the Distributor for sale of Class
B 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 financial reports and sales literature to persons
other than current shareholders of the Fund;
(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 shares of the
Fund;
(f) to the extent permitted by law, interest on unreimbursed Carry
Forward Amounts as defined in Section 3 at a rate equal to
that paid by Prudential Securities for bank borrowings as such
rate may vary from day to day, not to exceed that permitted
under Article III, Section 26, of the NASD Rules of Fair
Practice; and
39
<PAGE> 6
(g) unreimbursed distribution expenses incurred with respect to
the sale of Class B shares which have been exchanged into 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 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 B shares of the Fund.
If approved by a vote of a majority of the outstanding voting
securities of the Class B shares of the Fund, the Plan shall, unless earlier
terminated in accordance with its terms, continue in
40
<PAGE> 7
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 B shares of
the Fund.
7. Amendments
The Plan may not be amended to change the distribution expenses to be
paid as provided for in Section 3 hereof so as to increase materially the
amounts payable 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 B shares of the Fund. All material
amendments of the Plan, including the addition or deletion of categories of
expenditures which are reimbursable hereunder, 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. Non-interested Directors
While the Plan is in effect, the selection and nomination of the
Directors who are not "interested persons" of the Fund
41
<PAGE> 8
(non-interested Directors) shall be committed to the discretion of the
non-interested 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 as of June 1, 1992 and
amended and restated as of July 1, 1993
42
