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As filed with the Securities and Exchange Commission
on June 6, 1995
Registration No. 33-46658
811-6615
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. / /
Post-Effective Amendment No. 5 /X/
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 6 /X/
(Check appropriate box or boxes)
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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.
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It is proposed that this filing will become effective
(check appropriate box):
/ / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/x/ 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
/ / This post-effective amendment designates a new
effective date for a previously filed post-effective
amendment
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant
has previously registered an indefinite number of shares of common stock par
value $.01 per share. The Registrant filed a notice under such Rule for its
fiscal year ended February 28, 1995 on or about April 28, 1995.
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<PAGE> 2
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
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PART A
<S> <C> <C> <C>
Item 1. Cover Page.................................................. Cover Page
Item 2. Synopsis.................................................... Fund Expenses; Fund Highlights
Item 3. Condensed Financial Information............................. Fund Expenses; Financial
Highlights; General
Information
Item 4. General Description of Registrant........................... Cover Page; Fund Highlights;
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 Purchase and Redemption of
Offered..................................................... Fund Shares; Shareholder
Investment Account
Item 20. Tax Status.................................................. Taxes, Dividends and
Distributions
Item 21. Underwriters................................................ Distributor
Item 22. Calculation of Performance Data............................. Performance Information
Item 23. Financial Statements........................................ Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Post-Effective Amendment to
the Registration Statement.
<PAGE> 3
PRUDENTIAL ADJUSTABLE RATE
SECURITIES FUND, INC.
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PROSPECTUS DATED JUNE , 1995
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Prudential Adjustable Rate Securities Fund, Inc. (the Fund) is an open-end,
diversified management investment company whose investment objective is high
current income consistent with low volatility of principal. The Fund seeks to
achieve its objective by investing, under normal circumstances, at least 65% of
its total assets in adjustable rate securities, including mortgage-backed
securities issued or guaranteed by private institutions or the U.S. Government,
its agencies or instrumentalities, asset-backed securities and corporate and
other debt obligations, all of which have interest rates which reset at periodic
intervals. The Fund may invest the remainder of its assets in fixed rate
securities. The Fund expects that under normal market conditions at least 75% of
the value of the securities purchased by the Fund (excluding options and
futures) will be rated "AA" or "AAA" by Standard & Poor's Ratings Group
(Standard & Poor's) or "Aa" or "Aaa" by Moody's Investors Service (Moody's) or,
if unrated, will be determined to be of comparable quality by the 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. The Fund may
also engage in various derivative securities transactions including the purchase
and sale of put and call options on securities and financial indices and 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.
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This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information about
the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated June , 1995, which information is
incorporated herein by reference (is legally considered a part of this
Prospectus) and is available without charge upon request to the Fund at the
address or telephone number noted above.
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Investors are advised to read this Prospectus and retain it for future
reference.
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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.
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FUND HIGHLIGHTS
The following summary is intended to highlight certain information
contained in the Prospectus and is qualified in its entirety by more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC?
Prudential Adjustable Rate Securities Fund, Inc. is a mutual fund. A mutual
fund pools the resources of investors by selling its shares to the public and
investing the proceeds of such sale in a portfolio of securities designed to
achieve its investment objective. Technically, the Fund is an open-end,
diversified management investment company.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is to seek high current income consistent
with low volatility of principal. There can be no assurance that the Fund's
investment objective will be achieved. See "How the Fund Invests--Investment
Objective and Policies" at page 7.
IMPORTANT FUND INFORMATION
The Board of Directors of the Fund has recently approved a proposal
to exchange the assets and liabilities of the Fund for shares of
Prudential Government Securities Trust-Intermediate Term Series
(Intermediate Series). Class A and Class B shares of the Fund would be
exchanged at net asset value for shares of equivalent value of
Intermediate Series.
The transfer has been approved by Intermediate Series' Trustees and
the Fund's Directors, and is subject to approval by the Fund's
shareholders. It is anticipated that a proxy statement/prospectus will be
mailed to the Fund's shareholders in early July 1995.
Under the terms of the proposal, shareholders of the Fund would
become shareholders of Intermediate Series. No sales charges would be
imposed on the proposed transfer. The Fund anticipates obtaining an
opinion of its counsel that no gain or loss for federal income tax
purposes would be recognized by shareholders of the Fund as a result of
the proposed transaction.
AS OF CLOSE OF BUSINESS ON MAY 18, 1995 THE FUND NO LONGER ACCEPTS
PURCHASE ORDERS FOR SHARES OF EITHER CLASS, EXCEPT FOR PURCHASES BY
CERTAIN RETIREMENT AND EMPLOYEE PLANS (EXCLUDING IRA ACCOUNTS). Existing
shareholders may continue to acquire shares through dividend reinvestment
and the current exchange and redemption privileges will remain in effect
until the transaction is consummated. In the event that Fund shareholders
do not approve the proposed transaction, the Board of Directors will
consider appropriate action including, but not limited to, the public
offering of Fund shares.
2
<PAGE> 5
RISK FACTORS AND SPECIAL CHARACTERISTICS
In seeking to achieve its investment objective, the Fund will under normal
circumstances invest at least 65% of its assets in adjustable rate securities,
including mortgage-backed securities, obligations issued or guaranteed by the
U.S. Government, its agencies and instrumentalities and corporate and other debt
securities, all of which have their interest rates reset at periodic intervals.
The Fund may also invest up to 35% of its total assets in fixed rate securities.
The Fund expects that under normal conditions at least 75% of the value of the
securities purchased by the Fund (excluding options and futures) will be rated
"AA" or "AAA" by Standard & Poor's or "Aa" or "Aaa" by Moody's or, if unrated,
will be determined to be of comparable quality by the investment adviser. See
"How the Fund Invests--Investment Objective and Policies" at page 7. 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 engage in various derivative securities transactions
including the purchase and sale of put and call options on securities and
financial indices and futures contracts and related options. See "Other
Investments and Investment Techniques" at page 14.
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, 1995 PMF served as
manager or administrator to 68 investment companies, including 39 mutual funds,
with aggregate assets of approximately $46 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 21.
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.
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 22. 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 22.
3
<PAGE> 6
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 29 and "Shareholder Guide--Shareholder Services" at
page 36.
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 25 and "Shareholder Guide--How to Buy Shares
of the Fund" at page 29.
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 30 and
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales
Charge--Class B Shares" at page 35.
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 33.
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 27.
4
<PAGE> 7
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FUND EXPENSES
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
(INITIAL SALES (DEFERRED SALES
CHARGE CHARGE
ALTERNATIVE) ALTERNATIVE)
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<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.......................................................... .57% .53%
----- -----
Total Fund Operating Expenses (before fee waiver)**..................... 1.57% 2.03%
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</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
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<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.................................................................... $ 26 $ 59 $ 95 $ 195
Class B*................................................................... $ 16 $ 50 $ 86 $ 187
You would pay the following expenses on the same investment, assuming no
redemption:
Class A.................................................................... $ 26 $ 59 $ 95 $ 195
Class B*................................................................... $ 16 $ 50 $ 86 $ 187
</TABLE>
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 period 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 1.07% for Class A shares and 1.03% for Class B shares.
+ 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."
5
<PAGE> 8
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FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIODS)
THE FOLLOWING FINANCIAL HIGHLIGHTS HAVE BEEN AUDITED BY DELOITTE & TOUCHE LLP,
INDEPENDENT ACCOUNTANTS, WHOSE REPORT THEREON WAS UNQUALIFIED. THIS INFORMATION
SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND NOTES THERETO,
WHICH APPEAR IN THE STATEMENT OF ADDITIONAL INFORMATION. THE FINANCIAL
HIGHLIGHTS CONTAIN SELECTED DATA FOR A SHARE OF COMMON STOCK OUTSTANDING, TOTAL
RETURN, RATIOS TO AVERAGE NET ASSETS AND OTHER SUPPLEMENTAL DATA FOR THE PERIODS
INDICATED. THIS INFORMATION IS BASED ON DATA CONTAINED IN THE FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
CLASS A CLASS B
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JUNE 10, JUNE 10,
YEAR YEAR 1992* YEAR YEAR 1992*
ENDED ENDED THROUGH ENDED ENDED THROUGH
FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY
28, 28, 28, 28, 28, 28,
1995 1994 1993 1995 1994 1993
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<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................. $ 9.63 $ 9.94 $ 10.00 $ 9.67 $ 9.94 $ 10.00
---------- ---------- ---------- ---------- ---------- ----------
Income from investment operations
Net investment income+............... .36 0.41 0.35 .36 0.41 0.31
Net realized and unrealized loss on
investment transactions............ (.07) (0.29) (0.05) (.08) (0.29) (0.05)
---------- ---------- ---------- ---------- ---------- ----------
Total from investment operations... .29 0.12 0.30 .28 0.12 0.26
Less distributions
Dividends from net investment
income............................. (.35) (0.41) (0.35) (.33) (0.41) (0.31)
Dividends in excess of net investment
income............................. (.01) (0.02) (0.01) (.03) (0.01) (0.01)
---------- ---------- ---------- ---------- ---------- ----------
Total distributions................ (.36) (0.43) (0.36) (.36) (0.42) (0.32)
---------- ---------- ---------- ---------- ---------- ----------
Contingent deferred sales charge
collected.......................... -- -- -- -- .03 --
---------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of period....... $ 9.56 $ 9.63 $ 9.94 $ 9.59 $ 9.67 $ 9.94
========== ========== ========== ========== ========== ==========
TOTAL RETURN++....................... 3.07% 1.24% 2.92% 2.96% 1.58% 2.56%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...... $ 58,710 $122,860 $219,352 $ 746 $ 5,312 $ 38,766
Average net assets (000)............. $ 89,069 $176,863 $217,329 $2,279 $ 19,742 $ 33,895
Ratios to average net assets+
Expenses, including distribution
fees............................. 1.07% 0.69% 0.77%** 1.03% 0.75% 1.27%**
Expenses, excluding distribution
fees............................. 1.07% 0.63% 0.27%** 1.03% 0.63% 0.27%**
Net investment income.............. 3.65% 4.29% 4.81%** 3.47% 4.23% 4.31%**
Portfolio turnover rate.............. 268% 130% 45% 268% 130% 45%
</TABLE>
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* 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.
6
<PAGE> 9
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HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
THE FUND'S INVESTMENT OBJECTIVE IS HIGH CURRENT INCOME CONSISTENT WITH LOW
VOLATILITY OF PRINCIPAL. THE FUND SEEKS TO ACHIEVE ITS OBJECTIVE BY INVESTING,
UNDER NORMAL CIRCUMSTANCES, AT LEAST 65% OF ITS TOTAL ASSETS IN ADJUSTABLE RATE
SECURITIES, INCLUDING MORTGAGE-BACKED SECURITIES ISSUED OR GUARANTEED BY PRIVATE
INSTITUTIONS OR THE U.S. GOVERNMENT, ITS AGENCIES OR INSTRUMENTALITIES,
ASSET-BACKED SECURITIES AND CORPORATE AND OTHER DEBT OBLIGATIONS. By investing
primarily in adjustable rate securities, all of which have their interest rates
reset at periodic intervals, the Fund seeks to achieve less volatility of
principal than a portfolio which invests exclusively in fixed rate securities.
THERE CAN BE NO ASSURANCE THAT THE FUND'S INVESTMENT OBJECTIVE WILL 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.
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
7
<PAGE> 10
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. Government and, as such, are backed by the
"full faith and credit" of the United States. They differ primarily in their
interest rates, the lengths of their maturities and the dates of their
issuances. U.S. Treasury securities are generally fixed rate securities.
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SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES
THE FUND WILL INVEST IN BOTH ADJUSTABLE RATE AND FIXED RATE SECURITIES
ISSUED OR GUARANTEED BY AGENCIES OR INSTRUMENTALITIES OF THE U.S. GOVERNMENT,
INCLUDING, BUT NOT LIMITED TO, GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA),
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) AND FEDERAL HOME LOAN MORTGAGE
CORPORATION (FHLMC) SECURITIES. Obligations of GNMA, the Farmers Home
Administration and the Export-Import Bank are backed by the full faith and
credit of the United States. In the case of securities not backed by the full
faith and credit of the United States, the Fund must look principally to the
agency issuing or guaranteeing the obligation for ultimate repayment. Such
securities include obligations issued by the Student Loan Marketing Association
(SLMA), FNMA and FHLMC, each of which may borrow from the U.S. Treasury to meet
its obligations, although the U.S. Treasury is under no obligation to lend to
such entities. GNMA, FNMA and FHLMC may also issue collateralized mortgage
obligations. See "How the Fund Invests--Collateralized Mortgage Obligations and
Multiclass Pass-Through Securities" below.
THE FUND MAY INVEST IN COMPONENT PARTS OF U.S. GOVERNMENT SECURITIES,
NAMELY EITHER THE CORPUS (PRINCIPAL) OF SUCH OBLIGATIONS OR ONE OF THE INTEREST
PAYMENTS SCHEDULED TO BE PAID ON SUCH OBLIGATIONS. These obligations may take
the form of (i) obligations from which the interest coupons have been stripped;
(ii) the interest coupons that are stripped; (iii) book-entries at a Federal
Reserve member bank representing ownership of obligation components; or (iv)
receipts evidencing the component parts (corpus or coupons) of U.S. Government
obligations that have not actually been stripped. Such receipts evidence
ownership of component parts of U.S. Government obligations (corpus or coupons)
purchased by a third party (typically an investment banking firm) and held on
behalf of the third party in physical or book-entry form by a major commercial
bank or trust company pursuant to a custody agreement with the third party. The
Fund may also invest in custodial receipts held by a third party that are not
U.S. Government securities. See "Other Investments" in the Statement of
Additional Information.
MORTGAGE-RELATED SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT
AGENCIES AND INSTRUMENTALITIES
THE FUND WILL INVEST IN MORTGAGE-BACKED SECURITIES AND OTHER DERIVATIVE
MORTGAGE PRODUCTS, INCLUDING THOSE REPRESENTING AN UNDIVIDED OWNERSHIP INTEREST
IN A POOL OF MORTGAGES, E.G., GNMA, FNMA AND FHLMC CERTIFICATES WHERE THE U.S.
GOVERNMENT OR ITS AGENCIES OR INSTRUMENTALITIES GUARANTEES THE PAYMENT OF
INTEREST AND PRINCIPAL OF THESE SECURITIES. See "How the Fund
Invests--Mortgage-Backed Securities" below. However, these guarantees do not
extend to the securities' yield or value, which are likely to vary inversely
with fluctuations in interest rates, nor do these guarantees extend to the yield
or value of the Fund's shares. See "Investment Objective and Policies--U.S.
Government Securities" in the Statement of Additional Information. These
certificates are in most cases "pass-through" instruments, through which the
holder receives a share of all interest and principal payments from the
mortgages underlying the certificate, net of certain fees. See "How the Fund
Invests--Mortgage-Backed Securities" below.
IN ADDITION TO GNMA, FNMA OR FHLMC CERTIFICATES THROUGH WHICH THE HOLDER
RECEIVES A SHARE OF ALL INTEREST AND PRINCIPAL PAYMENTS FROM THE MORTGAGES
UNDERLYING THE CERTIFICATE, THE FUND MAY ALSO INVEST IN CERTAIN MORTGAGE
PASS-THROUGH SECURITIES ISSUED BY THE U.S. GOVERNMENT OR ITS AGENCIES AND
INSTRUMENTALITIES COMMONLY REFERRED TO AS MORTGAGE-BACKED SECURITY STRIPS OR MBS
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STRIPS. MBS strips are usually structured with two classes that receive
different proportions of the interest and principal distributions on a pool of
mortgage assets. A common type of stripped mortgage security will have one class
receiving some of the interest and most of the principal from the mortgage
assets, while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will receive all
of the interest (the interest-only or "IO" class), while the other class will
receive all of the principal (the principal-only or "PO" class). The yields to
maturity on IOs and POs are sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage assets, and principal
payments may have a material effect on yield to maturity. If the underlying
mortgage assets experience greater than anticipated prepayments of principal,
the Fund may not fully recoup its initial investment in IOs. Conversely, if the
underlying mortgage assets experience less than anticipated prepayments of
principal, the yield on POs could be materially adversely affected.
MORTGAGE-BACKED SECURITIES
MORTGAGE-BACKED SECURITIES ARE SECURITIES THAT DIRECTLY OR INDIRECTLY
REPRESENT A PARTICIPATION IN, OR ARE SECURED BY AND PAYABLE FROM, MORTGAGE LOANS
SECURED BY REAL PROPERTY. There are currently three basic types of
mortgage-backed securities: (i) those issued or guaranteed by the U.S.
Government or one of its agencies or instrumentalities, such as GNMA, FNMA and
FHLMC, described under "U.S. Government Securities" above; (ii) those issued by
private issuers that represent an interest in or are collateralized by
mortgage-backed securities issued or guaranteed by the U.S. Government or one of
its agencies or instrumentalities; and (iii) those issued by private issuers
that represent an interest in or are collateralized by whole mortgage loans or
mortgage-backed securities without a government guarantee but usually having
some form of private credit enhancement.
ADJUSTABLE RATE MORTGAGE SECURITIES
THE FUND WILL INVEST IN ADJUSTABLE RATE MORTGAGE SECURITIES (ARMS), WHICH
ARE PASS-THROUGH MORTGAGE SECURITIES COLLATERALIZED BY MORTGAGES WITH ADJUSTABLE
RATHER THAN FIXED RATES. ARMs eligible for inclusion in a mortgage pool
generally provide for a fixed initial mortgage interest rate for either the
first three, six, twelve, thirteen, thirty-six or sixty scheduled monthly
payments. Thereafter, the interest rates are subject to periodic adjustment
based on changes to a designated benchmark index.
ARMs contain maximum and minimum rates beyond which the mortgage interest
rate may not vary over the lifetime of the security. In addition, certain ARMs
provide for limitations on the maximum amount by which the mortgage interest
rate may adjust for any single adjustment period. Alternatively, certain ARMs
contain limitations on changes in the required monthly payment. In the event
that a monthly payment is not sufficient to pay the interest accruing on an ARM,
any such excess interest is added to the principal balance of the mortgage loan,
which is repaid through future monthly payments. If the monthly payment for such
an instrument exceeds the sum of the interest accrued at the applicable mortgage
interest rate and the principal payment required at such point to amortize the
outstanding principal balance over the remaining term of the loan, the excess is
utilized to reduce the then outstanding principal balance of the ARM.
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PRIVATE MORTGAGE PASS-THROUGH SECURITIES
PRIVATE MORTGAGE PASS-THROUGH SECURITIES ARE STRUCTURED SIMILARLY TO GNMA,
FNMA AND FHLMC MORTGAGE PASS-THROUGH SECURITIES AND ARE ISSUED BY ORIGINATORS OF
AND INVESTORS IN MORTGAGE LOANS, INCLUDING DEPOSITORY INSTITUTIONS, MORTGAGE
BANKS, INVESTMENT BANKS AND SPECIAL PURPOSE SUBSIDIARIES OF THE FOREGOING. These
securities usually are backed by a pool of conventional fixed rate or adjustable
rate mortgage loans. Since private mortgage pass-through securities typically
are not guaranteed by an entity having the credit status of GNMA, FNMA and
FHLMC, such securities generally are structured with one or more types of credit
enhancement. Types of credit enhancements are described under "Asset Backed
Securities" below.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES. COLLATERALIZED MORTGAGE OBLIGATIONS OR "CMOS" ARE DEBT OBLIGATIONS
COLLATERALIZED BY MORTGAGE LOANS OR MORTGAGE PASS-THROUGH SECURITIES. Typically,
CMOs are collateralized by GNMA, FNMA or FHLMC Certificates, but also may be
collateralized by whole loans or private mortgage pass-through securities (such
collateral collectively hereinafter referred to as "Mortgage Assets").
Multiclass pass-through securities are equity interests in a trust composed of
Mortgage Assets. Payments of principal of and interest on the Mortgage Assets,
and any reinvestment income thereon, provide the funds to pay debt service on
the CMOs or make scheduled distributions on the multiclass pass-through
securities. CMOs may be issued by agencies or instrumentalities of the U.S.
Government, or by private originators of, or investors in, mortgage loans,
including depository institutions, mortgage banks, investment banks and special
purpose subsidiaries of the foregoing. The issuer of a series of CMOs may elect
to be treated as a Real Estate Mortgage Investment Conduit (REMIC). All future
references to CMOs shall also be deemed to include REMICs.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final distribution
dates. Interest is paid or accrues on all classes of CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the Mortgage
Assets may be allocated among the several classes of a CMO series in a number of
different ways. Generally, the purpose of the allocation of the cash flow of a
CMO to the various classes is to obtain a more predictable cash flow to the
individual tranches than exists with the underlying collateral of the CMO. As a
general rule, the more predictable the cash flow on a CMO tranche, the lower the
anticipated yield will be on that tranche at the time of issuance relative to
prevailing market yields on mortgage-backed securities.
THE FUND ALSO MAY INVEST IN, AMONG OTHER THINGS, PARALLEL PAY CMOS AND
PLANNED AMORTIZATION CLASS CMOS (PAC BONDS). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds generally require payments of a
specified amount of principal on each payment date. PAC Bonds always are
parallel pay CMOs with the required principal payment on such securities having
the highest priority after interest has been paid to all classes.
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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.
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
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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 prepayment rates as
mortgage-backed securities, may respond to certain of the same factors
influencing prepayments, while at other times different factors will
predominate. Mortgage-backed securities and asset-backed securities may decrease
in value as a result of increases in interest rates and may
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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, INCLUDING DERIVATIVE
SECURITIES TRANSACTIONS, 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. New financial products and risk management techniques continue to
be developed and the Fund may use these new investments and techniques to the
extent consistent with its investment objective and policies.
OPTIONS TRANSACTIONS
THE FUND MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON
SECURITIES AND FINANCIAL INDICES THAT ARE TRADED ON NATIONAL SECURITIES
EXCHANGES OR IN THE OVER-THE-COUNTER MARKET TO ENHANCE INCOME OR TO HEDGE THE
FUND'S PORTFOLIO. THESE OPTIONS WILL BE ON DEBT SECURITIES, AGGREGATES OF DEBT
SECURITIES, FINANCIAL INDICES AND U.S. GOVERNMENT SECURITIES AND MAY BE TRADED
ON NATIONAL SECURITIES EXCHANGES OR OVER-THE-COUNTER. See "Additional
Risks--Options on Securities" in the Statement of Additional Information. The
Fund may write covered put and call options to generate additional income
through the receipt of premiums, purchase put options in an effort to protect
the value of a security that it owns against a decline in market value and
purchase
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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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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 (SEC). 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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<PAGE> 21
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 SECURITIES
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 other securities that are not readily marketable. Restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as amended, (the Securities Act), and privately placed commercial paper
that have a readily available market are not considered illiquid for purposes of
this limitation. The investment adviser will monitor the liquidity of such
restricted securities under the supervision of the Board of Directors.
Repurchase agreements subject to demand are deemed to have a maturity equal to
the applicable notice period.
The staff of the SEC has taken the position that purchased over-the-counter
options and the assets used as "cover" for written over-the-counter options are
illiquid securities unless the Fund and the counterparty have provided for the
Fund at the Fund's option to unwind the over-the-counter option. The exercise of
such an option ordinarily would involve the payment by the Fund of an amount
designed to reflect the counterparty's economic loss from an early termination,
but does allow the Fund to treat the assets used as "cover" as "liquid."
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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 (over 100%) 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. In addition, high portfolio turnover
may result in increased short-term capital gains which, when distributed to
shareholders, are treated as ordinary income. See "Taxes, Dividends and
Distributions."
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, 1995, THE TOTAL EXPENSES AS A PERCENTAGE OF
AVERAGE NET ASSETS FOR THE FUND'S CLASS A AND CLASS B SHARE WERE 1.07% (NET OF
MANAGEMENT FEE WAIVER) AND 1.03%, 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 ended February 28, 1995 the fund paid management fees to PMF
of $456,738 (.50% of average daily net assets).
As of March 31, 1995, PMF served as the manager to 39 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 $46 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 Barbara L. Kenworthy, a
managing director and senior portfolio manager of Prudential Investment
Advisors, a unit of PIC. She is responsible for the day to day management of the
portfolio and has managed the Fund's portfolio since May 1995. Ms. Kenworthy
joined PIC in July 1994, having previously been employed by The Dreyfus
Corporation (from June 1985 to June 1994) where she served as president and
portfolio manager for several Dreyfus fixed-income funds. Ms. Kenworthy also
serves as the portfolio manager of other investment companies advised by PIC.
PMF and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America (Prudential), a major diversified insurance and
financial services company.
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<PAGE> 24
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, 1995, PMFD incurred
distribution-related expenses under the Class A Plan of $445,344 (0.50% of
average daily net assets of Class A shares). In addition, for this period, PMFD
received approximately $1,900 in initial sales charges. PMFD has agreed to
waive, temporarily and voluntarily, all payments to it under the Class A Plan.
Therefore, the Fund did not pay any distribution expenses to PMFD for the fiscal
year ended February 28, 1995.
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In addition, 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, 1995, Prudential Securities received approximately $5,000 in
contingent deferred sales charges.
THE CLASS B PLAN ALSO PROVIDES FOR THE PAYMENT OF A SERVICE FEE TO
PRUDENTIAL SECURITIES AT A RATE NOT TO EXCEED .25 OF 1% OF THE AVERAGE DAILY NET
VALUE OF THE CLASS B SHARES. The service fee is used to pay financial advisers
for personal service and/or the maintenance of shareholder accounts.
Actual distribution expenses (asset-based sales charges) for Class B shares
for any given year may exceed the fees received pursuant to the Class B Plan and
will be carried forward and paid by the Fund in future years so long as the
Class B Plan is in effect. Interest is accrued monthly on such carry forward
amounts at a rate comparable to that paid by Prudential Securities for bank
borrowings. See "Distributor" in the Statement of Additional Information.
THE AGGREGATE DISTRIBUTION FEE FOR CLASS B SHARES (ASSET-BASED SALES
CHARGES PLUS SERVICE FEES) WILL NOT EXCEED THE ANNUAL RATE OF 1% OF THE AVERAGE
DAILY NET ASSET VALUE OF CLASS B SHARES UNDER THE CLASS B PLAN.
For the fiscal year ended February 28, 1995, Prudential Securities did not
assess its distribution fee under the Class B Plan since, 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 did not pay any distribution expenses to PSI for the fiscal year ended
February 28, 1995. In addition, 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.
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 Fund records all payments, if
any, made under the Plans as expenses in the calculation of net investment
income. 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.
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<PAGE> 26
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 out of its own resources to dealers and other persons which distribute
shares of the Fund. Such payments may be calculated by reference to the net
asset value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition
of a $10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI
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<PAGE> 27
agreed, among other things, to pay an additional $330,000,000 into the fund
established by the SEC to pay restitution to investors who purchased certain PSI
limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
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. (PMFS), Raritan Plaza One, Edison,
New Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and in
those capacities maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
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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. NAV IS CALCULATED SEPARATELY FOR EACH
CLASS. 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:
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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.
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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 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., Morningstar
Publications, Inc., other industry publications, business periodicals, and
market indices. See "Performance Information" in the Statement of Additional
Information. The Fund will include performance data for 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."
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TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE FUND HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED. ACCORDINGLY, THE FUND WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON
ITS NET INVESTMENT INCOME AND CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS
SHAREHOLDERS.
TAXATION OF SHAREHOLDERS
All dividends out of net investment income, together with distributions of
short-term capital gains, will be taxable as ordinary income to the shareholder
whether or not reinvested. Any net long-term capital gains distributed to
shareholders will be taxable as such to the shareholders, whether or not
reinvested and regardless of the length of time a shareholder has owned his or
her shares.
The Fund has obtained 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."
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.
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<PAGE> 30
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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. 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.
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<PAGE> 31
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SHAREHOLDERS' GUIDE
HOW TO BUY SHARES OF THE FUND
AS OF CLOSE OF BUSINESS ON MAY 18, 1995, THE FUND NO LONGER ACCEPTS
PURCHASE ORDERS FOR SHARES OF EITHER CLASS, EXCEPT FOR PURCHASES BY CERTAIN
RETIREMENT AND EMPLOYEE PLANS (EXCLUDING IRA ACCOUNTS). SEE "FUND
HIGHLIGHTS--IMPORTANT FUND INFORMATION."
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. The minimum initial investment requirement is
waived for purchases of Class A shares effected through an exchange of Class B
shares of The BlackRock Government Income Trust.
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 (including an
exchange into the Fund) 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 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).
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<PAGE> 32
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Fund as of that day. See "Net Asset Value" in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential 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
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
30
<PAGE> 33
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 contingent deferred sales charge of 1% and a distribution and
service fee. If you are not entitled to a reduced initial sales charge and you
expect to maintain your investment in the Fund 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.
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
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<PAGE> 34
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 participants.
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.
OTHER WAIVERS. Class A shares may be purchased at NAV, through Prudential
Securities or the Transfer Agent, by investors who have a business relationship
with a financial adviser who joined Prudential Securities from another
investment firm, provided that (i) the purchase is made within 90 days of the
commencement of the financial adviser's employment at Prudential Securities,
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<PAGE> 35
(ii) the purchase is made with proceeds of a redemption of shares of any
open-end, non-money market fund sponsored by the financial adviser's previous
employer (other than a fund which imposes a distribution or service fee .25 of
1% or less) and (iii) the financial adviser served as the client's broker on the
previous purchase.
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 INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION
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<PAGE> 36
WILL BE CREDITED TO YOUR PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE
OTHERWISE. Such payment may be postponed or the right of redemption suspended at
times (a) when the New York Stock Exchange is closed for other than customary
weekends and holidays, (b) when trading on such Exchange is restricted, (c) when
an emergency exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, or (d) during any
other period when the 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.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the NAV next
determined after the order is received, which must be within 90 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.
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<PAGE> 37
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 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. No sales charge will be imposed at the time of the
exchange. Any applicable CDSC payable upon the redemption of shares exchanged
will be calculated from the first day of the month after the 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
35
<PAGE> 38
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.
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
36
<PAGE> 39
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 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 account 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) 225-1852 (toll-free) 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.
37
<PAGE> 40
- --------------------------------------------------------------------------------
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 Allocation Fund
Prudential Diversified Bond Fund, Inc. Conservatively Managed Portfolio
Prudential GNMA Fund Strategy Portfolio
Prudential Government Income Fund, Inc. Prudential Equity Fund, Inc.
Prudential Government Securities Trust Prudential Equity Income Fund
Intermediate Term Series Prudential Growth Opportunity Fund, Inc.
Prudential High Yield Fund, Inc. Prudential IncomeVertible(R) Fund, Inc.
Prudential Structured Maturity Fund, Inc. Prudential Multi-Sector Fund, Inc.
Income Portfolio Prudential Utility Fund
Prudential U.S. Government Fund Nicholas-Applegate Fund, Inc.
The BlackRock Government Income Trust Nicholas-Applegate Growth Equity Fund
TAX-EXEMPT BOND FUNDS MONEY MARKET FUNDS
Prudential California Municipal Fund - Taxable Money Market Funds
California Series Prudential Government Securities Trust
California Income Series Money Market Series
Prudential Municipal Bond Fund U.S. Treasury Money Market Series
High Yield Series Prudential Special Money Market Fund
Insured Series Money Market Series
Modified Term Series Prudential MoneyMart Assets
Prudential Municipal Series Fund
Arizona Series - Tax-Free Money Market Funds
Florida Series Prudential Tax-Free Money Fund
Georgia Series Prudential California Municipal Fund
Hawaii Income Series California Money Market Series
Maryland Series Prudential Municipal Series Fund
Massachusetts Series Connecticut Money Market Series
Michigan Series Massachusetts Money Market Series
Minnesota Series New Jersey Money Market Series
New Jersey Series New York Money Market Series
New York Series
North Carolina Series - Command Funds
Ohio Series Command Money Fund
Pennsylvania Series Command Government Fund
Prudential National Municipals Fund, Inc. Command Tax-Free Fund
GLOBAL FUNDS - Institutional Money Market Funds
Prudential Institutional Liquidity
Prudential Europe Growth Fund, Inc. Portfolio, Inc.
Prudential Global Fund, Inc. Institutional Money Market Series
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
</TABLE>
A-1
<PAGE> 41
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 PROSPECTUS
of an offer to buy any of the
securities offered hereby in any
jurisdiction to any person to whom it
is unlawful to make such
offer in such jurisdiction. PRUDENTIAL
ADJUSTABLE RATE
- ------------------------------------------------ SECURITIES FUND, INC.
JUNE , 1995
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
FUND HIGHLIGHTS....................... 2
Risk Factors and Special
Characteristics................... 3
FUND EXPENSES......................... 5
FINANCIAL HIGHLIGHTS.................. 6
HOW THE FUND INVESTS.................. 7
Investment Objective and Policies... 7
Other Investments and Investment
Techniques........................ 14
Investment Restrictions............. 20
HOW THE FUND IS MANAGED............... 21
Manager............................. 21
Fee Waivers and Subsidy............. 22
Distributor......................... 22
Portfolio Transactions.............. 25
Custodian and Transfer and Dividend
Disbursing Agent.................. 25
HOW THE FUND VALUES ITS SHARES........ 25
HOW THE FUND CALCULATES PERFORMANCE... 26
TAXES, DIVIDENDS AND DISTRIBUTIONS.... 27
Taxation of the Fund................ 27
Taxation of Shareholders............ 27
Withholding Taxes................... 27
Dividends and Distributions......... 27
GENERAL INFORMATION................... 28
Description of Common Stock......... 28
Additional Information.............. 28
SHAREHOLDERS' GUIDE................... 29
How to Buy Shares of the Fund....... 29
Alternative Purchase Plan........... 30
How to Sell Your Shares............. 33
How to Exchange Your Shares......... 35
Shareholder Services................ 36
THE PRUDENTIAL MUTUAL FUND
FAMILY.............................. A-1
- ------------------------------------------------
</TABLE>
MF 156A 4445901 [PRUDENTIAL MUTUAL
FUNDS LOGO]
CUSIP NOS.: Class A: 74429J106
Class B: 74429J205
<PAGE> 42
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC.
Statement of Additional Information
dated June __, 1995
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 June __, 1995, a copy of
which may be obtained from the Fund at One Seaport Plaza, New York, New York
10292 upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
----- ----------------
<S> <C> <C>
Investment Objective and Policies.......................................... B-2 6
Additional Investment Information.......................................... B-2 6
Investment Restrictions.................................................... B-11 19
Directors and Officers..................................................... B-13 20
Manager.................................................................... B-15 20
Distributor................................................................ B-17 21
Portfolio Transactions and Brokerage....................................... B-18 23
Purchase and Redemption of Fund Shares..................................... B-19 27
Shareholder Investment Account............................................. B-21 33
Net Asset Value............................................................ B-24 23
Taxes, Dividends and Distributions......................................... B-24 25
Performance Information.................................................... B-26 24
Custodian, Transfer and Dividend Disbursing Agent and Independent
Accountants.............................................................. B-27 23
Financial Statements....................................................... B-28 --
Report of Independent Accountants.......................................... B-36 --
</TABLE>
- --------------------------------------------------------------------------------
MF156B
<PAGE> 43
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is high current income consistent with
low volatility of principal. There can be no assurance that the Fund's
investment objective will be achieved. See ``How the Fund Invests--Investment
Objective and Policies'' in the Prospectus.
ADDITIONAL INVESTMENT INFORMATION
U.S. GOVERNMENT SECURITIES
MORTGAGE-RELATED SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT
AGENCIES AND INSTRUMENTALITIES. The Fund may purchase mortgage-related
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, including GNMA, FNMA and FHLMC Certificates. See
``Mortgage-Backed Securities'' below. Mortgages backing the securities which may
be purchased by the Fund include conventional thirty-year fixed rate mortgages,
graduated payment mortgages, fifteen-year mortgages, adjustable rate mortgages
and balloon payment mortgages. A balloon payment mortgage-backed security is an
amortized mortgage security with installments of principal and interest, the
last installment of which is predominately principal. All of these mortgages can
be used to create pass-through securities. A pass-through security is formed
when mortgages are pooled together and undivided interests in the pool or pools
are sold. The cash flow from the mortgages is passed through to the holders of
the securities in the form of periodic payments of interest, principal and
prepayments (net of a service fee). Prepayments occur when the holder of an
undivided mortgage prepays the remaining principal before the mortgage's
scheduled maturity date. As a result of the pass-through of prepayments of
principal on the underlying securities, mortgage-backed securities are often
subject to more rapid prepayment of principal than their stated maturity would
indicate. The remaining expected average life of a pool of mortgage loans
underlying a mortgage-backed security is a prediction of when the mortgage loans
will be repaid and is based upon a variety of factors, such as the demographic
and geographic characteristics of the borrowers and the mortgaged properties,
the length of time that each of the mortgage loans has been outstanding, the
interest rates payable on the mortgage loans and the current interest rate
environment.
During periods of declining interest rates, prepayment of mortgages
underlying mortgage-backed securities can be expected to accelerate. When
mortgage obligations are prepaid, the Fund reinvests the prepaid amounts in
securities, the yields of which reflect interest rates prevailing at that time.
Therefore, the Fund's ability to maintain a portfolio of high-yielding
mortgage-backed securities will be adversely affected to the extent that
prepayments of mortgages are reinvested in securities which have lower yields
than the prepaid mortgages. Moreover, prepayments of mortgages which underlie
securities purchased at a premium generally will result in capital losses.
SPECIAL CONSIDERATIONS. Fixed income U.S. Government securities are
considered among the most creditworthy of fixed income investments. The yields
available from U.S. Government securities are generally lower than the yields
available from corporate debt securities. The values of U.S. Government
securities will change as interest rates fluctuate. To the extent U.S.
Government securities are not adjustable rate securities, these changes in value
in response to changes in interest rates generally will be more pronounced.
During periods of falling interest rates, the values of outstanding long-term
fixed rate U.S. Government securities generally rise. Conversely, during periods
of rising interest rates, the values of such securities generally decline. The
magnitude of these fluctuations will generally be greater for securities with
longer maturities. Although changes in the value of U.S. Government securities
will not affect investment income from those securities, they may affect the net
asset value of the Fund.
At a time when the Fund has written call options on a portion of its U.S.
Government securities, its ability to profit from declining interest rates will
be limited. Any appreciation in the value of the securities held in the
portfolio above the strike price would likely be partially or wholly offset by
unrealized losses on call options written by the Fund. The termination of option
positions under these conditions would generally result in the realization of
capital losses, which would reduce the Fund's capital gains distribution.
Accordingly, the Fund would generally seek to realize capital gains to offset
realized losses by selling portfolio securities. In such circumstances, however,
it is likely that the proceeds of such sales would be reinvested in lower
yielding securities. See ``Additional Risks--Options Transactions and Related
Risks''.
MORTGAGE-BACKED SECURITIES
As discussed in the Prospectus, the mortgage-backed securities purchased by
the Fund evidence an interest in a specific pool of mortgages. Such securities
may be issued by GNMA, FNMA and FHLMC.
GNMA CERTIFICATES. GNMA is a wholly-owned corporate instrumentality of the
United States within the Department of Housing and Urban Development. The
National Housing Act of 1934, as amended (the Housing Act), authorizes GNMA to
guarantee the timely payment of the principal of and interest on certificates
that are based on and backed by a pool of mortgage loans issued by the Federal
Housing Administration under the Housing Act, or Title V of the Housing Act of
1949 (FHA Loans), or guaranteed by the Veterans' Administration under the
Servicemen's Readjustment Act of 1944, as amended (VA Loans), or by pools of
other eligible mortgage loans.
B-2
<PAGE> 44
The Housing Act provides that the full faith and credit of the U.S. Government
is pledged to the payment of all amounts that may be required to be paid under
the guarantee. In order to meet its obligations under such guarantee, GNMA is
authorized to borrow from the U.S. Treasury with no limitations as to amount.
The GNMA Certificates will represent a pro rata interest in one or more
pools of the following types of mortgage loans: (i) fixed rate level payment
mortgage loans; (ii) fixed rate graduated payment mortgage loans; (iii) fixed
rate growing equity mortgage loans; (iv) fixed rate mortgage loans secured by
manufactured (mobile) homes; (v) mortgage loans on multifamily residential
properties under construction; (vi) mortgage loans on completed multifamily
projects; (vii) fixed rate mortgage loans as to which escrowed funds are used to
reduce the borrower's monthly payments during the early years of the mortgage
loans (``buydown'' mortgage loans); (viii) mortgage loans that provide for
adjustments in payments based on periodic changes in interest rates or in other
payment terms of the mortgage loans; and (ix) mortgage-backed serial notes. All
of these mortgage loans will be FHA Loans or VA Loans and, except as otherwise
specified above, will be fully-amortizing loans secured by first liens on one-to
four-family housing units. Legislative changes may be proposed from time to time
in relation to the Department of Housing and Urban Development which, if
adopted, could alter the viability of investing in GNMAs. As of the date of this
Statement of Additional Information, no such legislation has been effected. The
Fund's investment adviser would re-evaluate the Fund's investment objectives and
policies if any such legislative proposals were adopted.
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
B-3
<PAGE> 45
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 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, as
amended (the Investment Company Act) on investments by the Fund in other
investment companies. In addition, in reliance on an earlier SEC interpretation,
the Fund's investments in certain other qualifying CMOs, which cannot or do not
rely on the rule, are also not subject to the limitation of the Investment
Company Act on acquiring interests in other investment companies. In order to be
able to rely on the SEC's interpretation, these CMOs must be unmanaged, fixed
asset issuers, that (a) invest primarily in mortgage-backed securities, (b) do
not issue redeemable securities, (c) operate under general exemptive orders
exempting them from all provisions of the Investment Company Act and (d) are not
registered or regulated under the Investment Company Act as investment
companies. To the extent that the Fund selects CMOs or REMICs that cannot rely
on the rule or do not meet the above requirements, the Fund may not invest more
than 10% of its assets in all such entities and may not acquire more than 3% of
the voting securities of any single such entity.
OTHER INVESTMENTS. Obligations issued or guaranteed as to principal and
interest by the United States Government may be acquired by the Fund in the form
of custodial receipts that evidence ownership of future interest payments,
principal payments or both on certain United States Treasury notes or bonds.
Such notes and bonds are held in custody by a bank on behalf of the owners.
These custodial receipts are known by various names, including ``Treasury
Receipts,'' ``Treasury Investment Growth Receipts'' (TIGRs) and ``Certificates
of Accrual on Treasury Securities'' (CATS). The Fund will not invest more than
5% of its assets in such custodial receipts.
ADDITIONAL RISKS
OPTIONS TRANSACTIONS AND RELATED RISKS
The Fund may purchase put and call options and sell covered put and call
options which are traded on national securities exchanges and may also engage in
over-the-counter options transactions with recognized United States securities
dealers (OTC Options).
OPTIONS ON SECURITIES. The purchaser of a call option has the right, for a
specified period of time, to purchase the securities subject to the option at a
specified price (the ``exercise price'' or ``strike price''). By writing a call
option, the Fund becomes obligated during the term of the option, upon exercise
of the option, to deliver the underlying securities or a specified amount of
cash to the purchaser against receipt of the exercise price. When the Fund
writes a call option, the Fund loses the potential for gain on the underlying
securities in excess of the exercise price of the option during the period that
the option is open.
The purchaser of a put option has the right, for a specified period of
time, to sell the securities subject to the option to the writer of the put at
the specified exercise price. By writing a put option, the Fund becomes
obligated during the term of the option, upon exercise of the option, to
purchase the securities underlying the option at the exercise price. The Fund
might, therefore, be obligated to purchase the underlying securities for more
than their current market price.
B-4
<PAGE> 46
The writer of an option retains the amount of the premium, although this
amount may be offset or exceeded, in the case of a covered call option, by a
decline and, in the case of a covered put option, by an increase in the market
value of the underlying security during the option period.
The Fund may wish to protect certain portfolio securities against a decline
in market value at a time when put options on those particular securities are
not available for purchase. The Fund may therefore purchase a put option on
other carefully selected securities, the values of which the investment adviser
expects will have a high degree of positive correlation to the values of such
portfolio securities. If the investment adviser's judgment is correct, changes
in the value of the put options should generally offset changes in the value of
the portfolio securities being hedged. If the investment adviser's judgment is
not correct, the value of the securities underlying the put option may decrease
less than the value of the Fund's investments and therefore the put option may
not provide complete protection against a decline in the value of the Fund's
investments below the level sought to be protected by the put option.
The Fund may similarly wish to hedge against appreciation in the value of
debt securities that it intends to acquire at a time when call options on such
securities are not available. The Fund may, therefore, purchase call options on
other carefully selected debt securities the values of which the investment
adviser expects will have a high degree of positive correlation to the values of
the debt securities that the Fund intends to acquire. In such circumstances the
Fund will be subject to risks analogous to those summarized above in the event
that the correlation between the value of call options so purchased and the
value of the securities intended to be acquired by the Fund is not as close as
anticipated and the value of the securities underlying the call options
increases less than the value of the securities to be acquired by the Fund.
The Fund may write options on securities in connection with buy-and-write
transactions; that is, the Fund may purchase a security and concurrently write a
call option against that security. If the call option is exercised, the Fund's
maximum gain will be the premium it received for writing the option, adjusted
upwards or downwards by the difference between the Fund's purchase price of the
security and the exercise price of the option. If the option is not exercised
and the price of the underlying security declines, the amount of the decline
will be offset in part, or entirely, by the premium received.
The exercise price of a call option may be below (``in-the-money''), equal
to (``at-the-money'') or above (``out-of-the-money'') the current value of the
underlying security at the time the option is written. Buy-and-write
transactions using in-the-money call options may be used when it is expected
that the price of the underlying security will remain flat or decline moderately
during the option period. Buy-and-write transactions using at-the-money call
options may be used when it is expected that the price of the underlying
security will remain fixed or advance moderately during the option period. A
buy-and-write transaction using an out-of-the-money call option may be used when
it is expected that the premium received from writing the call option plus the
appreciation in the market price of the underlying security up to the exercise
price will be greater than the appreciation in the price of the underlying
security alone. If the call option is exercised in such a transaction, the
Fund's maximum gain will be the premium received by it for writing the option,
adjusted upwards or downwards by the difference between the Fund's purchase
price of the security and the exercise price of the option. If the option is not
exercised and the price of the underlying security declines, the amount of the
decline will be offset in part, or entirely, by the premium received.
Prior to being notified of exercise of the option, the writer of an
exchange-traded option that wishes to terminate its obligation may effect a
``closing purchase transaction'' by buying an option of the same series as the
option previously written. (Options of the same series are options with respect
to the same underlying security, having the same expiration date and the same
strike price.) The effect of the purchase is that the writer's position will be
cancelled by the exchange's affiliated clearing organization. Likewise, an
investor who is the holder of an exchange-traded option may liquidate a position
by effecting a ``closing sale transaction'' by selling an option of the same
series as the option previously purchased. There is no guarantee that either a
closing purchase or a closing sale transaction can be effected.
Exchange-traded options are issued by a clearing organization affiliated
with the exchange on which the option is listed which, in effect, gives its
guarantee to every exchange-traded option transaction. In contrast, OTC options
are contracts between the Fund and its contra-party with no clearing
organization guarantee. Thus, when the Fund purchases an OTC option, it relies
on the dealer from which it has purchased the OTC option to make or take
delivery of the securities underlying the option. Failure by the dealer to do so
would result in the loss of the premium paid by the Fund as well as the loss of
the expected benefit of the transaction. The Board of Directors of the Fund will
approve a list of dealers with which the Fund may engage in OTC options.
When the Fund writes an OTC option, it generally will be able to close out
the OTC options prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Fund originally wrote the OTC option.
While the Fund will enter into OTC options only with dealers which agree to, and
which are expected to be capable of, entering into closing transactions with the
Fund, there can be no assurance that the Fund will be able to liquidate an OTC
option at a favorable price at any time prior to expiration. Until the Fund is
able to effect a closing purchase transaction in a covered OTC call option the
Fund has written, it will not be able to liquidate securities used as cover
until the option expires or is exercised or different cover is substituted. In
the event of insolvency of the contra-party, the Fund may be unable to liquidate
an OTC option.
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OTC options purchased by the Fund will be treated as illiquid securities
subject to any applicable limitation on such securities. Similarly, the assets
used to ``cover'' OTC options written by the Fund will be treated as illiquid
unless the OTC options are sold to qualified dealers who agree that the Fund may
repurchase any OTC options it writes for a maximum price to be calculated by a
formula set forth in the option agreement. The ``cover'' for an OTC option
written subject to this procedure would be considered illiquid only to the
extent that the maximum repurchase price under the formula exceeds the intrinsic
value of the option.
The Fund may write only ``covered'' options. This means that so long as the
Fund is obligated as the writer of a call option, it will own the underlying
securities subject to the option or an option to purchase the same underlying
securities, having an exercise price equal to or less than the exercise price of
the ``covered'' option, or will establish and maintain with its Custodian for
the term of the option a segregated account consisting of cash, U.S. Government
securities or other liquid high-grade debt obligations having a value equal to
or greater than the exercise price of the option. In the case of a straddle
written by the Fund, the amount maintained in the segregated account will equal
the amount, if any, by which the puts is ``in-the-money.''
OPTIONS ON SECURITIES INDICES. The Fund also may purchase and write call
and put options on securities indices in an attempt to hedge against market
conditions affecting the value of securities that the Fund owns or intends to
purchase, and not for speculation. Through the writing or purchase of index
options, the Fund can achieve many of the same objectives as through the use of
options on individual securities. Options on securities indices are similar to
options on a security except that, rather than the right to take or make
delivery of a security at a specified price, an option on a securities index
gives the holder the right to receive, upon exercise of the option, an amount of
cash if the closing level of the securities index upon which the option is based
is greater than, in the case of a call, or less than, in the case of a put, the
exercise price of the option. This amount of cash is equal to such difference
between the closing price of the index and the exercise price of the option. The
writer of the option is obligated, in return for the premium received, to make
delivery of this amount. Unlike security options, all settlements are in cash
and gain or loss depends upon price movements in the market generally (or in a
particular industry or segment of the market), rather than upon price movements
in individual securities. Price movements in securities that the Fund owns or
intends to purchase will probably not correlate perfectly with movements in the
level of an index and, therefore, the Fund bears the risk that a loss on an
index option would not be completely offset by movements in the price of such
securities.
When the Fund writes an option on a securities index, it will be required
to deposit with its custodian, and mark-to-market, eligible securities equal in
value to 100% of the exercise price in the case of a put, or the contract value
in the case of a call. In addition, where the Fund writes a call option on a
securities index at a time when the contract value exceeds the exercise price,
the Fund will segregate and mark-to-market, until the option expires or is
closed out, cash or cash equivalents equal in value to such excess.
Options on a securities index involve risks similar to those risks relating
to transactions in financial futures contracts described below. Also, an option
purchased by the Fund may expire worthless, in which case the Fund would lose
the premium paid therefor.
OPTIONS ON GNMA CERTIFICATES. Options on GNMA Certificates are not
currently traded on any Exchange. However, the Fund may purchase and write such
options should they commence trading on any Exchange and may purchase or write
OTC Options on GNMA certificates.
Since the remaining principal balance of GNMA Certificates declines each
month as a result of mortgage payments, the Fund, as a writer of a covered GNMA
call holding GNMA Certificates as ``cover'' to satisfy its delivery obligation
in the event of assignment of an exercise notice, may find that its GNMA
Certificates no longer have a sufficient remaining principal balance for this
purpose. Should this occur, the Fund will enter into a closing purchase
transaction or will purchase additional GNMA Certificates from the same pool (if
obtainable) or replacement GNMA Certificates in the cash market in order to
remain covered.
A GNMA Certificate held by the Fund to cover an option position in any but
the nearest expiration month may cease to represent cover for the option in the
event of a decline in the GNMA coupon rate at which new pools are originated
under the FHA/VA loan ceiling in effect at any given time. Should this occur,
the Fund will no longer be covered, and the Fund will either enter into a
closing purchase transaction or replace the GNMA Certificate with a GNMA
Certificate which represents cover. When the Fund closes its position or
replaces the GNMA Certificate, it may realize an unanticipated loss and incur
transaction costs.
RISKS OF OPTIONS TRANSACTIONS. An exchange-traded option position may be
closed out only on an Exchange which provides a secondary market for an option
of the same series. Although the Fund will generally purchase or write only
those options for which there appears to be an active secondary market, there is
no assurance that a liquid secondary market on an Exchange will exist for any
particular option at any particular time, and for some exchange-traded options,
no secondary market on an Exchange may exist. In such event, it might not be
possible to effect closing transactions in particular options, with the result
that the Fund would have to exercise its exchange-traded options in order to
realize any profit and may incur transaction costs in connection therewith. If
the Fund as a covered call option writer is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise.
Reasons for the absence of a liquid secondary market on an Exchange include
the following: (a) insufficient trading interest in certain options; (b)
restrictions on transactions imposed by an Exchange; (c) trading halts,
suspensions or other restrictions imposed with
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<PAGE> 48
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 Options Clearing Corporation (OCC) to handle
current trading volume; or (f) a decision by one or more Exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the secondary market on that Exchange (or in that class or series
of options) would cease to exist, although outstanding options on that Exchange
that had been issued by the OCC as a result of trades on that Exchange would
generally continue to be exercisable in accordance with their terms.
In the event of the bankruptcy of a broker through which the Fund engages
in options transactions, the Fund could experience delays and/or losses in
liquidating open positions purchased or sold through the broker and/or incur a
loss of all or part of its margin deposits with the broker. Similarly, in the
event of the bankruptcy of the writer of an OTC option purchased by the Fund,
the Fund could experience a loss of all or part of the value of the option.
Transactions are entered into by the Fund only with brokers or financial
institutions deemed creditworthy by the investment adviser.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the option markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be reflected
in the option markets.
FUTURES CONTRACTS. As a purchaser of a futures contract (futures contract),
the Fund incurs an obligation to take delivery of a specified amount of the
obligation underlying the futures contract at a specified time in the future for
a specified price. As a seller of a futures contract, the Fund incurs an
obligation to deliver the specified amount of the underlying obligation at a
specified time in return for an agreed upon price. The Fund may purchase futures
contracts on debt securities, aggregates of debt securities, financial indices
and U.S. Government securities including futures contracts or options linked to
the London Interbank Offered Rate (LIBOR). Eurodollar futures contracts are
currently traded on the Chicago Mercantile Exchange. They enable purchasers to
obtain a fixed rate for the lending of funds and sellers to obtain a fixed rate
for borrowings. The Fund would use Eurodollar futures contracts and options
thereon to hedge against changes in LIBOR, to which many interest rate swaps are
linked. See the discussion of ``Risks of Options Transactions.''
The Fund will purchase or sell futures contracts for the purpose of hedging
its portfolio (or anticipated portfolio) securities against changes in
prevailing interest rates. If the investment adviser anticipates that interest
rates may rise and, concomitantly, the price of the Fund's portfolio securities
may fall, the Fund may sell a futures contract. If declining interest rates are
anticipated, the Fund may purchase a futures contract to protect against a
potential increase in the price of securities the Fund intends to purchase.
Subsequently, appropriate securities may be purchased by the Fund in an orderly
fashion; as securities are purchased, corresponding futures positions would be
terminated by offsetting sales of contracts. In addition, futures contracts will
be bought or sold in order to close out a short or long position in a
corresponding futures contract.
Although most futures contracts call for actual delivery or acceptance of
securities, the contracts usually are closed out before the settlement date
without the making or taking of delivery. A futures contract sale is closed out
by effecting a futures contract purchase for the same aggregate amount of the
specific type of security and the same delivery date. If the sale price exceeds
the offsetting purchase price, the seller would be paid the difference and would
realize a gain. If the offsetting purchase price exceeds the sale price, the
seller would pay the difference and would realize a loss. Similarly, a futures
contract purchase is closed out by effecting a futures contract sale for the
same aggregate amount of the specific type of security and the same delivery
date. If the offsetting sale price exceeds the purchase price, the purchaser
would realize a gain, whereas if the purchase price exceeds the offsetting sale
price, the purchaser would realize a loss. There is no assurance that the Fund
will be able to enter into a closing transaction.
When the Fund enters into a futures contract it is initially required to
deposit with its Custodian, in a segregated account in the name of the broker
performing the transaction, an ``initial margin'' of cash or U.S. Government
securities equal to approximately 2-3% of the contract amount. Initial margin
requirements are established by the Exchanges on which futures contracts trade
and may, from time to time, change. In addition, brokers may establish margin
deposit requirements in excess of those required by the Exchanges.
Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing of
funds by a brokers' client but is, rather, a good faith deposit on a futures
contract which will be returned to the Fund upon the proper termination of the
futures contract. The margin deposits made are marked-to-market daily and the
Fund may be required to make subsequent deposits into the segregated account,
maintained at its Custodian for that purpose, of cash or U.S. Government
securities, called ``variation margin'', in the name of the broker, which are
reflective of price fluctuations in the futures contract.
Options on Futures Contracts. The Fund may purchase and sell call and put
options on futures contracts which are traded on an Exchange and enter into
closing transactions with respect to such options to terminate an existing
position. An option on a futures contract gives the purchaser the right (in
return for the premium paid), and the writer the obligation, to assume a
position in a futures contract (a long position if the option is a call and a
short position if the option is a put) at a specified exercise price at any time
during the term of the option. Upon exercise of the option, the assumption of an
offsetting futures position by the writer and holder of the option will be
accompanied by delivery of the accumulated cash balance in the writer's futures
margin account which represents the amount by
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<PAGE> 49
which the market price of the futures contract at exercise exceeds, in the case
of a call, or is less than, in the case of a put, the exercise price of the
option on the futures contract.
The Fund may only write ``covered'' put and call options on futures
contracts. The Fund will be considered ``covered'' with respect to a call option
it writes on a futures contract if the Fund owns the assets which are
deliverable under the futures contract or an option to purchase that futures
contract having a strike price equal to or less than the strike price of the
``covered'' option and having an expiration date not earlier than the expiration
date of the ``covered'' option, or if it segregates and maintains with its
Custodian for the term of the option cash, U.S. Government securities or other
liquid high-grade debt obligations equal to the fluctuating value of the
optioned future. The Fund will be considered ``covered'' with respect to a put
option it writes on a futures contract if it owns an option to sell that futures
contract having a strike price equal to or greater than the strike price of the
``covered'' option, or if it segregates and maintains with its Custodian for the
term of the option cash, U.S. Government securities or liquid high-grade debt
obligations at all times equal in value to the exercise price of the put (less
any initial margin deposited by the Fund with its Custodian with respect to such
option). There is no limitation on the amount of the Fund's assets which can be
placed in the segregated account.
The Fund will purchase options on futures contracts for identical purposes
to those set forth above for the purchase of a futures contract (purchase of a
call option or sale of a put option) and the sale of a futures contract
(purchase of a put option or sale of a call option), or to close out a long or
short position in futures contracts. If, for example, the investment adviser
wished to protect against an increase in interest rates and the resulting
negative impact on the value of a portion of its U.S. Government securities
portfolio, it might purchase a put option on an interest rate futures contract,
the underlying security of which correlates with the portion of the portfolio
the investment adviser seeks to hedge.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. The Fund
may sell a futures contract to protect against the decline in the value of
securities held by the Fund. However, it is possible that the futures market may
advance and the value of securities held in the Fund's portfolio may decline. If
this were to occur, the Fund would lose money on the futures contracts and also
experience a decline in value in its portfolio securities.
If the Fund purchases a futures contract to hedge against the increase in
value of securities it intends to buy, and the value of such securities
decreases, then the Fund may determine not to invest in the securities as
planned and will realize a loss on the futures contract that is not offset by a
reduction in the price of the securities.
In order to assure that the Fund is entering into transactions in futures
contracts for hedging purposes as such term is defined by the Commodities
Futures Trading Commission, either: (1) a substantial majority (i.e.,
approximately 75%) of all anticipatory hedge transactions (transactions in which
the Fund does not own at the time of the transaction, but expects to acquire,
the securities underlying the relevant futures contract) involving the purchase
of futures contracts will be completed by the purchase of securities which are
the subject of the hedge, or (2) the underlying value of all long positions in
futures contracts will not exceed the total value of (a) all short-term debt
obligations held by the Fund; (b) cash held by the Fund; (c) cash proceeds due
to the Fund on investments within thirty days; (d) the margin deposited on the
contracts; and (e) any unrealized appreciation in the value of the contracts.
If the Fund maintains a short position in a futures contract, it will cover
this position by holding, in a segregated account maintained at its Custodian,
cash, U.S. Government securities or other liquid high-grade debt obligations
equal in value (when added to any initial or variation margin on deposit) to the
market value of the securities underlying the futures contract. Such a position
may also be covered by owning the securities underlying the futures contract, or
by holding a call option permitting the Fund to purchase the same contract at a
price no higher than the price at which the short position was established.
In addition, if the Fund holds a long position in a futures contract, it
will hold cash, U.S. Government securities or other liquid high-grade debt
obligations equal to the purchase price of the contract (less the amount of
initial or variation margin on deposit) in a segregated account maintained for
the Fund by its Custodian. Alternatively, the Fund could cover its long position
by purchasing a put option on the same futures contract with an exercise price
as high or higher than the price of the contract held by the Fund.
Exchanges limit the amount by which the price of a futures contract may
move on any day. If the price moves equal the daily limit on successive days,
then it may prove impossible to liquidate a futures position until the daily
limit moves have ceased. In the event of adverse price movements, the Fund would
continue to be required to make daily cash payments of variation margin on open
futures positions. In such situations, if the Fund has insufficient cash, it may
be disadvantageous to do so. In addition, the Fund may be required to take or
make delivery of the instruments underlying futures contracts it holds at a time
when it is disadvantageous to do so. The ability to close out options and
futures positions could also have an adverse impact on the Fund's ability to
effectively hedge its portfolio.
In the event of the bankruptcy of a broker through which the Fund engages
in transactions in futures or options thereon, the Fund could experience delays
and/or losses in liquidating open positions purchased or sold through the broker
and/or incur a loss of all or part of its margin deposits with the broker.
Transactions are entered into by the Fund only with brokers or financial
institutions deemed creditworthy by the investment adviser.
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There are risks inherent in the use of futures contracts and options
transactions for the purpose of hedging the Fund's portfolio securities. One
such risk which may arise in employing futures contracts to protect against the
price volatility of portfolio securities is that the prices of securities
subject to futures contracts (and thereby the futures contract prices) may
correlate imperfectly with the behavior of the cash prices of the Fund's
portfolio securities. Another such risk is that prices of futures contracts may
not move in tandem with the changes in prevailing interest rates against which
the Fund seeks a hedge. A correlation may also be distorted by the fact that the
futures market is dominated by short-term traders seeking to profit from the
difference between a contract or security price objective and their cost of
borrowed funds. Such distortions are generally minor and would diminish as the
contract approached maturity.
There may exist an imperfect correlation between the price movements of
futures contracts purchased by the Fund and the movements in the prices of the
securities which are the subject of the hedge. If participants in the futures
market elect to close out their contracts through offsetting transactions rather
than meet margin deposit requirements, distortions in the normal relationships
between the debt securities and futures market could result. Price distortions
could also result if investors in futures contracts elect to make or take
delivery of underlying securities rather than engage in closing transactions due
to the resultant reduction in the liquidity of the futures market. In addition,
due to the fact that, from the point of view of speculators, the deposit
requirements in the futures markets are less onerous than margin requirements in
the cash market, increased participation by speculators in the futures markets
could cause temporary price distortions. Due to the possibility of price
distortions in the futures market and because of the imperfect correlation
between movements in the prices of securities and movements in the prices of
futures contracts, a correct forecast of interest rate trends by the investment
adviser may still not result in a successful hedging transaction.
Compared to the purchase or sale of futures contracts, the purchase and
sale of call or put options on futures contracts involves less potential risk to
the Fund because the maximum amount at risk is the premium paid for the options
(plus transaction costs). However, there may be circumstances when the purchase
of a call or put option on a futures contract would result in a loss to the Fund
notwithstanding that the purchase or sale of a futures contract would not result
in a loss, as in the instance where there is no movement in the prices of the
futures contracts or underlying U.S. Government securities.
REPURCHASE AGREEMENTS
The Fund will enter into repurchase transactions only with parties meeting
creditworthiness standards approved by the Fund's Board of Directors. The Fund's
investment adviser will monitor the creditworthiness of such parties, under the
general supervision of the Board of Directors. In the event of a default or
bankruptcy by a seller, the Fund will promptly seek to liquidate the collateral.
To the extent that the proceeds from any sale of such collateral upon a default
in the obligation to repurchase are less than the repurchase price, the Fund
will suffer a loss.
The Fund participates in a joint repurchase account with other investment
companies managed by Prudential Mutual Fund Management, Inc. (PMF or the
Manager) pursuant to an order of the 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
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material effect on the Fund's investment in such loaned securities. The Fund may
pay reasonable finders', administrative and custodial fees in connection with a
loan of its securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
From time to time, in the ordinary course of business, the Fund may
purchase securities on a when-issued or delayed delivery basis--i.e., delivery
and payment can take place a month or more after the date of the transactions.
The securities so purchased are subject to market fluctuation and no interest
accrues to the purchaser during this period. While the Fund will only purchase
securities on a when-issued, delayed delivery or forward commitment basis with
the intention of acquiring the securities, the Fund may sell the securities
before the settlement date, if it is deemed advisable. At the time the Fund
makes the commitment to purchase securities on a when-issued or delayed delivery
basis, the Fund will record the transaction and thereafter reflect the value,
each day, of such security in determining the net asset value of the Fund. At
the time of delivery of the securities, the value may be more or less than the
purchase price. The Fund will also establish a segregated account with the
Fund's custodian bank in which it will continuously maintain cash, U.S.
Government securities or other liquid high-grade debt securities equal in value
to commitments for such when-issued or delayed delivery securities; subject to
this requirement, the Fund may purchase securities on such basis without limit.
An increase in the percentage of the Fund's assets committed to the purchase of
securities on a when-issued or delayed delivery basis may increase the
volatility of the Fund's net asset value. The investment adviser does not
believe that the Fund's net asset value or income will be adversely affected by
the Fund's purchase of securities on such basis.
INTEREST RATE SWAP TRANSACTIONS
The Fund may enter into either asset-based interest rate swaps or
liability-based interest rate swaps, depending on whether it is hedging its
assets or its liabilities. The Fund will usually enter into interest rate swaps
on a net basis, i.e., the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as these hedging transactions are entered into for good faith
hedging purposes, the investment adviser and the Fund believe such obligations
do not constitute senior securities and, accordingly, will not treat them as
being subject to its borrowing restrictions. The net amount of the excess, if
any, of the Fund's obligations over its entitlements with respect to each
interest rate swap will be accrued on a daily basis and an amount of cash or
liquid high-grade debt securities having an aggregate net asset value at least
equal to the accrued excess will be maintained in a segregated account by a
custodian that satisfies the requirements of the Investment Company Act. To the
extent that the Fund enters into interest rate swaps on other than a net basis,
the amount maintained in the segregated account will be the full amount of the
Fund's obligations, if any, with respect to such interest rate swaps, accrued on
a daily basis. If there is a default by the other party to such a transaction,
the Fund will have contractual remedies pursuant to the agreement related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid.
The use of interest rate swaps is highly speculative activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Investment Adviser is
incorrect in its forecast of market values, interest rates and other applicable
factors, the investment performance of the Fund would diminish compared to what
it would have been if this investment technique was never used.
The Fund may only enter into interest rate swaps to hedge its portfolio.
Interest rate swaps do not involve the delivery of securities or other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rates swaps is limited to the net amount of interest payments that the
Fund is contractually obligated to make. If the other party to an interest rate
swap defaults, the Fund's risk of loss consists of the net amount of interest
payments, if any, that the Fund is contractually entitled to receive. Since
interest rate swaps are individually negotiated, the Fund expects to achieve an
acceptable degree of correlation between its rights to receive interest on its
portfolio securities and its rights and obligations to receive and pay interest
pursuant to interest rate swaps. The Fund will enter into interest rate swaps
only with parties meeting creditworthiness standards approved by the Fund's
Board of Directors. The investment adviser will monitor the creditworthiness of
such parties under the supervision of the Board of Directors.
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%. For the fiscal years ended February 28, 1994
and February 28, 1995, portfolio turnover was 130% and 268%, respectively. The
recent increase in the Fund's portfolio turnover rate was generally due to the
movement in interest rates, which required a restructuring of the Fund's
holdings.
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
B-10
<PAGE> 52
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 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 under 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 and commercial paper for which there is a readily
available market will not be deemed to be illiquid. The investment adviser will
monitor the liquidity of such restricted securities subject to the supervision
of the Board of Directors. In reaching liquidity decisions, the investment
adviser will consider, inter alia, the following factors: (1) the frequency of
trades and quotes for the security; (2) the number of dealers wishing to
purchase or sell the security and the number of other potential purchasers; (3)
dealer undertakings to make a market in the security and (4) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer). In addition, in order for commercial paper that is issued in
reliance on Section 4(2) of the Securities Act to be considered liquid, (i) it
must be rated in one of the two highest rating categories by at least two
nationally recognized statistical rating organizations (NRSRO), or if only one
NRSRO rates the securities, by that NRSRO, or, if unrated, be of comparable
quality in the view of the investment adviser; and (ii) it must not be ``traded
flat'' (i.e., without accrued interest) or in default as to principal or
interest. Repurchase agreements subject to demand are deemed to have a maturity
equal to the notice period.
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities. A ``majority of the Fund's
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
B-11
<PAGE> 53
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 estate and publicly traded
securities of real estate investment trusts. The Fund may not purchase interests
in real estate limited partnerships which are not readily marketable.
7. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter under
certain federal securities laws. The Fund has not adopted a fundamental
investment policy with respect to investments in restricted securities. See
``Illiquid Securities.''
8. Make investments for the purpose of exercising control or management.
9. Invest in securities of other investment companies, except by purchases
in the open market involving only customary brokerage commissions and as a
result of which the Fund will not hold more than 3% of the outstanding voting
securities of any one investment company, will not have invested more than 5% of
its total assets in any one investment company and will not have invested more
than 10% of its total assets (determined at the time of investment) in such
securities or one or more investment company's, or except as part of a merger,
consolidation or other acquisition.
10. Invest in interests in oil, gas or other mineral exploration or
development programs, except that the Fund may invest in the securities of
companies which invest in or sponsor such programs.
11. Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities limited to 33 1/3% of the value of the Fund's total assets.
12. Purchase more than 10% of all outstanding voting securities of any one
issuer.
13. Buy or sell commodities or commodity contracts, except that the Fund
may purchase and sell financial futures contracts and options thereon.
The foregoing restrictions are fundamental policies that may not be changed
without the approval of a majority of the Fund's voting securities.
In order to comply with certain ``blue sky'' restrictions, the Fund will
not, as a matter of operating policy:
1. Invest in oil, gas and mineral leases.
2. Invest in securities of any issuer if, to the knowledge of the Fund, any
officer or director of the Fund or the Fund's Manager or Subadviser owns more
than 1/2 of 1% of the outstanding securities of such issuer, and such officers
and directors who own more than 1/2 of 1% own in the aggregate more than 5% of
the outstanding securities of such issuer.
3. Purchase warrants if as a result the Fund would then have more than 5%
of its assets (determined at the time of investment) invested in warrants.
Warrants will be valued at the lower of cost or market and investment in
warrants which are not listed on the New York Stock Exchange or American Stock
Exchange or a major foreign exchange will be limited to 2% of the Fund's net
assets (determined at the time of investment). For purposes of this limitation,
warrants acquired in units or attached to securities are deemed to be without
value.
4. Except with respect to short sales against the box, make short sales
provided that short sales will only be made in those securities that are listed
on a national securities exchange and the value of the short sales of the
securities of any one issuer shall not exceed the lesser of 2% of the value of
the Fund's net assets, or 2% of the securities of any one issuer.
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.
B-12
<PAGE> 54
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE FUND DURING PAST 5 YEARS
- ---------------------- ------------- ----------------------
<S> <C> <C>
Edward D. Beach (70) Director President and Director of BMC Fund, Inc., a
c/o Prudential Mutual closed-end investment company; prior thereto,
Fund Vice Chairman of Broyhill Furniture Industries,
Management, Inc. Inc.; Certified Public Accountant; Secretary and
One Seaport Plaza Treasurer of Broyhill Family Foundation Inc.;
New York, NY Member of the Board of Trustees of Mars Hill
College; President and Director of First
Financial Fund, Inc. and The High Yield Income
Fund, Inc.; Director of The Global Government
Plus Fund, Inc. and The Global Total Return Fund,
Inc.
Delayne Dedrick Gold Director Marketing and Management Consultant.
(56) c/o Prudential
Mutual Fund
Management, Inc.
One Seaport Plaza
New York, NY
*Harry A. Jacobs, Jr. Director Senior Director (since January 1986) of Prudential
(72) Securities Incorporated (Prudential Securities);
One Seaport Plaza formerly interim Chairman and Chief Executive
New York, NY 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 First Australia
Fund, Inc., The First Australia Prime Income
Fund, Inc., The Global Government Plus Fund, Inc.
and The Global Total Return Fund, Inc.; Trustee
of The Trudeau Institute.
Thomas T. Mooney (52) Director President of the Greater Rochester Metro Chamber of
c/o Prudential Mutual Commerce; former Rochester City Manager; Trustee
Fund of Center for Governmental Research, Inc.;
Management, Inc. Director of Blue Cross of Rochester, Monroe
One Seaport Plaza County Water Authority, Rochester Jobs, Inc.,
New York, NY Northeast-Midwest Institute, Executive Service
Corps of Rochester, Monroe County Industrial
Development Corporation, First Financial Fund,
Inc., The Global Government Plus Fund, Inc., The
Global Total Return Fund, Inc. and The High Yield
Income Fund, Inc.
Thomas H. O'Brien (70) Director President, O'Brien Associates (financial and
c/o Prudential Mutual management consultants) (since April 1984);
Fund formerly President of Jamaica Water Securities
Management, Inc. Corp. (holding company) (February 1989-August
One Seaport Plaza 1990); Director (September 1987-April 1991),
New York, NY Chairman and Chief Executive Officer (September
1987-February 1989) and Director (September
1987-August 1990) of Jamaica Water Supply
Company; Director of Yankee Energy System, Inc.
and Ridgewood Savings Bank; and Trustee of
Hofstra University.
Thomas A. Owens, Jr. Director Consultant; Director of EMCORE Corp. (manufacturer
(71) of electronic materials).
c/o Prudential Mutual
Fund Management, Inc.
One Seaport Plaza
New York, NY
</TABLE>
B-13
<PAGE> 55
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE FUND DURING PAST 5 YEARS
- ---------------------- -------------------- ---------------------------------------------------
<S> <C> <C>
*Richard A. Redeker Director and President, Chief Executive Officer and Director
(50) President (since October 1993), PMF; Executive Vice
One Seaport Plaza President, Director and Member of the Operating
New York, NY Committee (since October 1993), Prudential
Securities; Director (since October 1993) of
Prudential Securities Group, Inc. (PSG);
Executive Vice President, The Prudential
Investment Corporation (since July 1994);
Director (since January 1994) of Prudential
Mutual Fund Distributors, Inc. (PMFD) and
Prudential Mutual Fund Services, Inc. (PMFS);
formerly Senior Executive Vice President and
Director of Kemper Financial Services, Inc.
(September 1978-September 1993); Director and
President of The Global Yield Fund, Inc., The
Global Government Plus Fund, Inc., The Global
Total Return Fund, Inc. and The High Yield Income
Fund, Inc.
Stanley E. Shirk (78) Director Certified Public Accountant and a former Senior
c/o Prudential Mutual Partner of the accounting firm of KPMG Peat
Fund Marwick; former Management and Accounting
Management, Inc. Consultant for the Association of Bank Holding
One Seaport Plaza Companies, Washington, D.C. and the Bank
New York, NY Administration Institute, Chicago, IL; Director
of The High Yield Income Fund, Inc.
Robert F. Gunia (48) Vice President Chief Administrative Officer (since July 1990),
One Seaport Plaza Director (since January 1989), and Executive Vice
New York, NY President, Treasurer and Chief Financial Officer
(since June 1987) of PMF; Senior Vice President
(since March 1987) of Prudential Securities;
Executive Vice President, Treasurer and
Comptroller (since March 1991) of PMFD; Director
(since June 1987) of PMFS; and Vice President and
Director of The Asia Pacific Fund, Inc. (since
May 1989).
Grace Torres (36) Treasurer and First Vice President (since March 1994) of PMF; and
One Seaport Plaza Principal Vice President at Bankers Trust (July 1989-March
New York, NY Financial and 1994).
Accounting Officer
S. Jane Rose (49) Secretary Senior Vice President (since January 1991), Senior
One Seaport Plaza Counsel (since June 1987) and First Vice
New York, NY President (June 1987-December 1990) of PMF;
Senior Vice President and Senior Counsel of
Prudential Securities (since July 1992); formerly
Vice President and Associate General Counsel of
Prudential Securities.
Ellyn C. Acker (34) Assistant Secretary Vice President and Associate General Counsel (since
One Seaport Plaza March 1995) of PMF; Vice President and Associate
New York, NY General Counsel of Prudential Securities (since
March 1995); prior thereto, associated with the
law firm of Fulbright & Jaworski, L.L.P.
</TABLE>
- ---------------
* ``Interested'' Director, as defined in the Investment Company Act.
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.
B-14
<PAGE> 56
The following table sets forth the aggregate compensation paid by the Fund
for the fiscal year ended February 28, 1995 to the Directors who are not
affiliated with the Manager and the aggregate compensation paid to such
Directors for service on the Fund's Board and the Board of any other investment
companies managed by Prudential Mutual Fund Management, Inc. (Fund Complex) for
the calendar year ended December 31, 1994.
<TABLE>
<CAPTION>
COMPENSATION TABLE
PENSION OR TOTAL
RETIREMENT COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM FUND AND
COMPENSATION AS PART OF FUND BENEFITS UPON FUND COMPLEX
NAME AND POSITION FROM FUND EXPENSES RETIREMENT PAID TO DIRECTORS
- ----------------- ------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Edward D. Beach, Director $8,000 None N/A $159,000(20)*
Delayne Dedrick Gold, Director $8,000 None N/A $185,000(24)*
Thomas T. Mooney, Director $8,000 None N/A $126,000(15)*
Thomas H. O'Brien Director $8,000 None N/A $44,000 (6)*
Thomas A. Owens, Director $8,000 None N/A $100,500(12)*
Stanely E. Shirk, Director $8,000 None N/A $79,000 (8)*
<FN>
*Indicates number of funds in Fund Complex (including the Fund) to which aggregate compensation relates.
</FN>
</TABLE>
As of May 26, 1995, the Directors and officers of the Fund, as a group,
owned beneficially less than 1% of the common stock of the Fund.
As of May 26, 1995, Paul G. Allen, 110 110th Ave, NE. Suite 550, Bellevue,
Washington was the beneficial owner of 2,129,624 Class A shares (approximately
37% of the outstanding Class A shares). As of May 26, 1995, Sammy L. Clement,
2740 Kuilei Street - Apt. 1806, Honolulu, Hawaii was the beneficial owner of
1,068 Class B shares (approximately 5% of the outstanding Class B shares), James
Woodson, Rose Boyd Co-TTEES, Gloria Glywasky Fmly Mgt Trust UA DTD 08/17/94, FBO
Gloria Glywasky, 23 Pendale Drive, Amityville, New York was the beneficial owner
of 3,157 Class B shares (approximately 15% of the outstanding Class B shares),
Prudential Bank & Trust Co. C/F The Rollover IRA of S. Stanley Steen, Rd. 1, Box
229, Lincoln, Delaware was the beneficial owner of 2,356 Class B shares
(approximately 11% of the outstanding Class B shares), Prudential Bank & Trust
Co. C/F The IRA of Ralph E. Butler, Sr., Rd. 1, Box 98B, Harrington, Delaware
was the beneficial owner of 1,605 Class B shares (approximately 8% of the
outstanding Class B shares), Romesh Wadltwant TTEE Aspect Development 401K DTD
01/01/92 FBO 401K Svgs and Retrm, 1240 Villa Street, Mountain View, California
was the beneficial owner of 2,237 Class B shares (approximately 11% of the
outstanding Class B shares), Prudential Securities C/F Betty Jennings IRA DTD
06/20/88, 17044 Louis Court, South Holland, Illinois was the beneficial owner of
1,318 Class B shares (approximately 6% of the outstanding Class B shares) and
Dennis B. Markgraf, Connie D. Markgraf Co-TTEES The Marvin H. and Cecil G.
Markgraf Living Trust UA DTD 04/11/92, 103 Pleasant Street, Granite Falls,
Minnesota was the beneficial owner of 1,735 Class B shares (approximately 8% of
the outstanding Class B 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, 1995, PMF managed and/or administered
open-end and closed-end management investment companies with assets of
approximately $46 billion and, according to the Investment Company Institute, as
of August 31, 1994, the Prudential Mutual Funds were the 12th largest family of
mutual funds in the United States.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PMF, subject to the supervision of the Fund's Board of Directors and
in conformity with the stated policies of the Fund, manages both the investment
operations of the Fund and the composition of the Fund's portfolio, including
the purchase, retention, disposition and lending of securities. In connection
therewith, PMF is obligated to keep certain books and records of the Fund. PMF
also administers the Fund's corporate affairs and, in connection therewith,
furnishes the Fund with office facilities, together with those ordinary clerical
and bookkeeping services which are not being furnished by State Street Bank and
Trust Company, the Fund's custodian and Prudential Mutual Fund Services, Inc.
(PMFS or the Transfer Agent), the Fund's transfer and dividend disbursing agent.
The management services of PMF for the Fund are not exclusive under the terms of
the Management Agreement and PMF is free to, and does, render management
services to others.
For its services, PMF receives, pursuant to the Management Agreement, a fee
at an annual rate of .50 of 1% of the Fund's average daily net assets. The fee
is computed daily and payable monthly. The Management Agreement also provides
that, in the event the expenses of the Fund (including the fees of PMF, but
excluding interest, taxes, brokerage commissions, distribution fees and
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business) for any fiscal
B-15
<PAGE> 57
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, 1995. 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 13, 1995 and by PMF, as
initial shareholder of the Fund, on May 29, 1992.
For the fiscal year ended February 28, 1995, the Fund paid PMF management
fees of $456,738 (representing .50% of average daily net assets of the Fund).
For the period March 1, 1993 through April 14, 1993 PMF waived 100% of its
management fee of $150,690 (representing .50% of the average net assets of the
Fund) and for the period April 15, 1993 through February 28, 1994, the Fund paid
PMF management fees of $832,334 (representing 0.42% of average daily net assets
of the Fund). For the period from June 10, 1992 (commencement of operations) to
February 28, 1993, PMF waived 100% of its management fee of $908,536
(representing .50% of the average net assets of the Fund).
PMF has entered into the Subadvisory Agreement with PIC (the Subadviser), a
wholly-owned subsidiary of The Prudential Insurance Company of America
(Prudential). The Subadvisory Agreement provides that PIC will furnish
investment advisory services in connection with the management of the Fund. In
connection therewith, PIC is obligated to keep certain books and records of the
Fund. PMF continues to have responsibility for all investment advisory services
pursuant to the Management Agreement and supervises PIC's performance of such
services. PIC is reimbursed by PMF for the reasonable costs and expenses
incurred by PIC in furnishing those services.
The Subadvisory Agreement was approved by the Board of Directors, including
a majority of the Directors who are not parties to such contract or interested
persons of any such parties, on April 13, 1995 and was approved by the initial
shareholder of the Fund on May 29, 1992.
B-16
<PAGE> 58
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 are indirect subsidiaries of The Prudential
which, as of December 31, 1993, was the largest insurance company in North
America. Prudential has been engaged in the insurance business since 1875. In
July 1994, Institutional Investor ranked The Prudential the second largest
institutional money manager of the 300 largest money management organizations in
the United States as of December 31, 1993.
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), PMFD 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 13, 1995, 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, 1995 PMFD incurred
distribution-related expenses under the Class A Plan of $445,344. PMFD waived
all of its fee under the Class A Plan.
In addition, for the fiscal year ended February 28, 1995, PMFD received
approximately $1,900 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 incurred no distribution-related expenses under the Class B Plan.
Prudential Securities therefore did not assess its fee under the Class B Plan.
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 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, 1995, Prudential Securities received approximately $5,000 in
contingent deferred sales charges attributable to the Class B shares. 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.
B-17
<PAGE> 59
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. Each Distribution Agreement was
last approved by the Board of Directors, including a majority of the Rule
12b-1 Directors, on April 13, 1995 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. (NASD), the Distributor is required to
limit aggregate initial sales charges, deferred sales charges and asset-based
sales charges to 6.25% of total gross sales of each class of shares. 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.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators in 51 jurisdictions and the NASD to resolve
allegations that PSI sold interests in more than 700 limited partnerships (and a
limited number of other types of securities) from January 1, 1980 through
December 31, 1990, in violation of securities laws to persons for whom such
securities were not suitable in light of the individuals' financial condition or
investment objectives. It was also alleged that the safety, potential returns
and liquidity of the investments had been misrepresented. The limited
partnerships principally involved real estate, oil and gas producing properties
and aircraft leasing ventures. The SEC Order (i) included findings that PSI's
conduct violated the federal securities laws and that an order issued by the SEC
in 1986 requiring PSI to adopt, implement and maintain certain supervisory
procedures had not been complied with; (ii) directed PSI to cease and desist
from violating the federal securities laws and imposed a $10 million civil
penalty; and (iii) required PSI to adopt certain remedial measures including the
establishment of a Compliance Committee of its Board of Directors. Pursuant to
the terms of the SEC settlement, PSI established a settlement fund in the amount
of $330,000,000 and procedures, overseen by a court approved Claims
Administrator, to resolve legitimate claims for compensatory damages by
purchasers of the partnership interests. PSI has agreed to provide additional
funds, if necessary, for that purpose. PSI's settlement with the state
securities regulators included an agreement to pay a penalty of $500,000 per
jurisdiction. PSI consented to a censure and to the payment of a $5,000,000 fine
in settling the NASD action. In settling the above referenced matters, PSI
neither admitted nor denied the allegations asserted against it.
On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a
Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and other
improper conduct resulting in pecuniary losses and other harm to investors
residing in Texas with respect to purchases and sales of limited partnership
interests during the period of January 1, 1980 through December 31, 1990.
Without admitting or denying the allegations, PSI consented to a reprimand,
agreed to cease and desist from future violations, and to provide voluntary
donations to the State of Texas in the aggregate amount of $1,500,000. The firm
agreed to suspend the creation of new customer accounts, the general
solicitation of new accounts, and the offer for sale of securities in or from
PSI's North Dallas office to new customers during a period of twenty consecutive
business days, and agreed that its other Texas offices would be subject to the
same restrictions for a period of five consecutive business days. PSI also
agreed to institute training programs for its securities salesmen in Texas.
On October 27, 1994, Prudential Securities Group, Inc. (PSG) and PSI
entered into agreements with the United States Attorney deferring prosecution
(provided PSI complies with the terms of the agreement for three years) for any
alleged criminal activity related to the sale of certain limited partnership
programs from 1983 to 1990. In connection with these agreements, PSI agreed to
add the sum of $330,000,000 to the Fund established by the SEC and executed a
stipulation providing for a reversion of such funds to the United States Postal
Inspection Service. PSI further agreed to obtain a mutually acceptable outside
director to sit on the Board of Directors of PSG and the Compliance Committee of
PSI. The new director will also serve as an independent ``ombudsman'' whom PSI
employees can call anonymously with complaints about ethics and compliance.
Prudential Securities shall report any allegations or instances of criminal
conduct and material improprieties to the new director. The new director will
submit compliance reports which shall identify all such allegations or instances
of criminal conduct and material improprieties every three months for a
three-year period.
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
B-18
<PAGE> 60
transactions, including options, futures, and options on futures transactions
and the purchase and sale of underlying securities upon the exercise of options.
Orders may be directed to any broker or futures commission merchant, including
to the extent and in the manner permitted by applicable law, Prudential
Securities and its affiliates. Portfolio securities may not be purchased
from any underwriting or selling syndicate of which Prudential Securities
(or an affiliate thereof), during the existence of the syndicate, is a
principal underwriter (as defined in the Investment Company Act), except
in accordance with rules of the SEC. The Fund will not deal with Prudential
Securities or its affiliates on a principal basis. This limitation, in
the opinion of the Fund, will not significantly affect the Fund's ability to
pursue its present investment objective. However, in the future in other
circumstances, the Fund may be at a disadvantage because of this limitation in
comparison to other funds with similar objectives but not subject to such
limitations.
In placing orders for portfolio securities of the Fund, the Manager is
required to give primary consideration to obtaining the most favorable price and
efficient execution. This means that the Manager will seek to execute each
transaction at a price and commission, if any, which provide the most favorable
total cost or proceeds reasonably attainable under the circumstances. While the
Manager generally seeks reasonably competitive spreads or commissions, the Fund
will not necessarily be paying the lowest spread or commission available. Within
the framework of this policy, the Manager may consider research and investment
services provided by brokers or dealers who effect or are parties to portfolio
transactions of the Fund, the Manager or the Manager's other clients. Such
research and investment services are those which brokerage houses customarily
provide to institutional investors and include statistical and economic data and
research reports on particular companies and industries. Such services are used
by the Manager in connection with all of its investment activities, and some of
such services obtained in connection with the execution of transactions for the
Fund may be used in managing other investment accounts. Conversely, brokers,
dealers or commission merchants furnishing such services may be selected for the
execution of transactions for such other accounts, whose aggregate assets are
far larger than the Fund's, and the services furnished by such brokers, dealers
or commission merchants may be used by the Manager in providing investment
management for the Fund. Commission rates are established pursuant to
negotiations with the broker, dealer or futures commission merchant based on the
quality and quantity of execution services provided by the broker or futures
commission merchant in the light of generally prevailing rates. The Manager's
policy is to pay higher commissions to brokers and futures commission merchants,
other than Prudential Securities, for particular transactions than might be
charged if a different broker had been selected, on occasions when, in the
Manager's opinion, this policy furthers the objective of obtaining best price
and execution. In addition, the Manager is authorized to pay higher commissions
on brokerage transactions for the Fund to brokers and futures commission
merchants other than Prudential Securities in order to secure research and
investment services described above, subject to review by the Fund's Board of
Directors from time to time as to the extent and continuation of this practice.
The allocation of orders among brokers and futures commission merchants and the
commission rates paid are reviewed periodically by the Fund's Board of
Directors. While such services are useful and important in supplementing its own
research and facilities, the Manager believes that the value of such services is
not determinable and does not significantly reduce expenses.
Subject to the above considerations, Prudential Securities may act as a
securities broker or futures commission merchant for the Fund. In order for
Prudential Securities 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 years ended February 28, 1994, and February
28, 1995, 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 Class A
shares), or (ii) on a deferred basis (the Class B shares). See ``Shareholder
Guide--How to Buy Shares of the Fund'' in the Prospectus. As of the date of this
Statement of Additional Information, the Fund no longer accepts purchase orders
for shares of either class, except for purchases by certain Retirement and
Employee Plans (excluding IRA accounts).
B-19
<PAGE> 61
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, 1995, the maximum offering price of the Fund's shares is as
follows:
<TABLE>
<S> <C>
CLASS A
Net asset value and redemption price per Class A share.................. $9.55
Maximum sales charge (1.00% of offering price).......................... .10
-----
Offering price to public................................................ $9.65
=====
CLASS B
Net asset value, offering price and redemption price per Class B
share*.................................................................. $9.59
======
---------------
*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.
</TABLE>
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 Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will be granted
subject to confirmation of the investor's holdings. The Combined Purchase and
Cumulative Purchase Privilege does not apply to individual participants in any
retirement or group plans.
B-20
<PAGE> 62
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 any retirement or
group plans.
LETTER OF INTENT. Reduced sales charges are available to investors (or an
eligible group of related investors) including retirement and group plans, who
enter into a written Letter of Intent providing for the purchase, within a
thirteen-month period, of 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 held either directly with the Transfer Agent or through
Prudential Securities. The Distributor must be notified at the time of purchase
that the investor is entitled to a reduced sales charge. The reduced sales
charge will be granted subject to confirmation of the investor's holdings.
Letters of Intent are not available to individual participants in any retirement
or group plans.
A Letter of Intent permits a purchaser to establish a total investment goal
to be achieved by any number of investments over a thirteen-month period. Each
investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. 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, except in the case of retirement and group plans where the employer
or plan sponsor will be responsible for paying any applicable sales charge. The
effective date of 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, except in
the case of retirement and group plans.
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 (or the employer or
plan sponsor in the case of any retirement or group plan) is required to pay the
difference between the sales charge otherwise applicable to the purchases made
during this period and sales charges actually paid. Such payment may be made
directly to the Distributor or, if not paid, the Distributor will liquidate
sufficient escrowed shares to obtain such difference. Investors electing to
purchase Class A shares of the Fund pursuant to a Letter of Intent should
carefully read such Letter of Intent.
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. 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. Such shareholder will receive credit for any contingent
deferred sales charge paid in connection with the amount of proceeds being
reinvested.
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 Prudential Short-Term Global Income Fund, Inc. 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.
B-21
<PAGE> 63
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 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 days' notice, and any fund,
including the Fund, or the Distributor, has the right to reject any exchange
application relating to such fund's shares.
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average cost
per share is lower than it would be if a constant number of shares were bought
at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $4,800 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2007, the cost of four years at a private
college could reach $163,000 and over $97,000 at a public university.(1)
- ---------------
(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.
B-22
<PAGE> 64
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.''
- ---------------
(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 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.
B-23
<PAGE> 65
<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 a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, agency ratings, market
transactions in comparable securities and various relationships between
securities in determining value. Options on U.S. Government securities traded on
an exchange are valued at the mean between the most recently quoted bid and
asked prices on the respective exchange. Short-term debt securities, including
bonds, notes, debentures and other debt securities, and money market instruments
such as certificates of deposit, commercial paper, bankers' acceptances and
obligations of domestic and foreign banks, with remaining maturities of more
than 60 days, for which reliable market quotations are readily available, shall
each be valued at current market quotations as provided by an independent
pricing agent or principal market maker. Short-term investments with remaining
maturities of 60 days or less shall each be valued at cost with interest accrued
or discount amortized to the date of maturity, unless the Board of Directors
determines that such valuation does not represent fair value.
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. The Fund will compute its net asset value at 4:15
P.M., New York time, on each day the New York Stock Exchange is open for trading
except on days on which no orders to purchase, sell or redeem Fund shares have
been received or days on which changes in the value of the Fund's portfolio
securities do not affect net asset value. In the event the New York Stock
Exchange closes early on any business day, the net asset value of the Fund's
shares shall be determined at a time between such closing and 4:15 P.M., New
York time.
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.
B-24
<PAGE> 66
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 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.
B-25
<PAGE> 67
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 ]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
The yield for the 30-day period ended February 28, 1995 for the Fund's
Class A and Class B shares was 4.7% and 4.8%, respectively.
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 investment 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).
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 two
and two-thirds years ending February 28, 1995 was 2.04% and 2.28%, respectively.
The average annual total return with respect to the Class B shares of the Fund
for the one year and two and two-thirds years ending February 28, 1995 was 1.96%
and 2.61%, respectively. Without the distribution fee waiver the average annual
total return for the one year and two and two-thirds years ending February 28,
1995 would have been 1.30% and 1.49% for Class A shares and 1.30% and
(6.91)% 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 investment 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.
B-26
<PAGE> 68
The aggregate total return for Class A shares for the one year and two and
two-thirds years ending February 28, 1995 was 3.07% and 7.41%, respectively. The
aggregate total return for Class B shares for the one year and two and
two-thirds years ending February 28, 1995 was 2.96% and 7.26%, 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)
[PERFORMANCE 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.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts, serves as Custodian for the Fund's portfolio securities and cash,
and in that capacity maintains certain financial and accounting books and
records pursuant to an agreement with the Fund.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison,
New Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the
Fund. It is a wholly-owned subsidiary of PMF. PMFS provides customary transfer
agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, payment of dividends and distributions and related
functions. For these services, PMFS receives an annual fee per shareholder
account, a new account set-up fee for each manually established account and a
monthly inactive zero balance account fee per shareholder account. PMFS is also
reimbursed for its out-of-pocket expenses, including but not limited to postage,
stationery, printing, allocable communications and other costs. For the year
ended February 28, 1995, the Fund incurred fees of approximately $38,000 for
such services.
Deloitte & Touche LLP, Two World Financial Center, New York, New York
10281, serves as the Fund's independent accountants and in that capacity will
audit the Fund's annual financial statements.
B-27
<PAGE> 69
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC. PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1995
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--71.6%
ADJUSTABLE RATE MORTGAGE
PASS-THROUGHS--71.6%
Federal Home Loan Mortgage
Corporation,
$ 9,794# 5.01%, 7/01/24................ $ 9,779,057
8,065 5.03%, 8/01/24................ 8,097,562
5,458 5.13%, 5/01/24................ 5,413,207
97 7.14%, 10/01/23............... 99,617
29 7.38%, 7/01/22................ 29,968
Federal National Mortgage
Association,
7,931 5.90%, 11/01/24............... 8,121,892
3,000 6.75%, 1/01/23................ 3,057,188
Resolution Trust Corporation,
7,876 7.09%, 12/25/20............... 7,949,376
-----------
Total Adjustable Rate Mortgage
Pass-Throughs
(cost $42,225,353).......... 42,547,867
-----------
Total long-term investments
(cost $42,225,353).......... 42,547,867
-----------
SHORT-TERM INVESTMENTS--17.9%
ADJUSTABLE RATE MORTGAGE
PASS-THROUGHS--8.4%
Federal National Mortgage
Association,
$ 5,000 5.89%, 3/07/95
(cost $4,999,454)........... $ 5,000,000
-----------
CORPORATE BONDS--5.0%
Salomon Incorporated,
3,000 7.10%, 2/14/96
(cost $3,000,000)........... 2,991,750
-----------
REPURCHASE AGREEMENT--4.5%
Joint Repurchase Agreement
2,677 Account, 6.07%, 3/01/95
(cost $2,677,000; Note 5)... 2,677,000
-----------
Total short-term investments
(cost $10,676,454).......... 10,668,750
-----------
TOTAL INVESTMENTS--89.5%
(cost $52,901,807; Note 4).... 53,216,617
U.S. GOVERNMENT OBLIGATION
SOLD SHORT--(11.9)%
U.S. Treasury Note,
7,000 7.25%, 2/15/98
(proceeds $6,977,305)....... (7,066,710)
-----------
Total investments, net of
short sales--77.6%.......... 46,149,907
Other assets in excess of
liabilities--22.4%.......... 13,306,502
-----------
NET ASSETS--100%.............. $59,456,409
===========
</TABLE>
- ---------------
# Pledged as collateral on short sale.
See Notes to Financial Statements.
B-28
<PAGE> 70
PRUDENTIAL ADJUSTABLE RATE
SECURITIES FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
ASSETS February 28, 1995
-----------------
<S> <C>
Investments, at value (cost $52,901,807)................................................. $53,216,617
Cash..................................................................................... 4,907
Receivable for investments sold.......................................................... 9,826,794
Receivable for investment sold short..................................................... 6,977,305
Interest receivable...................................................................... 548,912
Receivable for Fund shares sold.......................................................... 2,020
Deferred expenses and other assets....................................................... 84,381
-----------
Total assets........................................................................... 70,660,936
-----------
LIABILITIES
Investment sold short, at value (proceeds $6,977,305).................................... 7,066,710
Payable for investments purchased........................................................ 3,080,898
Payable for Fund shares reacquired....................................................... 849,122
Accrued expenses......................................................................... 137,328
Dividends payable........................................................................ 47,224
Due to Manager........................................................................... 23,245
-----------
Total liabilities...................................................................... 11,204,527
-----------
NET ASSETS............................................................................... $59,456,409
===========
Net assets were comprised of:
Common stock, at par................................................................... $ 6,222
Paid-in capital in excess of par....................................................... 68,231,556
-----------
68,237,778
Accumulated net realized loss on investments........................................... (9,006,774)
Net unrealized appreciation on investments............................................. 225,405
-----------
Net assets, February 28, 1995........................................................ $59,456,409
===========
Class A:
Net asset value and redemption price per share
($58,709,948 / 6,144,443 shares of common stock issued and outstanding).............. $9.55
Maximum sales charge (1.0% of offering price).......................................... .10
-----
Maximum offering price to public....................................................... $9.65
-----
Class B:
Net asset value, offering price and redemption price per share
($746,461 / 77,858 shares of common stock issued and outstanding).................... $9.59
=====
</TABLE>
See Notes to Financial Statements.
B-29
<PAGE> 71
PRUDENTIAL ADJUSTABLE RATE
SECURITIES FUND, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
February 28,
NET INVESTMENT INCOME 1995
------------
<S> <C>
Income
Interest.............................. $ 4,299,982
------------
Expenses
Management fee........................ 456,738
Distribution fee--Class A, net of
waiver of
$445,344............................ --
Distribution fee--Class B, net of
waiver of
$22,789............................. --
Custodian's fees and expenses......... 168,000
Registration fees..................... 84,000
Reports to shareholders............... 73,000
Directors' fees....................... 48,000
Transfer agent's fees and expenses.... 47,000
Amortization of deferred organization
expenses............................ 37,000
Audit fee............................. 34,000
Legal fees............................ 13,000
Insurance expense..................... 4,000
Miscellaneous......................... 9,640
------------
Total expenses...................... 974,378
------------
Net investment income................... 3,325,604
------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Investment transactions............... (2,250,608)
Short sales........................... 264,564
------------
(1,986,044)
------------
Net change in unrealized appreciation/
depreciation on:
Investments........................... 641,031
Short sales........................... (89,405)
------------
551,626
------------
Net loss on investments................. (1,434,418)
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS............... $ 1,891,186
============
</TABLE>
See Notes to Financial Statements.
PRUDENTIAL ADJUSTABLE RATE
SECURITIES FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended February 28,
INCREASE (DECREASE) IN ----------------------------
NET ASSETS 1995 1994
------------ -------------
<S> <C> <C>
Operations
Net investment income.... $ 3,325,604 $ 8,392,463
Net realized loss on
investment
transactions........... (1,986,044) (7,020,730)
Net change in unrealized
appreciation/depreciation
on investments......... 551,626 1,125,105
------------ -------------
Net increase in net
assets resulting from
operations............. 1,891,186 2,496,838
------------ -------------
Contingent deferred sales
charges rebated.......... -- 87,220
------------ -------------
Dividends and distributions
(Note 1)
Dividends to shareholders
from net investment
income
Class A................ (3,246,500) (7,557,640)
Class B................ (79,104) (834,823)
------------ -------------
(3,325,604) (8,392,463)
------------ -------------
Distributions to
shareholders in excess
of net investment
income
Class A................ (100,808) (262,362)
Class B................ (6,354) (28,982)
------------ -------------
(107,162) (291,344)
------------ -------------
Fund share transactions
(net of share
conversions) (Note 6)
Net proceeds from shares
sold................... 2,804,234 75,303,969
Net asset value of shares
issued to shareholders
in reinvestment of
dividends and
distributions.......... 2,778,067 6,959,698
Cost of shares
reacquired............... (72,756,688) (206,110,076)
------------ -------------
Decrease in net assets
from Fund share
transactions........... (67,174,387) (123,846,409)
------------ -------------
Total decrease............. (68,715,967) (129,946,158)
NET ASSETS
Beginning of year.......... 128,172,376 258,118,534
------------ -------------
End of year................ $ 59,456,409 $ 128,172,376
============ =============
</TABLE>
See Notes to Financial Statements.
B-30
<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 primarily 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, which have interest rates which reset at periodic intervals.
NOTE 1. ACCOUNTING The following is a summary
POLICIES of significant accounting poli-
cies followed by the Fund in the preparation of
its financial statements.
SECURITIES VALUATION: The Fund values portfolio securities on the basis of
current market quotations provided by dealers or by a pricing service approved
by the Board of Directors, which uses information such as quotations from
dealers, market transactions in comparable securities, various relationships
between securities and calculations on yield to maturity in determining values.
If market quotations are not readily available, a security is valued at fair
value as determined under procedures established by the Board of Directors.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian, or designated subcustodians, as the case may be under
triparty repurchase agreements, 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.
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 sale). When the Fund makes a
short sale, it must borrow the security sold short and deliver it to the
broker-dealer through which it made the short sale. The Fund may have to pay a
fee to borrow the particular security and may be obligated to pay over any
payments received on such borrowed securities. 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. A gain, limited to the price at which
the Fund sold the security short, or a loss, unlimited in magnitude, will be
recognized upon the termination of a short sale if the market price at
termination is less than or greater than, respectively, the proceeds originally
received.
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.
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: The Fund accounts and reports 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. For the year ended February 28, 1995, the Fund reclassed $208,058 of
dividends
B-31
<PAGE> 73
in excess of net 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.
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. PMFD has waived, temporarily and voluntarily,
all payments to it under the Class A Plan. The amount of fees waived for the
year ended February 28, 1995, amounted to $445,344 ($.05 per Class A share; .50%
of Class A 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. PSI has
waived, temporarily and voluntarily, all payments to it under the Class B Plan.
The amount of fees waived for the year ended February 28, 1995 amounted to
$22,789 ($.10 per Class B share; 1.00% of Class B average net assets).
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 $1,900 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended February 28, 1995. From these fees, PMFD paid such sales charges to
dealers (PSI and Prusec) which in turn paid commissions to salespersons.
With respect to the Class B Plan, at any given time, the amount of expenses
incurred by PSI in distributing the Fund's shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total payment made by the Fund pursuant to
the Class B Plan. PSI advised the Fund that for the year ended February 28,
1995, it received approximately $5,000 in contingent deferred sales charges
imposed upon certain redemptions by investors. PSI, as distributor, has also
advised the Fund that at February 28, 1995, the amount of distribution expenses
incurred by PSI and not yet reimbursed by the Fund or recovered through
contingent deferred sales charges approximated $9,100. This amount may be
recovered through future payments under the Class B Plan or 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 Prudential Mutual Fund Ser-
TRANSACTIONS vices, Inc. (``PMFS''), a
WITH AFFILIATES wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the fiscal year ended February 28, 1995, the Fund incurred fees of approximately
$38,000 for the services of PMFS. As of February 28, 1995, approximately $2,400
of such fees were due to PMFS. Transfer agent fees and expenses in the Statement
of Operations include certain out-of-pocket expenses paid to non-affiliates.
NOTE 4. PORTFOLIO Purchases and sales of invest-
SECURITIES ment securities, other than
short-term investments, for
B-32
<PAGE> 74
the fiscal year ended February 28, 1995 were $224,246,307 and $286,453,845,
respectively.
The federal income tax basis of the Fund's investments at February 28, 1995
was substantially the same as the basis for financial reporting and,
accordingly, net unrealized depreciation for federal income tax purposes was
$314,810 (gross unrealized appreciation--$385,697; gross unrealized
depreciation--$70,887).
For federal income tax purposes, the Fund has a capital loss carryforward as
of February 28, 1995 of approximately $8,597,700 of which $3,282,600 expires in
2002 and $5,315,100 expires in 2003. 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 $409,000
incurred in the four month period ended February 28, 1995 as having been
incurred in the following fiscal year.
NOTE 5. JOINT The Fund along with other
REPURCHASE affiliated registered invest-
AGREEMENT ACCOUNT ment companies, transfers
uninvested cash balances into a single joint
account, the daily aggregate balance of which is invested in one or more
repurchase agreements collateralized by U.S. Treasury or Federal agency
obligations. As of February 28, 1995, the Fund has a 0.33% undivided interest in
the repurchase agreements in the joint account. The undivided interest for the
Fund represents $2,677,000 in the principal amount. As of such date, each
repurchase agreement in the joint account and the collateral therefor were as
follows:
Goldman, Sachs & Co., 6.08%, in the principal amount of $250,000,000,
repurchase price $250,042,222, due 3/1/95. The value of the collateral including
accrued interest is $255,043,078.
Bear, Stearns & Co., 6.07%, in the principal amount of $250,000,000,
repurchase price $250,042,153, due 3/1/95. The value of the collateral including
accrued interest is $255,223,281.
Barclays de Zoete Wedd Securities, Inc., 6.08%, in the principal amount of
$60,000,000, repurchase price $60,010,133, due 3/1/95. The value of the
collateral including accrued interest is $61,200,060.
Smith Barney Inc., 6.06%, in the principal amount of $250,000,000, repurchase
price $250,042,083 due 3/1/95. The value of the collateral including accrued
interest is $255,000,305.
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 6,222,301 shares issued and
outstanding at February 28, 1995, PMF owned 10,015 Class A shares.
B-33
<PAGE> 75
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A SHARES AMOUNT
- ------- ---------------- -------------
<S> <C> <C>
Year ended February 28, 1995:
Shares sold.................... 228,976 $ 2,205,352
Shares issued in reinvestment
of distributions............. 285,589 2,710,958
Shares reacquired.............. (7,570,166) (71,826,463)
------------ -------------
Net decrease in shares
outstanding before
conversion................... (7,055,601) (66,910,153)
Shares issued upon conversion
from Class B................. 447,807 4,242,531
------------ -------------
Net decrease in shares
outstanding.................. (6,607,794) $ (62,667,622)
============ =============
Year ended February 28, 1994:
Shares sold.................... 3,885,604 $ 38,096,534
Shares issued in reinvestment
of distributions............. 643,966 6,301,453
Shares reacquired.............. (17,047,153) (166,644,600)
------------ -------------
Net decrease in shares
outstanding before
conversion................... (12,517,583) $(122,246,613)
Shares issued upon conversion
from Class B................. 3,195,365 31,329,562
------------ -------------
Net decrease in shares
outstanding.................. (9,322,218) $ (90,917,051)
============ =============
Class B
- -------
Year ended February 28, 1995:
Shares sold.................... 62,621 $ 598,882
Shares issued in reinvestment
of distributions............. 7,031 67,109
Shares reacquired.............. (95,108) (930,225)
------------ -------------
Net decrease in shares
outstanding before
conversion................... (25,456) (264,234)
Shares reacquired upon conver-
sion into Class A............ (446,322) (4,242,531)
------------ -------------
Net decrease in shares
outstanding.................. (471,778) $ (4,506,765)
============ =============
Year ended February 28, 1994:
Shares sold.................... 597,901 $ 5,877,873
Shares issued in reinvestment
of distributions............. 66,872 658,245
Shares reacquired.............. (827,247) (8,135,914)
------------ -------------
Net decrease in shares
outstanding before
conversion................... (162,474) (1,599,796)
Shares reacquired upon
conversion into Class A...... (3,188,039) (31,329,562)
------------ -------------
Net decrease in shares
outstanding.................. (3,350,513) $ (32,929,358)
============ =============
</TABLE>
B-34
<PAGE> 76
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Class A Class B
------------------------------------------ ------------------------------------------
JUNE 10, JUNE 10,
YEAR YEAR 1992* YEAR YEAR 1992*
ENDED ENDED THROUGH ENDED ENDED THROUGH
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1995 1994 1993 1995 1994 1993
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 9.63 $ 9.94 $ 10.00 $ 9.67 $ 9.94 $ 10.00
------------ ------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------
Net investment income+.................. .36 0.41 0.35 .36 0.41 0.31
Net realized and unrealized loss on
investment transactions............... (.07) (0.29) (0.05) (.08) (0.29) (0.05)
------------ ------------ ------------ ------------ ------------ ------------
Total from investment operations...... .29 0.12 0.30 .28 0.12 0.26
LESS DISTRIBUTIONS
- ------------------
Dividends from net investment income.... (.35) (0.41) (0.35) (.33) (0.41) (0.31)
Distributions in excess of net
investment income..................... (.01) (0.02) (0.01) (.03) (0.01) (0.01)
------------ ------------ ------------ ------------ ------------ ------------
Total distributions................... (.36) (0.43) (0.36) (.36) (0.42) (0.32)
------------ ------------ ------------ ------------ ------------ ------------
Contingent deferred sales charges
rebated............................... -- -- -- -- .03 --
------------ ------------ ------------ ------------ ------------ ------------
Net asset value, end of period.......... $ 9.56 $ 9.63 $ 9.94 $ 9.59 $ 9.67 $ 9.94
============ ============ ============ ============ ============ ============
TOTAL RETURN#........................... 3.07% 1.24% 2.92% 2.96% 1.58% 2.56%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $58,710 $122,860 $219,352 $746 $5,312 $38,766
Average net assets (000)................ $89,069 $176,863 $217,329 $2,279 $19,742 $33,895
Ratios to average net assets:+
Expenses, including distribution
fees.................................. 1.07% 0.69% 0.77%** 1.03% 0.75% 1.27%**
Expenses, excluding distribution
fees.................................. 1.07% 0.63% 0.27%** 1.03% 0.63% 0.27%**
Net investment income................. 3.65% 4.29% 4.81%** 3.47% 4.23% 4.31%**
Portfolio turnover rate................. 268% 130% 45% 268% 130% 45%
- ---------------
</TABLE>
* Commencement of investment operations.
** Annualized.
+ Net of management fee and/or distribution fee waivers.
# Total return does not consider the effect of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of each period reported and includes reinvestments of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.
See Notes to Financial Statements.
B-35
<PAGE> 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, 1995, the related statements of operations for
the year then ended and of changes in net assets for each of the two years in
the period then ended and the financial highlights for each of the two years in
the period 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, 1995 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, 1995, 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 LLP
New York, New York
April 13, 1995
B-36
<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, 1995.
Statement of Assets and Liabilities at February 28, 1995.
Statement of Operations for the fiscal year ended February 28, 1995.
Statement of Changes in Net Assets for the fiscal years ended February
28, 1994, and February 28, 1995.
Notes to Financial Statements.
Financial Highlights with respect to the period ended February 28,
1993 and for the fiscal years ended February 28, 1994, and February
28, 1995.
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 Form N-1A (File No. 33-46658) filed on May
4, 1992.
2. (a) By-Laws of the Registrant, incorporated by reference to Exhibit
No. 2 to the Registration Statement on Form N-1A (File No. 33-46658)
filed on March 25, 1992.
(b) Amended By-Laws of the Registrant; incorporated by reference to
Exhibit 2(b) to Post-Effective Amendment No. 1 to the Registration
Statement on Form N-1A (File No. 33-46658) filed on November 2,
1992.
3. Not Applicable.
4. Instruments defining rights of shareholders; incorporated by
reference to Exhibit 4 to Post-Effective Amendment No. 3 to the
Registration Statement on Form N-1A (File No. 33-46658) filed on May
1, 1994.
5. (a) Management Agreement between the Registrant, and Prudential
Mutual Fund Management, Inc.; incorporated by reference to Exhibit
5(a) to Post-Effective Amendment No. 1 to the Registration Statement
on Form N-1A (File No. 33-46658) filed on November 2, 1992.
(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation; incorporated by
reference to Exhibit 5(b) to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A (File No. 33-46658) filed on
November 2, 1992.
6. (a) Distribution Agreement between the Registrant and Prudential
Mutual Fund Distributors for Class A shares, dated June 1, 1992 and
amended and restated as of April 13, 1995.*
(b) Distribution Agreement between the Registrant and Prudential
Securities for Class B shares, dated June 1, 1992 and amended and
restated as of April 13, 1995.*
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.
C-1
<PAGE> 79
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.
11. Consent of Independent Auditors.*
12. Not Applicable.
13. Subscription Agreement between the Registrant and Prudential Mutual
Fund Management, Inc. incorporated by reference to Exhibit 13 to
Post-Effective Amendment No. 1 to the Registration Statement on Form
N-1A (File No. 33-46658) filed on November 2, 1992.
14. Not Applicable.
15. (a) (i) Plan of Distribution pursuant to Rule 12b-1 for Class A
shares; incorporated by reference to Exhibit 15(a) to Post-Effective
Amendment No. 1 to the Registration Statement on Form N-1A (File No.
33-46658) filed on November 2, 1992.
(ii) Amended and restated Distribution and Service Plan pursuant to
Rule 12b-1 for Class A shares; incorporated by reference to Exhibit
15 to Post-Effective Amendment No. 3 to the Registration Statement
on Form N-1A (File No. 33-46658) filed on May 1, 1994.
(b) (i) Plan of Distribution pursuant to Rule 12b-1 for Class B
shares; incorporated by reference to Exhibit 15(a) to Post-Effective
Amendment No. 1 to the Registration Statement on Form N-1A (File No.
33-46658) filed on November 2, 1992.
(ii) Amended and restated Distribution and Service Plan pursuant to
Rule 12b-1 for Class B shares; incorporated by reference to Exhibit
15 to Post-Effective Amendment No. 3 to the Registration Statement
on Form N-1A (File No. 33-46658) filed on May 1, 1994.
16. (a) Schedule of Computation of Performance (Class A shares)
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, and May 1, 1994, respectively.
(b) Schedule of Computation of Performance (Class B shares)
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 and May 1, 1994, respectively.
27. (a) Financial Data Schedule for Class A shares.*
(b) Financial Data Schedule for Class B shares.*
- ------------------
*Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of May 26, 1995, there were 1,239 and 51 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 to
the Registration Statement), each
C-2
<PAGE> 80
Distributor of the Registrant may be indemnified against liabilities which it
may incur, except liabilities arising from bad faith, gross negligence, willful
misfeasance or reckless disregard of duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (Securities Act) may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1940 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in connection with the successful defense of any
action, suit or proceeding) is asserted against the Registrant by such director,
officer or controlling person in connection with the shares being registered,
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the 1940 Act and will be governed by the final adjudication of such
issue.
The Registrant has purchased an insurance policy insuring its officers and
directors against liabilities, and certain costs of defending claims against
such officers and directors, to the extent such officers and directors are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and directors under certain circumstances.
Section 9 of the Management Agreement (Exhibit 5(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 5(b) to the
Registration Statement) limit the liability of Prudential Mutual Fund
Management, 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. BuUSINESS 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 March 30, 1995).
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, Director of Marketing and
President, Director of Director, PMF; Senior Vice President, Prudential
Marketing and Director Securities Incorporated (Prudential Securities);
Chairman and Director of Prudential Mutual Fund
Distributors, Inc. (PMFD)
Stephen P. Fisher Senior Vice President Senior Vice President, PMF; Senior Vice President,
Prudential Securities; Vice President, PMFD
Frank W. Giordano Executive Vice Executive Vice President, General Counsel, Secretary and
President, General Director PMF and PMFD; Senior Vice President,
Counsel, Secretary and Prudential Securities; Director, Prudential Mutual Fund
Director Services, Inc. (PMFS)
</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 Financial and
President, Chief Administrative Officer, Treasurer and Director, PMF;
Financial and Senior Vice President, Prudential Securities; Executive
Administrative Vice President, Treasurer, Comptroller and Director,
Officer, Treasurer, PMFD; Director, PMFS
and Director
Timothy J. O'Brien Director President, Chief Executive Officer, Chief Operating
Officer, and Director, PMFD; Chief Executive Officer
and Director, PMFS; Director, PMF
Richard A. Redeker President, Chief President, Chief Executive Officer and Director, PMF;
Executive Officer and Executive Vice President, Director and Member of
Director Operating Committee, Prudential Securities; Director,
Prudential Securities Group, Inc. (PSG); Executive Vice
President, PIC; Director, PMFD; Director, PMFS
S. Jane Rose Senior Vice President, Senior Vice President and Senior Counsel, and Assistant
Senior Counsel and Secretary, PMF; Senior Vice President and Senior
Assistant Secretary Counsel, Prudential Securities
</TABLE>
(b) Prudential Investment Corporation
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 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>
William M. Bethke Senior Vice President Senior Vice President, Prudential; Senior Vice President,
Two Gateway Center PIC
Newark, NJ 07102
John D. Brookmeyer, Jr. Senior Vice President Senior Vice President, Prudential; Senior Vice President
51 JFK Pkwy and Director and Director, PIC
Short Hills, NJ 07078
Theresa A. Hamacher Vice President Vice President, Prudential; Vice President, PIC
Harry E. Knapp President, Director President, Director and Chief Executive Officer, PIC;
and Chief Executive Vice President, Prudential
Officer
William P. Link Senior Vice President Executive Vice President, Prudential; Senior Vice
Four Gateway Center President, PIC
Newark, NJ 07102
Richard A. Redeker Executive Vice President, Chief Executive Officer and Director, PMF;
President Executive Vice President, Director and Member of
Operating Committee, Prudential Securities; Director,
PSG; Executive Vice President, PIC; Director, PMFD;
Director, PMFS
Arthur F. Ryan Director Chairman of the Board, President and Chief Executive
Officer, Prudential; Director, PIC; Chairman of the
Board and Director, PSG
Eric A. Simonson Vice President and Vice President and Director, PIC; Executive Vice
Director President, Prudential
Claude J. Zinngrabe, Jr. Executive Vice Vice President, Prudential; Executive Vice President, PIC
President
</TABLE>
C-4
<PAGE> 82
ITEM 29. PRINCIPAL UNDERWRITERS
(a)(i) Prudential Securities
Prudential Securities is distributor for Prudential Government Securities
Trust (Intermediate Term Series) and The Target Portfolio Trust, for Class B
shares of Prudential Adjustable Rate Securities Fund, Inc. and for Class B and
Class C shares of Prudential Allocation Fund, Prudential California Municipal
Fund (California Income Series and California Series), Prudential Diversified
Bond Fund, Inc., Prudential Equity Fund, Inc., Prudential Equity Income Fund,
Prudential Europe Growth Fund, Inc., Prudential Global Fund, Inc., Prudential
Global Genesis Fund, Inc., Prudential Global Natural Resources Fund, Inc.,
Prudential GNMA Fund, Inc., Prudential Government Income Fund, Inc., Prudential
Growth Opportunity Fund, Inc., Prudential High Yield Fund, Inc., Prudential
IncomeVertible(R) Fund, Inc., Prudential Intermediate Global Income Fund, Inc.,
Prudential Multi-Sector Fund, Inc., Prudential Municipal Bond Fund, Prudential
Municipal Series Fund (except Connecticut Money Market Series, Massachusetts
Money Market Series, New York Money Market Series and New Jersey Money Market
Series), Prudential National Municipals Fund, Inc., Prudential Pacific Growth
Fund, Inc., Prudential Short-Term Global Income Fund, Inc., Prudential
Strategist Fund, Inc., Prudential Structured Maturity Fund, Inc., Prudential
U.S. Government Fund, Prudential Utility Fund, Inc., Global Utility Fund, Inc.,
Nicholas-Applegate Fund, Inc., (Nicholas-Applegate Growth Equity Fund) and The
BlackRock Government Income Trust. Prudential Securities is also a depositor for
the following unit investment trusts:
The Corporate Income Fund
Prudential Equity Trust Shares
National Equity Trust
Prudential Unit Trusts
Government Securities Equity Trust
National Municipal Trust
(a)(ii) Prudential Mutual Fund Distributors, Inc.
Prudential Mutual Fund Distributors, Inc. is distributor for Command
Government Fund, Command Money Fund, Command Tax-Free Fund, Prudential
California Municipal Fund (California Money Market Series), Prudential
Government Securities Trust (Money Market Series and U.S. Treasury Money Market
Series), Prudential-Bache MoneyMart Assets (d/b/a Prudential MoneyMart Assets),
Prudential Municipal Series Fund (Connecticut Money Market Series, Massachusetts
Money Market Series, New York Money Market Series and New Jersey Money Market
Series), Prudential Institutional Liquidity Portfolio, Inc., 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., Prudential Allocation Fund, The BlackRock Government Income Trust,
Prudential California Municipal Fund (California Income Series and California
Series), Prudential Diversified Bond Fund, Inc., Prudential Equity Fund, Inc.,
Prudential Equity Income Fund, Prudential Europe Growth Fund, Inc., Prudential
Global Fund, Inc., Prudential Global Genesis Fund, Inc., Prudential Global
Natural Resources Fund, Inc., Prudential GNMA Fund, Inc., Prudential Government
Income Fund, Inc., Prudential Growth Opportunity Fund, Inc., Prudential High
Yield Fund, Inc., Prudential IncomeVertible(R) Fund, Inc., Prudential
Intermediate Global Income Fund, Inc., Prudential Multi-Sector Fund, Inc.,
Prudential Municipal Bond Fund, Prudential Municipal Series Fund (Arizona
Series, Georgia Series, Hawaii Income Series, Maryland Series, Massachusetts
Series, Michigan Series, Minnesota Series, New Jersey Series, North Carolina
Series, Ohio Series and Pennsylvania Series), Prudential National Municipals
Fund, Inc., Prudential Pacific Growth Fund, Inc., Prudential Short-Term Global
Income Fund, Inc., Prudential Strategist Fund, Inc., Prudential Structured
Maturity Fund, Inc., Prudential U.S. Government Fund and Prudential Utility
Fund, Inc., 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>
Robert Golden.................... Executive Vice President and Director None
Alan D. Hogan.................... Executive Vice President and Director None
George A. Murray................. Executive Vice President and Director None
Leland B. Paton.................. Executive Vice President and None
Director
Vincent T. Pica, II.............. Executive Vice President and Director None
Richard A. Redeker............... Executive Vice President and Director Director and President
</TABLE>
C-5
<PAGE> 83
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
- --------------------------------- -------------------------------------- -------------------------
<S> <C> <C>
Gregory W. Scott................. Executive Vice President, Chief None
Financial Officer and Director
Hardwick Simmons................. Chief Executive Officer, President None
and Director
Lee B. Spencer, Jr............... General Counsel, Executive Vice None
President and Director
</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> <C>
Joanne Accurso-Soto.............. Vice President None
Dennis Annarumma................. Vice President, Assistant Treasurer None
and Assistant Comptroller
Phyllis J. Berman................ Vice President None
Brendan D. Boyle................. Chairman and Director None
Stephen P. Fisher................ Vice President None
Frank W. Giordano................ Executive Vice President, General None
Counsel, Secretary and Director
Robert F. Gunia.................. Executive Vice President, Treasurer, Vice President
Comptroller and Director
Timothy J. O'Brien............... President, Chief Executive Officer, None
Chief Operating Officer and Director
Richard A. Redeker............... Director Director and President
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 Two 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.
C-6
<PAGE> 84
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 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 5th day of June, 1995.
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC.
/s/ Richard A. Redeker
--------------------------------------
(RICHARD A. REDEKER, PRESIDENT)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Edward D. Beach Director June 5, 1995
- ---------------------------------------
EDWARD D. BEACH
/s/ Delayne D. Gold Director June 5, 1995
- ---------------------------------------
DELAYNE D. GOLD
/s/ Director June 5, 1995
- ---------------------------------------
HARRY A. JACOBS, JR.
/s/ Richard A. Redeker President and Director June 5, 1995
- ---------------------------------------
RICHARD A. REDEKER
/s/ Director June 5, 1995
- ---------------------------------------
THOMAS T. MOONEY
/s/ Thomas H. O'Brien Director June 5, 1995
- ---------------------------------------
THOMAS H. O'BRIEN
/s/ Thomas A. Owens, Jr. Director June 5, 1995
- ---------------------------------------
THOMAS A. OWENS, JR.
/s/ Stanley E. Shirk Director June 5, 1995
- ---------------------------------------
STANLEY E. SHIRK
/s/ Grace C. Torres Treasurer, Controller and Principal June 5, 1995
- --------------------------------------- Financial and Accounting Officer
GRACE C. TORRES
</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 Form N-1A (File No. 33-46658) filed on May 4, 1992.
2. (a) By-Laws of the Registrant, incorporated by reference to Exhibit No. 2 to
the Registration Statement on Form N-1A (File No. 33-46658) filed on March
25, 1992.
(b) Amended By-Laws of the Registrant; incorporated by reference to Exhibit
2(b) to Post-Effective Amendment No. 1 to the Registration Statement on Form
N-1A (File No. 33-46658) filed on November 2, 1992.
3. Not Applicable.
4. Instruments defining rights of shareholders; incorporated by reference to
Exhibit 4 to Post-Effective Amendment No. 1 to the Registration Statement on
Form N-1A (File No. 33-46658) filed on May 1, 1994.
5. (a) Management Agreement between the Registrant, and Prudential Mutual Fund
Management, Inc.; incorporated by reference to Exhibit 5(a) to
Post-Effective Amendment No. 1 to the Registration Statement on Form N-1A
(File No. 33-46658) filed on November 2, 1992.
(b) Subadvisory Agreement between Prudential Mutual Fund Management, Inc.
and The Prudential Investment Corporation; incorporated by reference to
Exhibit 5(b) to Post-Effective Amendment No. 1 to the Registration Statement
on Form N-1A (File No. 33-46658) filed on November 2, 1992.
6. (a) Distribution Agreement between the Registrant and Prudential Mutual Fund
Distributors Inc. for Class A shares, dated June 1, 1992 and amended and
restated as of April 13, 1995.*
(b) Distribution Agreement between the Registrant and Prudential Securities
Incorporated for Class B shares, dated June 1, 1992 and amended and restated
as of April 13, 1995.*
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.
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; incorporated by reference to Exhibit 15 to
Post-Effective Amendment No. 3 to the Registration Statement on Form N-1A
(File No. 33-46658) filed on May 1, 1994.
(b) (i) Plan of Distribution pursuant to Rule 12b-1 for Class B shares;
incorporated by reference to Exhibit 15(a) to Post-Effective Amendment No. 1
to the Registration Statement on Form N-1A (File No. 33-46658) filed on
November 2, 1992.
(ii) Amended and restated Distribution and Service Plan pursuant to Rule
12b-1 for Class B shares; incorporated by reference to Exhibit 15 to
Post-Effective Amendment No. 3 to the Registration Statement on Form N-1A
(File No. 33-46658) filed on May 1, 1994.
16. (a) Schedule of Computation of Performance (Class A shares) incorporated by
reference to Exhibit 16(a) to Post-Effective Amendments No. 1 and No. 3 to
the Registration Statement on Form N-1A (File No. 33-46658) filed on
November 2, 1992, and May 1, 1994, respectively.
(b) Schedule of Computation of Performance (Class B shares) incorporated by
reference to Exhibit 16(a) to Post-Effective Amendments No. 1 and No. 3 to
the Registration Statement on Form N-1A (File No. 33-46658) filed on
November 2, 1992, and May 1, 1994, respectively.
27. (a) Financial Data Schedule for Class A shares.*
(b) Financial Data Schedule for Class B shares.*
- ------------------
*Filed herewith.
<PAGE> 1
Ex-6.a
Exhibit 6.(a)
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC.
Distribution Agreement
(Class A Shares)
Agreement, dated as of June 1, 1992 and amended and restated
as of April 13, 1995, 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 on behalf of the Fund 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 through the
Distributor on the terms and conditions set forth below.
Section 2. Exclusive Nature of Duties
The Distributor shall be the exclusive representative of the
Fund to act as principal underwriter and distributor of the Fund's
Class A shares, except that:
2.1 The exclusive rights granted to the Distributor to sell
Class A shares of 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
<PAGE> 2
3.1 The Distributor shall have the right to buy from the Fund
on behalf of investors 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).
3.2 The Class A shares shall be sold by the Distributor on
behalf of the Fund and delivered by the Distributor or selected
dealers, as described in Section 6.4 hereof, to investors at the
offering price as set forth in the Prospectus.
3.3 The Fund shall have the right to suspend the sale of its
Class 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
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
<PAGE> 3
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.
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
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.
<PAGE> 4
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
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
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
<PAGE> 5
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
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.
<PAGE> 6
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 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: /s/ Robert F. Gunia
Robert F. Gunia
Executive Vice President
Prudential Adjustable Rate Securities
Fund, Inc.
By: /s/ Richard A. Redeker
Richard A. Redeker
President
<PAGE> 1
Ex-6.b
Exhibit 6.(b)
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC.
Distribution Agreement
(Class B Shares)
Agreement, dated June 1, 1992 and amended and restated as of
April 13, 1995, 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 on behalf of the Fund 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 through the
Distributor on the terms and conditions set forth below.
Section 2. Exclusive Nature of Duties
The Distributor shall be the exclusive representative of the
Fund to act as principal underwriter and distributor of the Fund's
Class B shares, except that:
2.1 The exclusive rights granted to the Distributor to sell
Class B shares of 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
on behalf of investors 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).
3.2 The Class B shares shall be sold by the Distributor on
behalf of the Fund and delivered by the Distributor or selected
dealers, as described in Section 6.4 hereof, to investors at the
offering price as set forth in the Prospectus.
3.3 The Fund shall have the right to suspend the sale of its
Class 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
<PAGE> 2
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
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
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
<PAGE> 3
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.
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;
(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
<PAGE> 4
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.
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
<PAGE> 5
otherwise, arising out of or based upon any untrue statement of a
material fact contained in the Registration Statement or Prospectus
or arising out of or based upon any alleged omission to state a
material fact required to be stated in either thereof or necessary
to make the statements in either thereof not misleading, except
insofar as such claims, demands, liabilities or expenses arise out
of or are based upon any such untrue statement or omission or
alleged untrue statement or omission made in reliance upon and in
conformity with information furnished in writing by the Distributor
to the Fund for use in the Registration Statement or Prospectus;
provided, however, that this indemnity agreement shall not inure to
the benefit of any such officer, Director or controlling person
unless a court of competent jurisdiction shall determine in a final
decision on the merits, that the person to be indemnified was not
liable by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of its
reckless disregard of its obligations under this Agreement
(disabling conduct), or, in the absence of such a decision, a
reasonable determination, based upon a review of the facts, that
the indemnified person was not liable by reason of disabling
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
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
<PAGE> 6
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
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: /s/ Robert F. Gunia
Robert F. Gunia
Senior Vice President
Prudential Adjustable Rate Securities
Fund, Inc.
By: /s/ Richard A. Redeker
Richard A. Redeker
President
<PAGE> 1
Ex-11
Exhibit 11
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Post-Effective Amendment No. 5 to Registration
Statement No. 33-46658 of Prudential Adjustable Rate Securities Fund, Inc.
of our report dated April 13, 1995, appearing in the Statement of Additional
Information, which is a part of such Registration Statement, and to the
references to us under the headings "Financial Highlights" in the Prospectus,
which is a part of such Registration Statement, and "Custodian, Transfer and
Dividend Disbursing Agent and Independent Accountants" in the Statement of
Additional Information.
Deloitte & Touche LLP
Deloitte & Touche LLP
New York, New York
May 31, 1995
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