<PAGE>
As filed with the Securities and Exchange Commission
on June 20, 1995
Registration No. 33-55441
811-7215
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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. 1 /X/
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /
Amendment No. 4 /X/
(Check appropriate box or boxes)
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PRUDENTIAL DIVERSIFIED BOND 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.
------------------
/X/ immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
/ / This post-effective amendment designates a new effective date
for 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 $.001 per share. The Registrant filed a notice under such Rule for its
fiscal year ended December 31, 1994 on or about February 24, 1995.
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<PAGE>
CROSS REFERENCE SHEET
(as required by Rule 495)
<TABLE>
<CAPTION>
N-1A Item No. Location
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<S> <C> <C> <C>
Part A
Item 1. Cover Page................................................. Cover Page
Item 2. Synopsis................................................... Fund Expenses; Fund Highlights
Item 3. Condensed Financial Information............................ Fund Expenses; Financial
Highlights; How the Fund
Calculates Performance
Item 4. General Description of Registrant.......................... Cover Page; Fund Highlights;
How the Fund Invests; General
Information
Item 5. Management of the Fund..................................... Financial Highlights; How the
Fund is Managed; General
Information
Item 5A. Management's Discussion of Fund Performance................ Not Applicable
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................................... Shareholde Guide; How the Fund
Values its Shares; 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............................ General Information
Item 13. Investment Objectives and Policies......................... Investment Objective 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; Net Asset
Value
Item 20. Tax Status................................................. Taxes
Item 21. Underwriters............................................... Distributor
Item 22. Calculation of Performance Data............................ Performance Information
Item 23. Financial Statements....................................... Financial Statements
Part C
Information required to be included in Part C is set forth under the appropriate Item, so numbered,
in Part C to this Post-Effective Amendment to the Registration Statement.
</TABLE>
<PAGE>
Prudential Diversified Bond Fund, Inc.
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Supplement dated June 20, 1995 to
Prospectus dated January 3, 1995
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The Prospectus is hereby supplemented by inserting the following information
prior to page 5, ``How the Fund Invests'':
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout the period indicated)
(Class A, Class B and Class C shares)
The following financial highlights for Class A, Class B and Class C shares
are unaudited. This information should be read in conjunction with the financial
statements and the notes thereto, which appear in the Statement of Additional
Information. The financial highlights contain selected data for a Class A, Class
B and Class C share of common stock, respectively, outstanding, total return,
ratios to average net assets and other supplemental data for the period
indicated. The information has been determined based on data contained in the
financial statements.
<TABLE>
<CAPTION>
Class A Class B Class C
----------- ----------- -----------
January 10, January 10, January 10,
1995D 1995D 1995D
Through Through Through
April 30, April 30, April 30,
1995 1995 1995
----------- ----------- -----------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......................................... $ 12.50 $ 12.50 $ 12.50
----------- ----------- -----------
Income from investment operations
Net investment incomeDD....................................................... .27 .25 .25
Net realized and unrealized gain on investment transactions................... .50 .50 .50
----------- ----------- -----------
Total from investment operations.............................................. .77 .75 .75
----------- ----------- -----------
Less distributions
Dividends from net investment income.......................................... (.27) (.25) (.25)
----------- ----------- -----------
Net asset value, end of period................................................ $ 13.00 $ 13.00 $ 13.00
----------- ----------- -----------
----------- ----------- -----------
TOTAL RETURN#:................................................................ 6.21% 6.00% 6.00%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............................................... $5,456 $26,911 $887
Average net assets (000)...................................................... $3,820 $16,324 $535
Ratios to average net assetsDD/*:
Expenses, including distribution fees......................................... .90% 1.50% 1.50%
Expenses, excluding distribution fees......................................... .75% .75% .75%
Net investment income......................................................... 7.15% 6.55% 6.37%
Portfolio turnover rate....................................................... 120% 120% 120%
</TABLE>
- ---------------
D Commencement of investment operations.
DD Net of expense subsidy and fee waiver.
* Annualized.
# Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than
a full year are not annualized.
The following information supplements the Prospectus.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
All minimum investment requirements are waived for purchases made in
connection with the ``Best Minds'' program sponsored by the Distributor pursuant
to which the total dollar amount of a client's investment in the program will be
allocated equally among shares of the Fund and other Prudential Mutual Funds.
For more information about this program, you should contact your Prudential
Securities financial adviser or Prusec representative.
<PAGE>
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
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PROSPECTUS DATED JANUARY 3, 1995
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Prudential Diversified Bond Fund, Inc. (the Fund) is an open-end, diversified
management investment company whose investment objective is high current
income consistent with an appropriate balance between risk and reward as
determined by the investment adviser. The Fund seeks to achieve this objective
by allocating its assets among sectors of the fixed-income securities markets,
primarily U.S. Government securities, mortgage-backed securities, corporate
debt securities and foreign securities (mainly government), based upon the
investment adviser's evaluation of current market and economic conditions. The
Fund has the flexibility to allocate its investments across different sectors
of the fixed-income securities markets in order to seek to reduce some of the
risks from negative market movements and interest rate changes in any one
sector. The Fund is not obligated to invest in all of these sectors at a given
time and, at times, may invest all of its assets in only one sector, subject
to the limitations described herein. Under normal circumstances, the Fund will
maintain at least 65% of its total assets in investment grade debt securities
(as defined herein). The Fund may also purchase preferred stock and engage in
various derivative securities transactions, including the purchase and sale of
put and call options on securities and financial indices and futures
transactions on securities, financial indices and currencies and the purchase
and sale of foreign currency exchange contracts, to hedge its portfolio and to
attempt to enhance returns. The Fund may engage in short-selling and use
leverage, including reverse repurchase agreements, dollar rolls and bank
borrowings, which entail additional risks to the Fund. 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.
THE FUND MAY INVEST UP TO 35% OF ITS NET ASSETS IN LOWER-RATED AND UNRATED
BONDS, COMMONLY KNOWN AS "JUNK" BONDS. INVESTMENTS OF THIS TYPE ARE SUBJECT TO
A GREATER RISK OF LOSS OF PRINCIPAL AND INTEREST, INCLUDING DEFAULT RISK, THAN
HIGHER RATED BONDS. PURCHASERS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED
WITH AN INVESTMENT IN THIS FUND. See "How the Fund Invests--Investment
Objective and Policies--Risk Factors Relating to Investing in Debt Securities
Rated Below Investment Grade (Junk Bonds)."
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 January 3, 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 COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information
contained in this Prospectus and is qualified in its entirety by the more
detailed information appearing elsewhere herein.
WHAT IS PRUDENTIAL DIVERSIFIED BOND FUND, INC.?
Prudential Diversified Bond 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 high current income consistent with an
appropriate balance between risk and reward as determined by the investment
adviser. It seeks to achieve this objective by allocating its assets primarily
among U.S. Government securities, mortgage-backed securities, corporate debt
securities and foreign securities (mainly government), based upon the
investment adviser's evaluation of current market and economic conditions.
There can be no assurance that the Fund will achieve its objective. See "How
the Fund Invests--Investment Objective and Policies" at page 5.
RISK FACTORS AND SPECIAL CHARACTERISTICS
The Fund will allocate its assets among one or more sectors of the fixed-
income securities markets and, under normal circumstances, will maintain at
least 65% of its total assets in investment grade debt securities (as defined
herein). See "How the Fund Invests--Investment Objective and Policies" at page
5. The Fund is permitted to invest up to 45% of its total assets in debt
securities issued by foreign companies and foreign governments, which involves
certain risks and considerations not typically associated with investments in
U.S. Government securities and debt securities of domestic companies. See "How
the Fund Invests--Risk Factors and Special Considerations of Investing in
Foreign Securities" at page 9. The Fund is permitted to invest up to 35% of its
net assets in non-investment grade bonds having a minimum rating of at least
CCC as determined by a nationally recognized securities rating organization
(NRSRO), such as Standard & Poor's Ratings Group or another NRSRO or, if
unrated, are, in the opinion of the investment adviser, of equivalent quality.
Lower rated securities are subject to a greater risk of loss of principal and
interest. See "How the Fund Invests--Risk Factors Relating to Investing in Debt
Securities Rated Below Investment Grade (Junk Bonds)" at page 10. The Fund may
also engage in various derivative securities transactions including hedging and
return enhancement strategies and interest rate swap transactions, and borrow
for leveraging. See "How the Fund Invests--Other Investments and Policies" and
"How the Fund Invests--Hedging and Return Enhancement Strategies--Risks of
Hedging and Return Enhancement Strategies" at pages 14, 16 and 17. The amount
of income available for distribution to shareholders will be affected by any
foreign currency gains or losses generated by the Fund upon the disposition of
debt securities denominated in a foreign currency and by certain hedging
activities of the Fund. See "Taxes, Dividends and Distributions" at page 22.
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 September 30, 1994, PMF served as
manager or administrator to 68 investment companies, including 38 mutual funds,
with aggregate assets of approximately $47 billion. The Prudential Investment
Corporation (PIC or the Subadviser) furnishes investment advisory services in
connection with the management of the Fund under a Subadvisory Agreement with
PMF. See "How the Fund is Managed--Manager" at page 18. The term "investment
adviser", as used herein, refers to the Manager and the Subadviser.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor of
the Fund's Class A shares and is paid an annual distribution and service fee
which is currently being charged at the rate of .15 of 1% of the average daily
net assets of the Class A shares.
2
<PAGE>
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Fund's Class B and Class C shares and is paid an annual
distribution and service fee which is currently being charged at the rate of
.75 of 1% of the average daily net assets of each of the Class B and Class C
shares.
See "How the Fund Is Managed--Distributor" at page 19.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $5,000 per class. The minimum subsequent
investment is $100 for all classes. 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 24 and "Shareholder
Guide--Shareholder Services" at page 32.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund, through its transfer
agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent), at
the net asset value per share (NAV) next determined after receipt of your
purchase order by the Transfer Agent or Prudential Securities plus a sales
charge which may be imposed either (i) at the time of purchase (Class A shares)
or (ii) on a deferred basis (Class B or Class C shares). See "How The Fund
Values its Shares" at page 21 and "Shareholder Guide--How to Buy Shares of the
Fund" at page 24.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers three classes of shares:
.Class A Shares: Sold with a maximum initial sales charge of 4% of the
offering price.
.Class B Shares: Sold without an initial sales charge but are subject to a
contingent deferred sales charge or CDSC (declining from 5%
to zero of the lower of the amount invested or the redemption
proceeds) which will be imposed on certain redemptions made
within six years of purchase. Although Class B shares are
subject to higher ongoing distribution-related expenses than
Class A shares, Class B shares will automatically convert to
Class A shares (which are subject to lower ongoing
distribution-related expenses) approximately seven years
after purchase.
.Class C Shares: Sold without an initial sales charge but, for one year after
purchase, are subject to a CDSC of 1% on redemptions. Like
Class B shares, Class C shares are subject to higher ongoing
distribution-related expenses than Class A shares but do not
convert to another class.
See "Shareholder Guide--Alternative Purchase Plan" at page 25.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. See "Shareholder Guide--How to Sell Your Shares" at page 28.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to declare daily and pay monthly dividends of net investment
income and pay distributions of net capital gains, if any, at least annually.
It is anticipated that the first dividend will be paid in or about February
1995. Dividends and distributions will be automatically reinvested in
additional shares of the Fund at NAV without a sales charge unless you request
that they be paid to you in cash. The amount of income available for
distribution to shareholders will be affected by any foreign currency gains or
losses generated by the Fund upon the disposition of debt securities
denominated in a foreign currency and by certain hedging activities of the
Fund. See "Taxes, Dividends and Distributions" at page 22.
3
<PAGE>
FUND EXPENSES
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES+
Maximum Sales Load
Imposed on Purchases
(as a percentage of
offering price)....... 4% None None
Maximum Sales Load or
Deferred Sales Load
Imposed on Reinvested
Dividends............. None None None
Deferred Sales Load (as
a percentage of origi-
nal purchase price or
redemption proceeds,
whichever is lower)... None 5% during the first year, 1% on redemptions
decreasing by 1% annually to made within one
1% in the fifth and year of purchase
the sixth years and
0% in the seventh year*
Redemption Fees........ None None None
Exchange Fees.......... None None None
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
ANNUAL FUND OPERATING
EXPENSES**
(as a percentage of av-
erage net assets)
Management Fees** (Af-
ter Reduction)....... .10% .10% .10%
12b-1 Fees++ (After Re-
duction) ............ .15% .75% .75%
Other Expenses......... .65% .65% .65%
--- ---- ----
Total Fund Operating
Expenses (After Re-
duction)............. .90% 1.50% 1.50%
=== ==== ====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE** 1 YEAR 3 YEARS
- --------- ------ -------
<S> <C> <C>
You would pay the following expenses on a $1,000 investment, as-
suming (1) 5% annual return and (2) redemption at the end of
each time period:
Class A........................................................ $49 $68
Class B........................................................ $65 $77
Class C........................................................ $25 $47
You would pay the following expenses on the same investment, as-
suming no redemption:
Class A........................................................ $49 $68
Class B........................................................ $15 $47
Class C........................................................ $15 $47
</TABLE>
The above example is based on data for the Fund's fiscal year ending December
31, 1995. The example should not be considered a representation of past or
future expenses. Actual expenses may be greater or less than those shown.
The purpose of this table is to assist an investor in understanding the various
types of 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" include estimated
operating expenses of the Fund, such as Directors' and professional fees,
registration fees, reports to shareholders, transfer agency and custodian
(domestic and foreign) fees (but excludes foreign withholding taxes).
- ------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."
** The Manager has agreed to subsidize expenses and waive management fees so
that Total Operating Expenses do not exceed .90%, 1.50% and 1.50% of the
average net assets of the Class A, Class B and Class C shares, respectively,
for the fiscal year ending December 31, 1995. The management fee without
such reductions would be .50 of 1% of the Fund's average daily net assets.
See "How the Fund is Managed--Manager--Fee Waivers and Subsidy."
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-based
sales charges on shares of the Fund may not exceed 6.25% of total gross
sales, subject to certain exclusions. This 6.25% limitation is imposed on
the Fund rather than on a per shareholder basis. Therefore, long-term
shareholders of the Fund may pay more in total sales charges than the
economic equivalent of 6.25% of such shareholders' investment in such
shares. See "How the Fund is Managed--Distributor."
++ Although the Class A, Class B and Class C Distribution and Service Plans
provide that the Fund may pay up to an annual rate of .30 of 1% of the
average daily net assets of the Class A shares and 1% of the average daily
net assets of each of the Class B and Class C shares, the Distributor has
agreed to limit its distribution fees with respect to Class A shares of the
Fund to .15 of 1% of the average daily net asset value of the Class A shares
and, with respect to Class B and Class C shares of the Fund to .75 of 1% of
the average daily net asset value of the Class B and Class C shares,
respectively, each for the fiscal year ending December 31, 1995. See "How
the Fund is Managed--Distributor." Total operating expenses without such
limitations would be 1.45% for Class A shares, and 2.15% for Class B and
Class C shares.
4
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
THE FUND'S INVESTMENT OBJECTIVE IS HIGH CURRENT INCOME CONSISTENT WITH AN
APPROPRIATE BALANCE BETWEEN RISK AND REWARD AS DETERMINED BY THE INVESTMENT
ADVISER. THE FUND SEEKS TO ACHIEVE THIS OBJECTIVE BY ALLOCATING ITS ASSETS
AMONG SECTORS OF THE FIXED-INCOME SECURITIES MARKETS, PRIMARILY U.S.
GOVERNMENT SECURITIES, MORTGAGE-BACKED SECURITIES, CORPORATE DEBT SECURITIES
AND FOREIGN SECURITIES (MAINLY GOVERNMENT), BASED UPON THE INVESTMENT
ADVISER'S EVALUATION OF CURRENT MARKET AND ECONOMIC CONDITIONS. THE FUND HAS
THE FLEXIBILITY TO ALLOCATE ITS INVESTMENT ACROSS DIFFERENT SECTORS OF THE
FIXED-INCOME SECURITIES MARKETS, IN ORDER TO SEEK TO REDUCE SOME OF THE RISKS
FROM NEGATIVE MARKET MOVEMENTS AND INTEREST RATE CHANGES IN ANY ONE SECTOR.
THE FUND IS NOT OBLIGATED TO INVEST IN ALL OF THESE SECTORS AT A GIVEN TIME
AND, AT TIMES, MAY INVEST ALL OF ITS ASSETS IN ONLY ONE SECTOR, SUBJECT TO THE
LIMITATIONS DESCRIBED HEREIN. UNDER NORMAL MARKET CIRCUMSTANCES, THE FUND WILL
MAINTAIN AT LEAST 65% OF ITS TOTAL ASSETS IN "INVESTMENT GRADE" DEBT
SECURITIES (AS DEFINED BELOW) AND AT LEAST 65% OF ITS TOTAL ASSETS IN BONDS.
FOR THE PURPOSES OF THIS PROSPECTUS, BONDS ARE DEBT SECURITIES WITH A MATURITY
AT DATE OF ISSUE OF GREATER THAN ONE YEAR. THERE CAN BE NO ASSURANCE THAT THE
FUND'S OBJECTIVE WILL BE ACHIEVED. See "Investment Objective and Policies" in
the Statement of Additional Information.
THE FUND HAS NO FIXED PERCENTAGE LIMITATIONS ON ALLOCATIONS AMONG SECTORS OF
THE FIXED-INCOME SECURITIES MARKETS EXCEPT THAT (I) NO MORE THAN 35% OF ITS
NET ASSETS MAY BE INVESTED IN NON-INVESTMENT GRADE BONDS, (II) NO MORE THAN
45% OF ITS TOTAL ASSETS MAY BE INVESTED IN FOREIGN DEBT SECURITIES INCLUDING
BOTH CORPORATE AND GOVERNMENT ISSUERS AND (III) AT LEAST 65% OF ITS TOTAL
ASSETS MUST BE INVESTED IN INVESTMENT GRADE DEBT SECURITIES UNDER NORMAL
MARKET CONDITIONS. ALTHOUGH THE INVESTMENT ADVISER ANTICIPATES THAT
INVESTMENTS WILL BE MADE PRINCIPALLY AMONG THE U.S. GOVERNMENT, MORTGAGE-
BACKED, CORPORATE AND FOREIGN DEBT SECURITIES SECTORS, THE FUND MAY ALSO
INVEST IN OTHER SECTORS OF THE FIXED-INCOME MARKETS, INCLUDING MUNICIPAL
SECURITIES, AND MAY PURCHASE PREFERRED STOCK. SEE "INVESTMENT OBJECTIVES AND
POLICIES" IN THE STATEMENT OF ADDITIONAL INFORMATION. IN ADDITION, THE FUND
WILL NOT INVEST 25% OR MORE OF ITS TOTAL ASSETS IN A SINGLE INDUSTRY (OTHER
THAN OBLIGATIONS OF THE U.S. GOVERNMENT, ITS AGENCIES OR INSTRUMENTALITIES).
The investment adviser has a team of fixed-income professionals including
credit analysts and traders with experience in many sectors of the U.S. and
foreign fixed-income securities markets. The investment adviser uses both
quantitative and fundamental analyses to evaluate each bond issue considered
for the Fund. In selecting portfolio securities, the investment adviser will
consider economic conditions and interest rate fundamentals. Within each bond
sector, the investment adviser will evaluate individual issues based upon
their relative investment merit and will consider factors such as yield and
potential for price appreciation as well as credit quality, maturity and risk.
See "How the Fund is Managed--Manager."
WHEN MARKET OR ECONOMIC CONDITIONS DICTATE, IN THE VIEW OF THE INVESTMENT
ADVISER, THAT A TEMPORARY DEFENSIVE INVESTMENT STRATEGY IS APPROPRIATE, THE
FUND MAY INVEST WITHOUT LIMIT IN MONEY MARKET INSTRUMENTS, HOLD CASH AND
ENGAGE IN REPURCHASE AGREEMENT TRANSACTIONS. FOR LIQUIDITY PURPOSES, THE FUND
MAY INVEST UP TO 35% OF ITS TOTAL ASSETS IN MONEY MARKET INSTRUMENTS AND HOLD
CASH. MONEY MARKET INSTRUMENTS TYPICALLY HAVE A MATURITY OF ONE YEAR OR LESS
(AS MEASURED FROM THE DATE OF PURCHASE). SEE "OTHER INVESTMENTS AND POLICIES"
BELOW.
Under normal market conditions, the Fund will invest at least 65% of its
total assets in "investment grade" debt securities. The term "investment
grade" refers to bonds and other debt obligations, rated within the four
highest quality grades as determined by Moody's Investors Service (Moody's)
(currently Aaa, Aa, A and Baa for bonds and P-1 for commercial paper), or
Standard & Poor's Ratings Group (S&P) (currently AAA, AA, A and BBB for bonds,
SP-1 and SP-2 for notes and A-1 for commercial paper), or by another
nationally recognized statistical rating organization (NRSRO) or, in unrated
securities which
5
<PAGE>
are of equivalent quality in the opinion of the investment adviser, for
example, U.S. Government securities and certain foreign government securities.
Securities rated Baa by Moody's or BBB by S&P, although considered to be
investment grade, lack outstanding investment characteristics and, in fact,
have speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than as is the case with higher grade bonds. See the
"Description of Security Ratings" in the Appendix to this Prospectus. The
Fund's holdings in money market instruments may be used to meet the 65% test
for investment grade securities. See "Other Investments and Policies" below.
THE FUND IS PERMITTED TO INVEST UP TO 35% OF ITS NET ASSETS IN LOWER QUALITY
BONDS PROVIDED THAT SUCH SECURITIES HAVE A MINIMUM RATING OF AT LEAST CCC AS
DETERMINED BY ONE NRSRO OR, IF UNRATED, ARE DEEMED BY THE INVESTMENT ADVISER
TO BE OF COMPARABLE QUALITY. Securities rated Caa by Moody's or CCC by S&P are
speculative and of poor standing and may be in default or there may be present
elements of danger with respect to principal or interest. Lower rated debt
securities, as well as debt securities with longer maturities, typically
provide a higher return and are subject to a greater risk of loss of principal
and price volatility than higher rated securities and securities with shorter
maturities. See "Risk Factors Relating to Investing in Debt Securities Rated
Below Investment Grade (Junk Bonds)" below. The dollar weighted average
maturity of the Fund's portfolio will range from one to thirty years.
Subsequent to its purchase by the Fund, a security may be assigned a lower
rating or cease to be rated. Such an event would not require the elimination
of the issue from the portfolio, but the investment adviser will consider such
an event in determining whether the Fund should continue to hold the security
in its portfolio. The Fund does not intend to retain investment grade
securities that are downgraded to junk bond status if 35% or more of its net
assets would be invested in junk bonds.
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the values of bonds held by the Fund will change,
causing an increase or decrease in the net asset value of the Fund. Longer-
term bonds are generally more sensitive to changes in interest rates than
shorter-term bonds. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall. The
investment adviser will actively manage the Fund's portfolio maturity
according to its interest rate outlook and will engage in various techniques
to monitor the Fund's exposure to interest rate risk including hedging
transactions and interest rate swaps. See "How the Fund Invests--"Hedging and
Return Enhancement Strategies' and "Other Investments and Policies--Interest
Rate Swap Transactions.' "
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 (INVESTMENT COMPANY ACT). INVESTMENT POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE BOARD OF DIRECTORS.
U.S. GOVERNMENT SECURITIES
The Fund invests in adjustable rate and fixed rate U.S. Government
securities. U.S. Government securities are instruments issued or guaranteed by
the U.S. Treasury or by an agency or instrumentality of the U.S. Government.
U.S. Government guarantees do not extend to the yield or value of the
securities or the Fund's shares. Not all U.S. Government securities are backed
by the full faith and credit of the United States. Some are supported only by
the credit of the issuing agency. U.S. Government securities include "zero
coupon" securities. See "Mortgage-Backed Securities" and "Corporate and Other
Debt Obligations" below. See "Investment Objective and Policies--U.S.
Government Securities" in the Statement of Additional Information.
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 Government
National Mortgage Association (GNMA), Federal National Mortgage Association
(FNMA) and Federal Home Loan Mortgage
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Corporation (FHLMC); (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.
The Fund may 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. These guarantees do not
extend to the yield or value of the securities or 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. The value of these securities is likely to vary inversely
with fluctuations in interest rates.
Mortgage-backed securities are subject to the risk that the principal on the
underlying mortgage loans may be prepaid at any time. 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. Mortgage-backed
securities may decrease in value as a result of increases in interest rates
and may benefit less than other fixed income securities from declining
interest rates because of the risk of prepayment.
COLLATERALIZED MORTGAGE OBLIGATIONS
A collateralized mortgage obligation (CMO) is a security issued by a
corporation or U.S. Government agency or instrumentality which is backed by a
portfolio of mortgages or mortgage-backed securities. The issuer's obligation
to make interest and principal payments is secured by the underlying portfolio
of mortgages or mortgage-backed securities. Multiclass pass-through securities
are equity interests in a trust composed of mortgages or mortgage-backed
securities. Payments of principal of and interest on the underlying 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 underlying mortgage assets may cause the
CMOs to be retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on all classes of the CMOs on
a monthly, quarterly or semi-annual basis. The principal of and interest on
the underlying mortgage assets may be allocated among the several classes of a
CMO series in a number of different ways. Generally, the purpose of the
allocation of the cash flow of a CMO to the various classes is to obtain a
more predictable cash flow to the individual tranches than exists with the
underlying collateral of the CMO. As a general rule, the more predictable the
cash flow is on a CMO tranche, the lower the anticipated yield will be on that
tranche at the time of issuance relative to prevailing market yields on
mortgage-backed securities.
In reliance on rules and interpretations of the 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
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other investment companies. See "Investment Objective and Policies--Mortgage-
Backed Securities" in the Statement of Additional Information.
STRIPPED MORTGAGE-BACKED SECURITIES. The Fund may also invest in mortgage-
backed security strips (MBS strips) (i) issued by the U.S. Government or its
agencies or instrumentalities or (ii) issued by private originators of, or
investors in, mortgage loans, including depository institutions, mortgage
banks, investment banks and special purpose subsidiaries of the foregoing
(derivative multiclass mortgage securities). 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 expected or anticipated 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. See
"Investment Objective and Policies--Mortgage-Backed Securities" in the
Statement of Additional Information. Derivative mortgage-backed securities
such as MBS strips are highly sensitive to changes in prepayment and interest
rates.
PRIVATE MORTGAGE PASS-THROUGH SECURITIES
Private mortgage pass-through securities are structured similarly to the
GNMA, FNMA and FHLMC mortgage pass-through securities and are issued by
originators of and investors in mortgage loans, including depository
institutions, mortgage banks, investment banks and special purpose
subsidiaries of the foregoing. These securities usually are backed by a pool
of conventional fixed rate or adjustable rate mortgage loans. Since private
mortgage pass-through securities typically are not guaranteed by an entity
having the credit status of GNMA, FNMA and FHLMC, such securities generally
are structured with one or more types of credit enhancement.
CORPORATE AND OTHER DEBT OBLIGATIONS
The Fund may invest in corporate and other debt obligations of domestic and
foreign issuers including convertible securities. Issuers are not limited to
the corporate form of organization. See "Investment Objective and Policies--
Corporate and Other Debt Obligations" in the Statement of Additional
Information. Bonds and other debt securities are used by issuers to borrow
money from investors. The issuer pays the investor a fixed or variable rate of
interest and must repay the amount borrowed at maturity. Some debt securities,
such as zero coupon bonds, do not pay current interest but are purchased at a
discount from their face values. The discount approximates the total amount of
interest the security will accrue and compound over the period until maturity
or the particular interest payment date at a rate of interest reflecting the
market rate of the security at the time of issuance. Zero coupon securities do
not require the periodic payment of interest. These investments benefit the
issuer by mitigating its need for cash to meet debt service, but also require
a higher rate of return to attract investors who are willing to defer receipt
of cash. These investments may experience greater volatility in market value
than securities that make regular payments of interest. The Fund accrues
income on these investments for tax and accounting purposes, which is
distributable to shareholders and which, because no cash is received at the
time of accrual, may require the liquidation of other portfolio securities to
satisfy the Fund's distribution obligations, in which case the Fund will
forego the purchase of additional income producing assets with these funds.
Zero coupon securities include both corporate and U.S. and foreign government
securities.
Pay-in-kind securities have their interest payable upon maturity by delivery
of additional securities. Deferred payment securities are securities that
remain a zero coupon security until a predetermined date, at which time the
stated coupon rate
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becomes effective and interest becomes payable at regular intervals. Certain
debt securities are subject to call provisions. Zero coupon, pay-in-kind and
deferred payment securities may be subject to greater fluctuation in value and
lesser liquidity in the event of adverse market conditions than comparable
rated securities paying cash interest at regular interest payment periods. See
"Investment Objective and Policies--Corporate and Other Debt Obligations--Zero
Coupon, Pay-in-Kind and Deferred Payment Securities" in the Statement of
Additional Information.
The Fund is permitted to invest in adjustable rate or floating rate debt
securities, including corporate securities and securities issued by U.S.
Government agencies, whose interest rate is calculated by reference to a
specified index such as the constant maturity Treasury rate, the T-bill rate
or LIBOR (London Interbank Offered Rate) and is reset periodically. Adjustable
rate securities allow the Fund to participate in increases in interest rates
through these periodic adjustments. The value of adjustable or floating rate
securities will, like other debt securities, generally vary inversely with
changes in prevailing interest rates. The value of adjustable or floating rate
securities is unlikely to rise in periods of declining interest rates to the
same extent as fixed rate instruments of similar maturities. In periods of
rising interest rates, changes in the coupon will lag behind changes in the
market rate resulting in a lower net asset value until the coupon resets to
market rates.
The Fund is permitted to invest up to 45% of its total assets in foreign
debt securities including securities of corporate issuers and foreign
government securities. See "Risk Factors and Special Considerations of
Investing in Foreign Securities" below.
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. Unlike mortgage-backed securities, asset-backed
securities do not have the benefit of a security interest in the related
collateral. Credit card receivables, for example, 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. In many instances, asset-
backed securities are over-collateralized to ensure the relative stability of
their credit-quality. The Fund is permitted to invest up to 25% of its total
assets in asset-backed securities.
CONVERTIBLE SECURITIES
A convertible security is generally a corporate bond (or preferred stock)
which may be converted at a stated price within a specified period of time
into a certain quantity of the common stock of the same or a different issuer.
Convertible securities are senior to common stocks in a corporation's capital
structure, but are usually subordinated to similar nonconvertible securities.
While providing a fixed income stream (generally higher in yield than the
income derivable from a common stock but lower than that afforded by a similar
nonconvertible security), a convertible security also affords an investor the
opportunity, through its conversion feature, to participate in the capital
appreciation dependent upon a market price advance in the convertible
security's underlying common stock. The Fund may from time to time hold common
stock received upon the conversion of a convertible security. The Fund does
not intend to retain the common stock in its portfolio and will sell it as
soon as reasonably practicable. Convertible securities also include preferred
stock which technically is an equity security. The Fund has no fixed
percentage limitations on its investment in convertible securities except as
otherwise stated herein under "Investment Objective and Policies."
In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed-income security)
or its "conversion value" (i.e., its value upon conversion into its underlying
common stock). As a fixed-income security, a convertible security tends to
increase in market value when interest rates decline and tends to
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<PAGE>
decrease in value when interest rates rise. However, the price of a
convertible security is also influenced by the market value of the security's
underlying stock. The price of a convertible security tends to increase as the
market value of the underlying stock rises, whereas it tends to decrease as
the market value of the underlying stock declines.
MUNICIPAL SECURITIES
The Fund may from time to time invest in municipal bonds including general
obligation and revenue bonds. General obligation bonds are secured by the
issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest, whereas revenue bonds are payable only from the
revenues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise or other specific revenue source.
The Fund may also invest in municipal notes including tax, revenue and bond
anticipation notes which are issued to obtain funds for various public
purposes. See "Municipal Securities" in the Statement of Additional
Information.
FOREIGN GOVERNMENT SECURITIES
"Foreign Government securities" include debt securities issued or
guaranteed, as to payment of principal and interest, by governments, quasi-
governmental entities, governmental agencies, supranational entities and other
governmental entities (collectively, Governmental Entities) denominated in
U.S. dollars or foreign currencies.
A "supranational entity" is an entity constituted by the national
governments of several countries to promote economic development. Examples of
such supranational entities include, among others, the World Bank
(International Bank for Reconstruction and Development), the European
Investment Bank and the Asian Development Bank. Debt securities of "quasi-
governmental entities" are issued by entities owned by a national, state, or
equivalent government or are obligations of a political unit that are not
backed by the national government's "full faith and credit" and general taxing
powers. Examples of quasi-governmental entities issuers include, among others,
the provinces of Canada. "Foreign Government securities" shall also include
debt securities of Government Entities denominated in European Currency Units
(ECU). An ECU represents specified amounts of the currencies of certain of the
member states of the European Economic Community. Foreign Government
securities shall also include mortgage-backed securities issued by foreign
Government Entities including quasi-governmental entities and Brady Bonds,
which are long-term bonds issued by Governmental Entities in developing
countries as part of a restructuring of their commercial bank loans. See
"Investment Objective and Policies--Foreign Government Securities" in the
Statement of Additional Information.
RISK FACTORS AND SPECIAL CONSIDERATIONS OF INVESTING IN FOREIGN SECURITIES
FOREIGN SECURITIES INVOLVE CERTAIN RISKS, WHICH SHOULD BE CONSIDERED
CAREFULLY BY AN INVESTOR IN THE FUND. THESE RISKS INCLUDE POLITICAL OR
ECONOMIC INSTABILITY IN THE COUNTRY OF THE ISSUER, THE DIFFICULTY OF
PREDICTING INTERNATIONAL TRADE PATTERNS, THE POSSIBILITY OF IMPOSITION OF
EXCHANGE CONTROLS AND THE RISK OF CURRENCY FLUCTUATIONS. Such securities may
be subject to greater fluctuations in price than securities issued by U.S.
corporations or issued or guaranteed by the U.S. Government, its
instrumentalities or agencies. In addition, there may be less publicly
available information about a foreign company than about a domestic company.
Foreign companies generally are not subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to domestic
companies. There is generally less government regulation of securities
exchanges, brokers and listed companies abroad than in the United States and
there is a possibility of expropriation, confiscatory taxation or diplomatic
developments which could affect investment. In many instances, foreign debt
securities may provide higher yields than securities of domestic issuers which
have similar maturities and quality. These investments, however, may be less
liquid than the securities of U.S. corporations. In the event of default of
any such foreign debt obligations, it may be more difficult for the Fund to
obtain or enforce a judgment against the issuers of such securities.
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INVESTING IN THE FIXED-INCOME MARKETS OF DEVELOPING COUNTRIES INVOLVES
EXPOSURE TO ECONOMIES THAT ARE GENERALLY LESS DIVERSE AND MATURE AND TO
POLITICAL SYSTEMS WHICH CAN BE EXPECTED TO HAVE LESS STABILITY THAN THOSE OF
DEVELOPED COUNTRIES. HISTORICAL EXPERIENCE INDICATES THAT THE MARKETS OF
DEVELOPING COUNTRIES HAVE BEEN MORE VOLATILE THAN THE MARKETS OF DEVELOPED
COUNTRIES. THE RISKS ASSOCIATED WITH INVESTMENTS IN FOREIGN DEBT SECURITIES
MAY BE GREATER WITH RESPECT TO INVESTMENTS IN DEVELOPING COUNTRIES.
ADDITIONAL COSTS COULD BE INCURRED IN CONNECTION WITH THE FUND'S
INTERNATIONAL INVESTMENT ACTIVITIES. Foreign transaction costs are generally
higher than in the United States. Increased custodian costs as well as
administrative difficulties (such as the applicability of foreign laws to
foreign custodians in various circumstances) may be associated with the
maintenance of assets in foreign jurisdictions.
If the security is denominated in a foreign currency, it will be affected by
changes in currency exchange rates and in exchange control regulations, and
costs will be incurred in connection with conversions between currencies. A
change in the value of any such currency against the U.S. dollar will result
in a corresponding change in the U.S. dollar value of the Fund's securities
denominated in that currency. Such changes also will affect the Fund's income
and distributions to shareholders. In addition, although the Fund will receive
income in such currencies, the Fund will be required to compute and distribute
its income in U.S. dollars. Therefore, if the exchange rate for any such
currency declines after the Fund's income has been accrued and translated into
U.S. dollars, the Fund could be required to liquidate portfolio securities to
make such distributions. Similarly, if an exchange rate declines between the
time the Fund incurs expenses in U.S. dollars and the time such expenses are
paid, the amount of such currency required to be converted into U.S. dollars
in order to pay such expenses in U.S. dollars will be greater than the
equivalent amount in any such currency of such expenses at the time they were
incurred.
The Fund may, but need not, enter into forward foreign currency exchange
contracts, options on foreign currencies and futures contracts on foreign
currencies and related options, for hedging purposes, including: locking-in
the U.S. dollar price of the purchase or sale of securities denominated in a
foreign currency; locking-in the U.S. dollar equivalent of interest or
dividends to be paid on such securities which are held by the Fund; and
protecting the U.S. dollar value of such securities which are held by the
Fund.
To mitigate against foreign market risk, the investment adviser intends to
invest the non-U.S. dollar denominated portion of the portfolio primarily in
government securities of developed nations and highly liquid corporate issues
and in options and futures thereon.
RISK FACTORS RELATING TO INVESTING IN DEBT SECURITIES RATED BELOW INVESTMENT
GRADE (JUNK BONDS)
Fixed-income securities are subject to the risk of an issuer's inability to
meet principal and interest payments on the obligations (credit risk) and may
also be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the creditworthiness of the issuer and
general market liquidity (market risk). Lower rated or unrated (i.e., high
yield or high risk) securities (commonly referred to as junk bonds) are more
likely to react to developments affecting market and credit risk than are more
highly rated securities, which react primarily to movements in the general
level of interest rates. The investment adviser considers both credit risk and
market risk in making investment decisions for the Fund.
The investment adviser will perform its own investment analysis and will not
rely principally on the ratings assigned by the rating services, although such
ratings will be considered by the investment adviser. The investment adviser
will consider, among other things, the financial history and condition, the
prospects and the management of an issuer in selecting securities for the
Fund's portfolio.
Under adverse economic conditions, there is a risk that highly leveraged
issuers may be unable to service their debt obligations or to repay their
obligations upon maturity. In addition, the secondary market for high yield
securities, which is
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concentrated in relatively few market makers, may not be as liquid as the
secondary market for more highly rated securities and, from time to time, it
may be more difficult to value high yield securities than more highly rated
securities. Under adverse market or economic conditions, the secondary market
for high yield securities could contract further, independent of any specific
adverse changes in the condition of a particular issuer. As a result, the
investment adviser could find it more difficult to sell these securities or
may be able to sell the securities only at prices lower than if such
securities were widely traded. Prices realized upon the sale of such lower
rated or unrated securities, under these circumstances, may be less than the
prices in calculating the Fund's net asset value.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Fund experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting
in a decline in the overall credit quality of the debt portion of the Fund's
portfolio and increasing the exposure of the Fund to the risks of high yield
securities.
From time to time, federal laws have been enacted which have required the
divestiture by companies of their investments in high yield bonds and have
limited the deductibility of interest by certain corporate issuers of high
yield bonds. These types of laws could adversely affect the Fund's net asset
value and investment practices, the secondary market for high yield
securities, the financial condition of issuers of these securities and the
value of outstanding high yield securities. There is currently no legislation
pending that would adversely impact the market for junk bonds. However, there
can be no assurance that such legislation will not be proposed or enacted in
the future.
HEDGING AND RETURN ENHANCEMENT STRATEGIES
THE FUND MAY ALSO ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING
DERIVATIVE SECURITIES TRANSACTIONS, TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS
AND TO ATTEMPT TO ENHANCE RETURN. These strategies currently include the use
of options, forward currency exchange contracts 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" and "Taxes" 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, FINANCIAL INDICES AND CURRENCIES THAT ARE TRADED ON U.S. OR
FOREIGN SECURITIES EXCHANGES OR IN THE OVER-THE-COUNTER MARKET TO HEDGE THE
FUND'S PORTFOLIO OR TO ENHANCE INCOME. These options will be on debt
securities, financial indices and foreign currencies. 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
securities (or currencies) that it owns against a decline in market value and
purchase call options in an effort to protect against an increase in the price
of securities (or currencies) 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--Options on
Securities" in the Statement of Additional Information.
A CALL OPTION GIVES THE PURCHASER, IN EXCHANGE FOR A PREMIUM PAID, THE RIGHT
FOR A SPECIFIED PERIOD OF TIME TO PURCHASE THE SECURITIES OR CURRENCY 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.
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A PUT OPTION GIVES THE PURCHASER, IN RETURN FOR A PREMIUM, THE RIGHT, FOR A
SPECIFIED PERIOD OF TIME, TO SELL THE SECURITIES OR CURRENCY 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 or currency underlying the option at
the exercise price. The Fund might, therefore, be obligated to purchase the
underlying securities or currency 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 currency 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--Options on Securities" in the Statement of Additional
Information. The Fund is not subject to any further limitations on the amount
of call options it may write. The Fund has undertaken with certain state
securities commissions that, so long as shares of the Fund are registered in
those states, it will not (a) write puts having aggregate exercise prices
greater than 25% of total net assets, or (b) purchase (i) put options on
securities not held in the Fund's portfolio, (ii) put options on stock indices
or foreign currencies or (iii) call options on securities, indices or foreign
currencies if, after any such purchase, the aggregate premiums paid for such
options would exceed 10% of the Fund's total assets; provided, however, that
the Fund may purchase put options on securities held by the Fund if after such
purchase the aggregate premiums paid for such options do not exceed 20% of the
Fund's total assets. The aggregate value of the obligations underlying put
options will not exceed 50% of the Fund's assets.
FORWARD CURRENCY EXCHANGE CONTRACTS
THE FUND MAY ENTER INTO FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS TO
PROTECT THE VALUE OF ITS ASSETS AGAINST FUTURE CHANGES IN THE LEVEL OF
CURRENCY EXCHANGE RATES. A forward contract on foreign currency is an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days agreed upon by the parties from the date of the
contract at a price set on the date of the contract.
THE FUND'S DEALINGS IN FORWARD CONTRACTS WILL BE LIMITED TO HEDGING
INVOLVING EITHER SPECIFIC TRANSACTIONS OR PORTFOLIO POSITIONS. Transaction
hedging is the purchase or sale of a forward contract with respect to specific
receivables or payables of the Fund generally arising in connection with the
purchase or sale of its portfolio securities and accruals of interest or
dividends receivable and Fund expenses. Position hedging is the sale of a
foreign currency with respect to portfolio security positions denominated or
quoted in that currency or in a different currency (cross hedge). Although
there are no limits on the number of forward contracts which the Fund may
enter into, the Fund may not position hedge (including cross hedges) with
respect to a particular currency for an amount greater than the aggregate
market value (determined at the time of making any sale of forward currency)
of the securities being hedged. See "Investment Objective and Policies--Risks
Related to Forward Foreign Currency Exchange Contracts" in the Statement of
Additional Information.
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, financial indices
and foreign currencies or groups of foreign currencies such as the ECU
(European Currency Unit). An ECU is a basket of specified amounts of the
currencies of certain member states of the European Economic Community, a
European economic cooperative organization. A financial futures contract is an
agreement to purchase or sell an agreed amount of securities or currencies at
a set price for delivery in the future.
The Fund may purchase and sell futures contracts and related options,
without limitation, for bona fide hedging purposes. The Fund may also purchase
or sell futures contracts and related options for return enhancement or risk
management
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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 does not exceed 5% of the liquidation value of
the Fund's total assets. The value of all futures contracts sold will not
exceed the total market value of the Fund's portfolio.
THE FUND MAY ALSO FROM TIME TO TIME PURCHASE EURODOLLAR INSTRUMENTS TRADED
ON THE CHICAGO MERCANTILE EXCHANGE. Eurodollar instruments are essentially
U.S. dollar-denominated futures contracts or options thereon which are linked
to the London Interbank Offered Rate (LIBOR). Eurodollar futures contracts
enable purchasers to obtain a fixed rate for the lending of funds and sellers
to obtain a fixed rate for borrowings. The Fund intends to use Eurodollar
futures contracts and options thereon to hedge against changes in LIBOR, to
which many interest rate swaps are linked. The use of these instruments is
subject to the same limitations and risks as those applicable to the use of
interest rate futures contracts and options thereon.
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 movements in the index or price of
the currencies being hedged is imperfect and there is a risk that the value of
the indices or currencies being hedged may increase or decrease at a greater
rate than the related futures contracts resulting in losses to the Fund.
Certain futures exchanges or boards of trade have established daily limits on
the amount that the price of futures contracts or related options may vary,
either up or down, from the previous day's settlement price. These daily
limits may restrict the Fund's ability to purchase or sell certain futures
contracts or related options on any particular day.
The Fund's ability to enter into futures contracts and options thereon is
limited by the requirements of the Internal Revenue Code for qualification as
a regulated investment company. See "Taxes" in the Statement of Additional
Information.
RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES
Participation in the options or futures markets and in currency exchange
transactions 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 predictions of movements in the direction of the securities, foreign
currency and interest rate markets are inaccurate, the adverse consequences to
the Fund may leave the Fund in a worse position than if such strategies were
not used. Risks inherent in the use of options, foreign currency 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, securities prices and currency markets; (2) imperfect
correlation between the price of options and futures contracts and options
thereon and movements in the prices of the securities or currencies being
hedged; (3) the fact that skills needed to use these strategies are different
from those needed to select portfolio securities; (4) the possible absence of
a liquid secondary market for any particular instrument at any time; (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 a portfolio security at a
disadvantageous time, due to the need for the Fund to maintain "cover" or to
segregate securities in connection with hedging transactions. See "Taxes" in
the Statement of Additional Information.
The Fund will generally purchase options and futures on an exchange only if
there appears to be a liquid secondary market for such options or futures; the
Fund will generally purchase OTC options only if management believes that the
counterparty to the option is creditworthy. However, there can be no assurance
that a liquid secondary market will continue to exist or that the counterparty
to the option will perform as promised. Thus, it may not be possible to close
an options or futures transaction. The inability to close options and futures
positions also could have an adverse impact on the Fund's ability effectively
to hedge its portfolio. There is also the risk of loss by the Fund of margin
deposits or collateral in the event of bankruptcy of a broker with whom the
Fund has an open position in an option, a futures contract or related option.
The investment adviser will monitor the creditworthiness of counterparties to
OTC options transactions under the supervision of the Board of Directors.
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OTHER INVESTMENTS AND POLICIES
MONEY MARKET INSTRUMENTS
The Fund may invest in high quality money market instruments, including
commercial paper of a U.S. or non-U.S. company, foreign government securities,
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 or denominated in a foreign currency. Money market
instruments typically have a maturity of one year or less as measured from the
date of purchase.
REPURCHASE AGREEMENTS
The Fund will enter into repurchase agreements whereby the seller of the
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 extend over a number of months. The
Fund's repurchase agreements will at all times be fully collateralized in an
amount at least equal to the purchase price of the underlying securities
(including accrued interest earned thereon). 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. pursuant to an order of the SEC. See "Investment
Objective and Policies--Repurchase Agreements" in the Statement of Additional
Information.
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 securities that are not readily marketable in securities
markets either within or outside of the United States. 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 Fund intends to comply with any applicable state blue sky laws
restricting the Fund's investments in illiquid securities. See "Investment
Restrictions" in the Statement of Additional Information. 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 OTC options and
the assets used as "cover" for written OTC options are illiquid securities
unless the Fund and the counterparty have provided for the Fund, at its
election, to unwind the OTC 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. See "Investment Objective and
Policies--Illiquid Securities" in the Statement of Additional Information.
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 IOs and POs as illiquid so long
as the staff of the SEC maintains its position that such securities are
illiquid.
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 a month or more in the future in order to secure what is considered to
be an advantageous price and yield to the Fund at the time of entering into
the transaction. While the Fund will only purchase securities on a when-issued
or delayed delivery basis with the intention of acquiring the securities, the
Fund may sell the securities before the settlement date, if it is deemed
advisable.
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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'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. Subject to this
requirement, the Fund may purchase securities on such basis without limit. See
"Investment Objective and Policies--When-Issued and Delayed Delivery
Securities" in the Statement of Additional Information.
BORROWING
The Fund may borrow an amount equal to no more than 33 1/3% of the value of
its total assets (calculated at the time of the borrowing) from banks for
temporary, extraordinary or emergency purposes, for the clearance of
transactions or for investment purposes. 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 300% asset coverage should decline as a result of market
fluctuations or other reasons, the Fund may be required to sell portfolio
securities to reduce the debt and restore the 300% asset coverage, even though
it may be disadvantageous from an investment standpoint to sell securities at
that time. Such liquidations could cause the Fund to realize gains on
securities held for less than three months. Because no more than 30% of the
Fund's gross income may be derived from the sale or disposition of securities
held for less than three months to maintain the Fund's status as a regulated
investment company under the Internal Revenue Code, such gains would limit the
ability of the Fund to sell other securities held for less than three months
that the Fund might wish to sell. See "Taxes" in the Statement of Additional
Information.
Borrowing for investment purposes is generally known as "leveraging."
Leveraging exaggerates the effect on net asset value of any increase or
decrease in the market value of the Fund's portfolio. Money borrowed for
leveraging will be subject to interest costs which may or may not be recovered
by appreciation of the securities purchased and may exceed the income from the
securities purchased. In addition, the Fund may be required to maintain
minimum average balances in connection with such borrowing or pay a commitment
fee to maintain a line of credit, which would increase the cost of borrowing
over the stated interest rate.
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 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.
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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 "Borrowing" above.
SECURITIES LENDING
The Fund may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or equivalent collateral or secures a
letter of credit in favor of the Fund in an amount equal to at least 100% of
the market value of the securities loaned. During the time portfolio
securities are on loan, the borrower will pay the Fund an amount equivalent to
any dividend or interest paid on such securities and the Fund may invest the
cash collateral and earn additional income, or it may receive an agreed-upon
amount of interest income from the borrower who has delivered equivalent
collateral or secured a letter of credit. Loans are subject to termination at
the option of the Fund or the borrower. 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 dividends or
interest which accrue 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 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, dividends 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 value of securities of
any one issuer in which the Fund is short may not exceed the lesser of 2% of
the value of the Fund's net assets or 2% of the securities of any class of any
issuer.
INTEREST RATE SWAP TRANSACTIONS
The Fund may enter into interest rate swap transactions. Interest rate swaps
involve the exchange by the Fund with another party of their respective
commitments to pay or receive interest, e.g., an exchange of floating rate
payments for fixed rate payments. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio or to protect against any increase in
the price of securities the Fund anticipates purchasing at a later date. The
Fund intends to use these transactions as a hedge and not as a speculative
investment. See "Investment Objective and Policies--Interest Rate Swap
Transactions" in the Statement of Additional Information.
The risk of loss with respect to interest rate swaps is limited to the net
amount of interest payments that the Fund is contractually obligated to make
and will not exceed 10% 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
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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 the investment technique was never
used.
PORTFOLIO TURNOVER
As a result of the Fund's investment policies, its portfolio turnover rate
may exceed 100%, although the rate is not expected to exceed 300%. High
portfolio turnover (over 100%) may involve correspondingly greater brokerage
commissions (or mark-ups) and other transaction costs, which will be borne
directly by the Fund. 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."
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.
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, 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.
The Fund is responsible for the payment of certain fees and expenses
including, among others, the following: (i) management and distribution fees;
(ii) the fees of unaffiliated Directors; (iii) the fees of the Fund's
Custodian and Transfer and Dividend Disbursing Agent; (iv) the fees of the
Fund's legal counsel and independent accountants; (v) brokerage commissions
incurred in connection with portfolio transactions; (vi) all taxes and charges
of governmental agencies; (vii) the reimbursement of organization expenses;
and (viii) expenses related to shareholder communications including all
expenses of shareholders' and Board of Directors' meetings and of preparing,
printing and mailing reports, proxy statements and prospectuses to
shareholders.
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. It was incorporated in May 1987 under the laws of the State of
Delaware. See "Manager" in the Statement of Additional Information.
As of September 30, 1994, PMF served as the manager to 38 open-end
investment companies, constituting all of the Prudential Mutual Funds, and as
manager or administrator to 30 closed-end investment companies with aggregate
assets of approximately $47 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF THE FUND AND ALSO ADMINISTERS THE FUND'S CORPORATE AFFAIRS. See
"Manager" in the Statement of Additional Information.
UNDER THE SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), PIC FURNISHES INVESTMENT ADVISORY
SERVICES IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY
PMF FOR ITS REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES.
Under the Management Agreement, PMF continues to have responsibility for all
investment advisory services and supervises PIC's performance of such
services. The current portfolio manager of the Fund is Barbara L. Kenworthy, a
managing director and senior portfolio manager of Prudential Investment
Advisors, a unit of PIC. Ms. Kenworthy has responsibility for the day-to-day
management
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of the Fund's portfolio. Ms. Kenworthy was previously employed by The Dreyfus
Corporation (June 1985-June 1994) and served as president and portfolio
manager for several Dreyfus fixed-income funds.
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance
Company of America (Prudential), a major diversified insurance and financial
services company.
DISTRIBUTOR
PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC. (PMFD), ONE SEAPORT PLAZA, NEW
YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE
OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS A SHARES OF THE FUND.
IT IS A WHOLLY-OWNED SUBSIDIARY OF PMF.
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE
SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE
LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS B AND
CLASS C SHARES OF THE FUND. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF
PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND SEPARATE DISTRIBUTION
AGREEMENTS (THE DISTRIBUTION AGREEMENTS), PMFD AND PRUDENTIAL SECURITIES
(COLLECTIVELY, THE DISTRIBUTOR) INCUR THE EXPENSES OF DISTRIBUTING THE FUND'S
CLASS A, CLASS B AND CLASS C SHARES. These expenses include commissions and
account servicing fees paid to, or on account of, financial advisers of
Prudential Securities and representatives of Pruco Securities Corporation
(Prusec), an affiliated broker-dealer, commissions and account servicing fees
paid to, or on account of, other broker-dealers or financial institutions
(other than national banks) which have entered into agreements with the
Distributor, advertising expenses, the cost of printing and mailing
prospectuses to potential investors and indirect and overhead costs of
Prudential 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 Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE FUND MAY PAY PMFD FOR ITS DISTRIBUTION-RELATED
ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE OF UP TO .30 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES. The Class A Plan
provides that (i) up to .25 of 1% of the average daily net assets of the Class
A shares may be used to pay for personal service and/or the maintenance of
shareholder accounts (service fee) and (ii) total distribution fees (including
the service fee of .25 of 1%) may not exceed .30 of 1% of the average daily
net assets of the Class A shares. PMFD has agreed to limit its distribution-
related fees payable under the Class A Plan to .15 of 1% of the average daily
net assets of the Class A shares for the fiscal year ending December 31, 1995.
UNDER THE CLASS B AND CLASS C PLANS, THE FUND PAYS PRUDENTIAL SECURITIES FOR
ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C SHARES
AT AN ANNUAL RATE OF 1% OF THE AVERAGE DAILY NET ASSETS OF EACH OF THE CLASS B
AND CLASS C SHARES. The Class B and Class C Plans provide for the payment to
Prudential Securities of (i) an asset-based sales charge of .75 of 1% of the
average daily net assets of the Class B and Class C shares, respectively, and
(ii) a service fee of .25 of 1% of the average daily net assets of each of the
Class B and Class C shares. The service fee is used to pay for personal
service and/or the maintenance of shareholder accounts. Prudential Securities
also receives contingent deferred sales charges from certain redeeming
shareholders. Prudential Securities has agreed to limit its distribution-
related fees payable under the Class B and Class C Plans to .75 of 1% of the
average daily net asset value of the Class B and Class C shares, respectively,
for the fiscal year ending December 31, 1995. See "Shareholder Guide--How to
Sell Your Shares--Contingent Deferred Sales Charges."
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Distribution expenses attributable to the sale of shares of the Fund will be
allocated to each class based upon the ratio of sales of each class to the
sales of all shares of the Fund other than expenses allocable to a particular
class. The distribution fee and sales charge of one class will not be used to
subsidize the sale of another class.
Each Plan provides that it shall continue in effect from year to year
provided that a majority of the Board of Directors of the Fund, including a
majority of the Directors who are not "interested persons" of the Fund (as
defined in the Investment Company Act) and who have no direct or indirect
financial interest in the operation of the Plan or any agreement related to
the Plan (the Rule 12b-1 Directors), vote annually to continue the Plan. Each
Plan may be terminated at any time by vote of a majority of the Rule 12b-1
Directors or of a majority of the outstanding shares of the applicable class
of the Fund. The Fund will not be obligated to pay expenses incurred under any
Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers and other persons which
distribute shares of the Fund. Such payments may be calculated by reference to
the net asset value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the 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 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.
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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 total return. See "Performance
Information" in the Statement of Additional Information and "Fund Expenses."
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant for
the Fund provided that the commissions, fees or other remuneration it receives
are fair and reasonable. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company (State Street or the Custodian), 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 1713, Boston, Massachusetts 02105.
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.
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. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. FOR
VALUATION PURPOSES, QUOTATIONS OF FOREIGN SECURITIES IN A FOREIGN CURRENCY ARE
CONVERTED TO U.S. DOLLAR EQUIVALENTS. THE BOARD OF DIRECTORS HAS FIXED THE
SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE FUND'S NAV TO BE AS OF 4:15
P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not
readily available, at fair value as determined in good faith under procedures
established by the Fund's Board of Directors. See "Net Asset Value" in the
Statement of Additional Information.
The Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase,
sell or redeem shares have been received by the Fund or days on which changes
in the value of the Fund's portfolio securities do not materially affect the
NAV. The New York Stock Exchange is closed on the following holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day. See "Net Asset Value" in the
Statement of Additional Information.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. As long as the Fund declares dividends daily, the NAV of
Class A, Class B and Class C shares will generally be the same. It is
expected, however, that the dividends will differ by approximately the amount
of the distribution-related expense accrual differential among the classes.
21
<PAGE>
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) AND YIELD IN
ADVERTISEMENTS OR SALES LITERATURE. TOTAL RETURN AND YIELD ARE CALCULATED
SEPARATELY FOR CLASS A, CLASS B AND CLASS C SHARES. These figures are based on
historical earnings and are not intended to indicate future performance. The
"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 "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., and other industry
publications, business periodicals and market indices. See "Performance
Information" in the Statement of Additional Information. The Fund will include
performance data for each class of shares of the Fund in any advertisement or
information including performance data of the Fund. Further performance
information will be contained in the Fund's annual and semi-annual reports to
shareholders, which will be available without charge. See "Shareholder Guide--
Shareholder Services--Reports to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
The Fund intends to elect to qualify and intends to remain qualified as a
regulated investment company under the Internal Revenue Code of 1986, as
amended (the Internal Revenue Code). Accordingly, the 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.
In addition, under the Internal Revenue Code, special rules apply to the
treatment of certain options and futures contracts (Section 1256 contracts).
At the end of each year, such investments held by the Fund will be required to
be "marked to market" for federal income tax purposes; that is, treated as
having been sold at market value. Sixty percent of any gain or loss recognized
on these "deemed sales" and on actual dispositions may be treated as long-term
capital gain or loss, and the remainder will be treated as short-term capital
gain or loss. See "Taxes" in the Statement of Additional Information.
Gains or losses on disposition of debt securities denominated in a foreign
currency attributable to fluctuations in the value of foreign currency between
the date of acquisition of the security and the date of disposition are
treated as ordinary gain or loss. These gains or losses increase or decrease
the amount of the Fund's investment company taxable income available to be
distributed to shareholders as ordinary income, rather than increasing or
decreasing the amount of the Fund's net capital gain. IF CURRENCY FLUCTUATION
LOSSES EXCEED OTHER INVESTMENT COMPANY TAXABLE INCOME DURING A TAXABLE YEAR,
DISTRIBUTIONS MADE BY THE FUND DURING THE YEAR WOULD BE CHARACTERIZED AS A
RETURN OF CAPITAL TO SHAREHOLDERS, REDUCING THE SHAREHOLDER'S BASIS IN HIS OR
HER FUND SHARES. SIGNIFICANT CURRENCY LOSSES COULD RESULT IN THE FUND'S
INABILITY TO PAY DIVIDENDS OF NET INVESTMENT INCOME.
22
<PAGE>
TAXATION OF SHAREHOLDERS
All dividends out of net investment income, together with distributions of
net 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 shareholder,
whether or not reinvested and regardless of the length of time a shareholder
has owned his or her shares. The maximum long-term capital gains rate for
corporate shareholders is currently the same as the maximum tax rate for
ordinary income. The maximum long-term capital gains rate for individual
shareholders is currently 28% and the maximum tax rate for ordinary income is
39.6%.
Net investment income attributable to the Fund's investments in municipal
securities will be tax-exempt to the Fund but if distributed to shareholders
as a dividend will become taxable as ordinary income to the shareholder.
The Fund may incur foreign income taxes in connection with some of its
foreign investments. Certain of these taxes may be credited to shareholders.
See "Taxes" in the Statement of Additional Information.
Any gain or loss realized upon a sale or redemption of shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held more than one year and
otherwise as short-term capital gain or loss. Any such loss, however, on
shares that are held for six months or less, will be treated as a long-term
capital loss to the extent of any capital gain distributions received by the
shareholder.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of
Class B or Class C shares for Class A shares constitutes a taxable event for
federal income tax purposes. However, such opinions are not binding on the
Internal Revenue Service.
WITHHOLDING TAXES
Under U.S. Treasury Regulations, the Fund is required to withhold and remit
to the U.S. Treasury 31% of dividend, capital gain income and redemption
proceeds, payable on the accounts of those shareholders who fail to furnish
their tax identification numbers on IRS Form W-9 (or IRS Form W-8 in the case
of certain foreign shareholders) with the required certifications regarding
the shareholder's status under the federal income tax law.
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.
DIVIDENDS AND DISTRIBUTIONS
THE FUND EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY NET
CAPITAL GAINS. Dividends paid by the Fund with respect to each class of
shares, to the extent any dividends are paid, will be calculated in the same
manner, at the same time, on the same day and will be in the same amount
except that each class will bear its own distribution charges, generally
resulting in lower dividends for Class B and Class C shares. Distribution of
net capital gains, if any, will be paid in the same amount for each class of
shares. See "How The Fund Values its Shares."
THE AMOUNT OF INCOME AVAILABLE FOR DISTRIBUTION TO SHAREHOLDERS WILL BE
AFFECTED BY ANY FOREIGN CURRENCY GAINS OR LOSSES GENERATED BY THE FUND UPON
THE DISPOSITION OF DEBT SECURITIES DENOMINATED IN A FOREIGN CURRENCY. See
"Taxation of the Fund" above. In the event the Fund's foreign currency losses
exceed other investment company taxable income during a taxable year, any
distributions made by the Fund during the year would be characterized as a
return of capital to investors, reducing the shareholder's basis in the
shares. Additionally, the Fund might not be able to pay further dividends to
shareholders under these circumstances.
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES, BASED ON
THE NAV OF EACH CLASS ON THE PAYABLE DATE OR SUCH OTHER DATE AS THE BOARD OF
DIRECTORS MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT LESS
23
<PAGE>
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., Attn: Account Maintenance Unit, 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 both of 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.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
THE FUND WAS INCORPORATED IN MARYLAND ON SEPTEMBER 1, 1994. THE FUND IS
AUTHORIZED TO ISSUE 2 BILLION SHARES OF COMMON STOCK, $.001 PAR VALUE PER
SHARE, DIVIDED INTO THREE CLASSES, DESIGNATED CLASS A, CLASS B AND CLASS C
COMMON STOCK. OF THE AUTHORIZED SHARES OF COMMON STOCK, 1 BILLION SHARES
CONSIST OF CLASS A COMMON STOCK, 500 MILLION SHARES CONSIST OF CLASS B COMMON
STOCK AND 500 MILLION SHARES CONSIST OF CLASS C COMMON STOCK. Each class of
common stock represents an interest in the same assets of the Fund and is
identical in all respects except that (i) each class bears different
distribution expenses, (ii) each class has exclusive voting rights with
respect to its distribution and service plan (except that the Fund has agreed
with the SEC in connection with the offering of a conversion feature on Class
B shares to submit any amendment of the Class A distribution and service plan
to both Class A and Class B shareholders), (iii) each class has a different
exchange privilege and (iv) only Class B shares have a conversion feature. See
"How the Fund is Managed--Distributor." Pursuant to an order of the SEC, the
Fund is permitted to issue and sell multiple classes of common stock.
Currently, the Fund is offering three classes, designated Class A, Class B and
Class C shares. In accordance with the Fund's Articles of Incorporation, the
Board of Directors may authorize the creation of additional series of common
stock and classes within such series, with such preferences, privileges,
limitations and voting and dividend rights as the Board may determine.
The Board of Directors may increase or decrease the number of authorized
shares. Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class
of common stock 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. Except for the conversion feature applicable to the Class B
shares, there are no conversion, preemptive or other subscription rights. In
the event of liquidation, each share of common stock of the Fund is entitled
to its portion of all of the Fund's assets after all debts and expenses of the
Fund have been paid. Since Class B and Class C shares generally bear higher
distribution expenses than Class A shares, the liquidation proceeds to
shareholders of those classes are likely to be lower than to Class A
shareholders. The Fund's shares do not have cumulative voting rights for the
election of Directors.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF DIRECTORS IS REQUIRED TO BE
ACTED ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OR
MORE 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. 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.
24
<PAGE>
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
Shares of the Fund may be purchased through Prudential Securities, Prusec or
directly from the Fund, through its Transfer Agent, Prudential Mutual Fund
Services, Inc. (PMFS or the Transfer Agent), Attention: Investment Services,
P.O. Box 15020, New Brunswick, New Jersey 08906-5020. The offering price is
the NAV next determined following receipt of an order by the Transfer Agent or
Prudential Securities plus a sales charge which, at your option, may be
imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class B or Class C shares). See "Alternative Purchase Plan"
below. See also "How the Fund Values its Shares."
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 minimum initial investment is $5,000 per class. The minimum subsequent
investment is $100 per class. All minimum investment requirements are waived
for certain retirement and employee savings plans or custodial accounts for
the benefit of minors. 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. For purchases through the Automatic
Savings Accumulation Plan the minimum initial and subsequent investment is
$50. See "Shareholder Services."
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."
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 Fund shares may be subject to postage and handling charges
imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the 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 name, 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 Diversified Bond Fund, Inc., specifying on the wire the account
number assigned by PMFS and your name and identifying the sales charge
alternative (Class A, Class B or Class C shares).
If you arrange for receipt by State Street of federal funds prior to 4:15
P.M., New York time, on a business day, you may purchase shares of the Fund as
of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Diversified
Bond Fund, Inc., Class A, Class B or Class C shares and your name and
individual account number. It is not necessary to call PMFS to make subsequent
purchase orders utilizing federal funds. The minimum amount which may be
invested by wire is $1,000.
25
<PAGE>
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS THREE CLASSES OF SHARES (CLASS A, CLASS B AND CLASS C
SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE
FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH
OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES
(ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12b-1 FEES
(AS A % OF AVERAGE
SALES CHARGE DAILY NET ASSETS) OTHER INFORMATION
------------ ------------------ -----------------
<S> <C> <C> <C>
CLASS Maximum initial sales charge .30 of 1% Initial sales charge waived
A of 4% of the public offering (currently being or reduced for certain
price charged at a rate purchases
of .15 of 1%)
CLASS Maximum contingent deferred 1% (currently Shares convert to Class A
B sales charge or CDSC of 5% being charged at a shares approximately seven
of the lesser of the amount rate of .75 of 1%) years after purchase
invested or the redemption
proceeds; declines to zero
after six years
CLASS Maximum CDSC of 1% of the 1% (currently Shares do not convert to
C lesser of the amount being charged at a another class
invested or the redemption rate of .75 of 1%)
proceeds on redemptions made
within one year of purchase.
</TABLE>
The three classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except
as noted under the heading "General Information--Description of Common Stock")
and (iii) only Class B shares have a conversion feature. The three classes
also have separate exchange privileges. See "How to Exchange Your Shares"
below. The income attributable to each class and the dividends payable on the
shares of each class will be reduced by the amount of the distribution fee of
each class. Class B and Class C shares bear the expenses of a higher
distribution fee which will generally cause them to have higher expense ratios
and to pay lower dividends than the Class A shares.
Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER
THINGS, (1) the length of time you expect to hold your investment, (2) the
amount of any applicable sales charge (whether imposed at the time of purchase
or redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) the fact that Class B shares
automatically convert to Class A shares approximately seven years after
purchase (see "Conversion Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund.
If you intend to hold your investment in the Fund for less than 7 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 4% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6-year period, you
should consider purchasing Class C shares over either Class A or Class B
shares.
If you intend to hold your investment for more than 6 years and do not
qualify for a reduced sales charge on Class A shares, since Class B shares
convert to Class A shares approximately 7 years after purchase and because all
of your money
26
<PAGE>
would be invested initially in the case of Class B shares, you should consider
purchasing Class A or Class B shares over Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money
invested initially because the sales charge on Class A shares is deducted at
the time of purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and Class C shares for the
higher cumulative annual distribution-related fee on those shares to exceed
the initial sales charge plus cumulative annual distribution-related fees on
Class A shares. This does not take into account the time value of money, which
further reduces the impact of the higher Class B or Class C distribution-
related fee on the investment, fluctuations in net asset value, the effect of
the return on the investment over this period of time or redemptions during
which the CDSC is applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT
OR UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A
SHARES. See "Reduction and Waiver of Initial Sales Charges" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial
sales charge alternative is the next determined NAV plus a sales charge
(expressed as a percentage of the offering price and of the amount invested)
as shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
--------------- --------------- -----------------
<S> <C> <C> <C>
Less than $50,000 4.00% 4.17% 3.75%
$50,000 to $99,999 3.50 3.63 3.25
$100,000 to $249,999 2.75 2.83 2.50
$250,000 to $499,999 2.00 2.04 1.90
$500,000 to $999,999 1.50 1.52 1.40
$1,000,000 and above None None None
</TABLE>
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be
aggregated to determine the applicable reduction. See "Purchase and Redemption
of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares"
in the Statement of Additional Information.
BENEFIT PLANS. Class A shares may be purchased at NAV, without payment of an
initial sales charge, by pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the
Internal Revenue Code (Benefit Plans), provided that the plan has existing
assets of at least $1 million invested in shares of Prudential Mutual Funds
(excluding money market funds other than those acquired pursuant to the
exchange privilege) or 1,000 eligible employees or participants. In the case
of Benefit Plans whose accounts are held directly with the Transfer Agent or
Prudential Securities and for which the Transfer Agent or Prudential
Securities does individual account record keeping (Direct Account Benefit
Plans) and Benefit Plans sponsored by PSI or its subsidiaries (PSI or
Subsidiary Prototype Benefit Plans), Class A shares may be purchased at NAV by
participants who are repaying loans made from such plans to the participant.
After a Benefit Plan qualifies to purchase Class A shares at NAV, subsequent
purchases will be made at NAV. Additional information concerning the reduction
and waiver of initial sales charges is set forth in the Statement of
Additional Information.
27
<PAGE>
OTHER WAIVERS. In addition, Class A shares may be purchased at NAV, through
Prudential Securities or the Transfer Agent, by the following persons: (a)
Directors and officers of the Fund and other Prudential Mutual Funds, (b)
employees of Prudential Securities and PMF and their subsidiaries and members
of the families of such persons who maintain an "employee related" account at
Prudential Securities or the Transfer Agent, (c) employees and special agents
of Prudential and its subsidiaries and all persons who have retired directly
from active service with Prudential or one of its subsidiaries, (d) registered
representatives and employees of dealers who have entered into a selected
dealer agreement with Prudential Securities provided that purchases at NAV are
permitted by such person's employer and (e) investors who have a business
relationship with a financial adviser who joined Prudential Securities from
another investment firm, provided that (i) the purchase is made within 90 days
of the commencement of the financial adviser's employment at Prudential
Securities, (ii) the purchase is made with proceeds of a redemption of shares
of any open-end, non-money market fund sponsored by the financial adviser's
previous employer (other than a fund which imposes a distribution or service
fee of .25 of 1% or less) and (iii) the financial adviser served as the
client's broker on the previous purchases.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation
of your entitlement. No initial sales charges are imposed upon Class A shares
purchased upon the reinvestment of dividends and distributions. See "Purchase
and Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--
Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one
of the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent, Prudential Securities or Prusec.
Although there is no sales charge imposed at the time of purchase, redemption
of Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges."
HOW TO SELL YOUR SHARES
YOU CAN REDEEM SHARES OF THE FUND AT ANY TIME FOR CASH AT THE NAV PER SHARE
NEXT DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. See "How the Fund Values its Shares."
In certain cases, however, redemption proceeds will be reduced by the amount
of any applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges" below.
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 NAMES(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.
28
<PAGE>
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR
WRITTEN REQUEST EXCEPT AS INDICATED BELOW. If you hold shares through
Prudential Securities, payment for shares presented for redemption will be
credited to your Prudential Securities account unless you indicate otherwise.
Such payment may be postponed or the right of redemption suspended at times
(a) when the New York Stock Exchange is closed for other than customary
weekends and holidays, (b) when trading on such Exchange is restricted, (c)
when an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or
(d) during any other period when the SEC, by order, so permits; provided that
applicable rules and regulations of the SEC shall govern as to whether the
conditions prescribed in (b), (c) or (d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL
THE FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS
BEEN HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE
CHECK BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY
WIRE OR BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price
in whole or in part by a distribution in kind of securities from the
investment portfolio of the Fund, in lieu of cash, in conformity with
applicable rules of the SEC. Securities will be readily marketable and will be
valued in the same manner as 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 has, however, 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 the 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 any such shareholder 60 days' prior written notice in which to
purchase sufficient additional shares to avoid such redemption. No contingent
deferred sales charge will be imposed on any involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the NAV next
determined after the order is received, which must be within 90 days after the
date of redemption. No sales charge will apply to such repurchases. You will
receive pro rata credit for any contingent deferred sales charge paid in
connection with the redemption of Class B or Class C shares. You must notify
the Fund's Transfer Agent, either directly or through Prudential Securities or
Prusec, at the time the repurchase privilege is exercised that you are
entitled to credit for the contingent deferred sales charge previously paid.
Exercise of the repurchase privilege will not affect the federal income tax
treatment of any gain realized upon redemption. If the redemption resulted in
a loss, some or all of the loss, depending on the amount reinvested, will not
be allowed for federal income tax purposes.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within one year of purchase will be subject to a 1% CDSC. The
CDSC will be deducted from the redemption proceeds and reduce the amount paid
to you. The CDSC will be imposed on any redemption by you which reduces the
current value of your Class B or Class C shares to an amount which is lower
than the amount of all payments by you for shares during the preceding six
years, in the case of Class B shares, and one year, in the case of Class C
shares. A CDSC will be applied on the lesser of the original purchase price or
the current value of the shares being redeemed. Increases in the value of your
shares or shares purchased through reinvestment of dividends or distributions
are
29
<PAGE>
not subject to a CDSC. The amount of any contingent deferred sales charge will
be paid to and retained by the Distributor. See "How the Fund is Managed--
Distributor" and "Waiver of the Contingent Deferred Sales Charges--Class B
Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of your shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchase of shares, all payments
during a month will be aggregated and deemed to have been made on the last day
of the month. The CDSC will be calculated from the first day of the month
after the initial purchase, excluding the time shares were held in a money
market fund. See "How to Exchange Your Shares."
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------- -------------------------
<S> <C>
First......................................... 5.0%
Second........................................ 4.0%
Third......................................... 3.0%
Fourth........................................ 2.0%
Fifth......................................... 1.0%
Sixth......................................... 1.0%
Seventh....................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results generally in the lowest possible rate.
It will be assumed that the redemption is made first of amounts representing
shares acquired pursuant to the reinvestment of dividends and distributions;
then of amounts representing the increase in net asset value above the total
amount of payments for the purchase of Fund shares made during the preceding
six years; then of amounts representing the cost of shares held beyond the
applicable CDSC period; and finally, of amounts representing the cost of
shares held for the longest period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase, you decided
to redeem $500 of your investment. Assuming at the time of the redemption the
NAV had appreciated to $12 per share, the value of your Class B shares would
be $1,260 (105 shares at $12 per share). The CDSC would not be applied to the
value of the reinvested dividend shares and the amount which represents
appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500
minus $260) would be charged at a rate of 4% (the applicable rate in the
second year after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint
tenancy (with rights of survivorship), or a trust, at the time of death or
initial determination or disability, provided that the shares were purchased
prior to death or disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i) in the case of a tax-
deferred retirement plan, a lump-sum or other distribution after retirement;
in the case of an IRA or Section 403(b) custodial account, a lump-sum or other
distribution after attaining age
30
<PAGE>
59 1/2; and (iii) a tax-free return of an excess contribution or plan
distributions following the death or disability of the shareholder, provided
that the shares were purchased prior to death or disability. The waiver does
not apply in the case of a tax-free rollover or transfer of assets, other than
one following a separation from service, i.e., following voluntary or
involuntary termination of employment or following retirement. Under no
circumstances will the CDSC be waived on redemptions resulting from the
termination of a tax-deferred retirement plan unless such redemptions
otherwise qualify as a waiver as described above. In the case of Direct
Account and PSI or Subsidiary Prototype Benefit Plans, the CDSC will be waived
on redemptions which represent borrowings from such plans. Shares purchased
with amounts used to repay a loan from such plans on which a CDSC was not
previously deducted will thereafter be subject to a CDSC without regard to the
time such amounts were previously invested. In the case of a 401(k) plan, the
CDSC will also be waived upon the redemption of shares purchased with amounts
used to repay loans made from the account to the participant and from which a
CDSC was previously deducted. In addition, the CDSC will be waived on
redemptions of shares held by Directors of the Fund.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec, at the time of redemption, that you are entitled to
waiver of the CDSC and provide the Transfer Agent with such supporting
documentation as it may deem appropriate. See "Purchase and Redemption of Fund
Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in the
Statement of Additional Information. The waiver will be granted subject to
confirmation of your entitlement.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase during the months of February,
May, August and November. Conversions will be effected at relative net asset
value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will
be determined on each conversion date in accordance with the following
formula: (i) the ratio of (a) the amounts paid for Class B shares purchased at
least seven years prior to the conversion date to (b) the total amount paid
for all Class B shares purchased and then held in your account (ii) multiplied
by the total number of Class B shares then in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or
amounts representing Class B shares then in your account that were acquired
through the automatic reinvestment of dividends and other distributions will
convert to Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible
Shares calculated as described above will generally be either more or less
than the number of shares actually purchased approximately seven years before
such conversion date. For example, if 100 shares were initially purchased at
$10 per share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (i.e., $1,000
divided by $2,100 or 47.62% multiplied by 200 shares or 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to
shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share net asset value of the Class A shares may be
higher than that of the Class B shares at the time of conversion. Thus,
although the aggregate dollar value will be the same, you may receive fewer
Class A shares than Class B shares converted. See "How the Fund Values its
Shares."
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been
made on the last day of the month, or for Class B shares acquired through
exchange, or a series of exchanges, on the last day of the month in which the
original payment for purchases of such Class B shares was made. For Class B
shares previously exchanged for shares of a money market fund, the time period
during which such shares
31
<PAGE>
were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of
measuring the time period during which shares are held in a money market fund,
exchanges will be deemed to have been made on the last day of the month. Class
B shares acquired through exchange will convert to Class A shares after
expiration of the conversion period applicable to the original purchase of
such shares. The conversion feature described above will not be implemented
and, consequently, the first conversion will not occur before February 1995 or
as soon thereafter as practicable. At that time, all amounts representing
Class B shares then outstanding beyond the applicable conversion period will
automatically convert to Class A shares, together with all shares or amounts
representing Class B shares acquired through the automatic reinvestment of
dividends and distributions then held in your account.
The conversion feature is subject to the continuing availability of opinions
of counsel or rulings of the Internal Revenue Service (i) that the dividends
and other distributions paid on Class A, Class B, and Class C shares will not
constitute "preferential dividends" under the Internal Revenue Code and (ii)
that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended,
Class B shares of the Fund will continue to be subject, possibly indefinitely,
to their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND YOU HAVE AN EXCHANGE PRIVILEGE WITH CERTAIN
OTHER PRUDENTIAL MUTUAL FUNDS, INCLUDING ONE OR MORE SPECIFIED MONEY MARKET
FUNDS, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A,
CLASS B AND CLASS C SHARES MAY BE EXCHANGED FOR CLASS A, CLASS B AND CLASS C
SHARES, RESPECTIVELY, OF ANOTHER FUND ON THE BASIS OF THE RELATIVE NAV. No
sales charge will be imposed at the time of exchange. Any applicable CDSC
payable upon the redemption of shares exchanged will be that imposed by the
fund in which shares are initially purchased and will be calculated from the
first day of the month after the initial purchase, excluding the time shares
were held in a money market fund. Class B and Class C shares may not be
exchanged into money market funds other than Prudential Special Money Market
Fund. For purposes of calculating the holding period applicable to the Class B
conversion feature, the time period during which Class B shares were held in a
money market fund will be excluded. See "Conversion Feature--Class B Shares"
above. An exchange will be treated as a redemption and purchase for tax
purposes. See "Shareholder Investment Account--Exchange Privilege" in the
Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE
TRANSFER AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may
call the Fund at (800) 225-1852 to execute a telephone exchange of shares, on
weekdays, except holidays, between the hours of 8:00 A.M. and 6:00 P.M., New
York time. For your protection and to prevent fraudulent exchanges, your
telephone call will be recorded and you will be asked to provide your personal
identification number. A written confirmation of the exchange transaction will
be sent to you. NEITHER THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS,
LIABILITY OR COST WHICH RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY
BELIEVED TO BE GENUINE UNDER THE FOREGOING PROCEDURES. All exchanges will be
made on the basis of the relative NAV of the two funds next determined after
the request is received in good order. The exchange privilege is available
only in states where the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON
THE FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, 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.
32
<PAGE>
SPECIAL EXCHANGE PRIVILEGE. Commencing in or about February 1995, a special
exchange privilege is available for shareholders who qualify to purchase Class
A shares at NAV. See "Alternative Purchase Plan--Class A Shares--Reduction and
Waiver of Initial Sales Charges" above. Under this exchange privilege, amounts
representing any Class B and Class C shares (which are not subject to a CDSC)
held in such a shareholder's account will be automatically exchanged for Class
A shares on a quarterly basis, unless the shareholder elects otherwise. It is
currently anticipated that this exchange will occur quarterly in February,
May, August and November. Eligibility for this exchange privilege will be
calculated on the business day prior to the date of the exchange. Amounts
representing Class B or Class C shares which are not subject to a CDSC include
the following: (1) amounts representing Class B or Class C shares acquired
pursuant to the automatic reinvestment of dividends and distributions, (2)
amounts representing the increase in the net asset value above the total
amount of payments for the purchase of Class B or Class C shares and (3)
amounts representing Class B or Class C shares held beyond the applicable CDSC
period. Class B and Class C shareholders must notify the Transfer Agent either
directly or through Prudential Securities or Prusec that they are eligible for
this special exchange privilege.
The exchange privilege may be modified or terminated at any time on sixty
days' notice.
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
than 5 full business days prior to the record date to have subsequent
dividends and/or distributions sent in cash rather than reinvested. If you
hold shares through Prudential Securities, you should contact your financial
adviser.
. AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make
regular purchases of the Fund's shares in amounts as little as $50 via an
automatic debit to a bank account or Prudential Securities account (including
a Command Account). For additional information about this service, you may
contact your Prudential Securities financial adviser, Prusec registered
representative or the Transfer Agent directly.
. TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the Distributor. These plans are for use by both self-
employed individuals and corporate employers. These plans permit either self-
direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from Prudential Securities or
the Transfer Agent. If you are considering adopting such a plan, you should
consult with your own legal or tax adviser with respect to the establishment
and maintenance of such a plan.
. SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders, which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges." See also "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 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.
33
<PAGE>
APPENDIX
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than Aaa bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
SHORT-TERM DEBT RATINGS
Moody's Short-Term Debt Ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year.
PRIME-1: Issuers rated Prime-1 or P-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
A-1
<PAGE>
PRIME-2: Issuers rated Prime-2 or P-2 (or supporting institutions) have a
strong ability for repayment of senior short-term debt obligations.
PRIME 3: Issuers rated Prime-3 or P-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime
rating categories.
SHORT-TERM MUNICIPAL RATINGS
Moody's ratings for tax-exempt notes and other short-term loans are
designated Moody's Investment Grade (MIG). This distinction is in recognition
of the differences between short-term and long-term credit risk.
MIG 1: Loans bearing the designation MIG 1 are of the best quality, enjoying
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2: Loans bearing the designation MIG 2 are of high quality, with margins
of protection ample although not so large as in the preceding group.
MIG 3: Loans bearing the designation MIG 3 are of favorable quality, with
all security elements accounted for but lacking strength of the preceding
grades.
MIG 4: Loans bearing the designation MIG 4 are of adequate quality.
Protection commonly regarded and required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
STANDARD & POOR'S RATINGS GROUP
BOND RATINGS
AAA: Debt rated AAA has the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A: Debt rated A has strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB, B, CCC, CC: Debt rated BB, B, CCC, and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligations. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties of major risk exposures to adverse
conditions.
COMMERCIAL PAPER
Standard & Poor's commercial paper ratings are current assessments of the
likelihood of timely payment of debt having an original maturity of no more
than 270 days.
A-1: The A-1 designation indicates that the degree of safety regarding
timely payment is very strong.
A-2
<PAGE>
A-2: Capacity for timely payment on issues with the designation A-2 is
strong. However, the relative degree of safety is not as overwhelming as for
issues designated A-1.
A-3: Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
MUNICIPAL NOTES
A municipal note rating reflects the liquidity concerns and market access
risks unique to municipal notes. Municipal notes due in three years or less
will likely receive a municipal note rating, while notes maturing beyond three
years will most likely receive a long-term debt rating. Municipal notes are
rates SP-1, SP-2 or SP-3. The designation SP-1 indicates a very strong
capacity to pay principal and interest. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation. An SP-2 designation indicates a satisfactory capacity to pay
principal and interest. An SP-3 designation indicates speculative capacity to
pay principal and interest.
A-3
<PAGE>
HISTORICAL PERFORMANCE DATA--FIXED-INCOME SECURITIES
Set forth below is historical performance data relating to various sectors of
the fixed-income securities markets. The first chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1987
to August 1994. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The second chart shows the yields on the 3-month U.S.
Treasury bill and 10-year U.S. Treasury bond from January 1987 to August 1994.
The data is provided to illustrate the varying historical total returns and
yields of different bond market sectors and investors should not consider this
performance data as an indication of the future performance of the Fund or of
any sector in which the Fund invests.
All information relies on data obtained from statistical services, reports and
other services believed by the Manager to be reliable. Such information has not
been verified. The figures do not reflect the operating expenses and fees of a
mutual fund. See "Fund Expenses" in the prospectus. The net effect of the
deduction of the operating expenses of a mutual fund on these historical total
returns, including the compounded effect over time, could be substantial.
Historical Total Returns of Different Bond Market Sectors
<TABLE>
<CAPTION>
YTD
YEAR '87 '88 '89 '90 '91 '92 '93 8/94
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY
BONDS/1/ 2.0% 7.0% 14.4 % 8.5 % 15.3% 7.2% 10.7% (2.4)%
-----------------------------------------------------------------
U.S. GOVERNMENT
MORTGAGE
SECURITIES/2/ 4.3% 8.7% 15.4 % 10.7 % 15.7% 7.0% 6.8% (0.6)%
-----------------------------------------------------------------
U.S. INVESTMENT GRADE
CORPORATE
BONDS/3/ 2.6% 9.2% 14.1 % 7.1 % 18.5% 8.7% 12.2% (2.5)%
-----------------------------------------------------------------
U.S.
HIGH YIELD
CORPORATE
BONDS/4/ 5.0% 12.5% 0.8 % (9.6)% 46.2% 15.8% 17.1% (0.7)%
-----------------------------------------------------------------
WORLD
GOVERNMENT
BONDS/5/ 35.2% 2.3% (3.4)% 15.3 % 16.2% 4.8% 15.1% 3.3 %
-----------------------------------------------------------------
-----------------------------------------------------------------
DIFFERENCE
BETWEEN HIGHEST
AND LOWEST
RETURN IN
PERCENT 33.2 10.2 18.8 24.9 30.9 11.0 10.3 5.9
</TABLE>
/1/ LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over
150 public issues of the U.S. Treasury having maturities of at least one year.
/2/ LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
/3/ LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.
/4/ LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one
year.
/5/ SALOMON BROTHERS WORLD GOVERNMENT INDEX (NON U.S.) includes over 800
bonds issued by various foreign governments or agencies, excluding those in the
U.S., but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
EXPLANATORY NOTE: The Fund invests primarily in the following sectors of the
fixed-income securities markets:
U.S. Government securities (This sector includes U.S. Treasury bonds.)
Mortgage-backed securities (This sector includes U.S. Government mortgage
securities.)
Corporate debt securities (This sector includes both U.S. corporate
investment grade bonds and U.S. high yield corporate bonds.)
Foreign securities (mainly government). (This sector includes world
government bonds.)
A-4
<PAGE>
HISTORICAL U.S. TREASURY RATES
3-Month T-Bill vs. 10-Year Treasury Notes
(CHART)
Source: Bloomberg L.P.
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the values of bonds held by the Fund will change,
causing an increase or decrease in the net asset value of the Fund. Longer-term
bonds are generally more sensitive to changes in interest rates than shorter-
term bonds. When interest rates fall, bond prices generally rise. Conversely,
when interest rates rise, bond prices generally fall.
The various sectors of the fixed-income securities markets may perform
differently under similar market conditions. A comparison of the historical
data contained in the above charts reflects the following:
. In 1987, a rise in interest rates caused many bond prices to weaken. Most
U.S. bond indices posted modestly positive total returns. By comparison,
World Government bonds enjoyed above-average returns (in U.S. dollar terms)
as interest rates in this sector declined.
. In 1988, 10-year Treasury bond yields were relatively stable and most U.S.
bond sectors earned only their coupon income, without posting significant
capital gains or losses. Outside of the U.S., World Government bonds did
not fare as well as a result of political and economic changes in many
foreign countries.
. From 1989 to 1993, U.S. interest rates generally trended lower, causing
bond prices to rise. The notable exception was in 1989 and 1990, when U.S.
High Yield Corporate bonds significantly underperformed all other U.S. bond
sectors. In 1989, institutional demand for these bonds declined sharply.
Then, in 1990, the U.S. recession caused the credit quality of many high
yield bond issuers to weaken. (By comparison, U.S. Government bonds and
high quality corporate bonds performed well since their prices rose as
rates declined.) The high yield market recovered in the early 1990s as
demand rose and stronger U.S. economic growth improved the credit quality
of many high yield issuers.
. In 1994, the Federal Reserve Board began to raise short-term rates in an
attempt to keep inflation under control. From January to August, the
Federal Reserve raised short-term rates five times, from 3.0% at the
beginning of the year to 4.75% as of August. Interest rates on intermediate
and long-term bonds rose as well, sending most bond prices lower.
A-5
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the
investment options available through our family of funds. For more information
on the Prudential Mutual Funds, including charges and expenses, contact your
Prudential Securities financial adviser or Prusec representative or telephone
the Fund at (800) 225-1852 for a free prospectus. Read the prospectus
carefully before you invest or send money.
TAXABLE BOND FUNDS
Prudential Adjustable Rate Securities Fund, Inc.
Prudential Diversified Bond Fund, Inc.
Prudential GNMA Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
TAX-EXEMPT BOND
FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
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.
EQUITY FUNDS
Prudential Allocation Fund
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible (R) Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Strategist Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
. Taxable Money Market Funds
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
. Tax-Free Money Market Funds
Prudential Tax-Free Money Fund
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
. Command Funds
Command Money Fund
Command Government Fund
Command Tax-Free Fund
. Institutional Money Market Funds
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
B-1
<PAGE>
P
R
O
S
P
E
C
T
U
S
JANUARY 3, 1995
- --------------------------------------------------------------------------------
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given
or made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS........................................................... 2
Risk Factors and Special Characteristics................................. 2
FUND EXPENSES............................................................. 4
HOW THE FUND INVESTS...................................................... 5
Investment Objective and Policies........................................ 5
Risk Factors and Special Considerations of Investing in Foreign
Securities.............................................................. 10
Risk Factors Relating to Investing in Debt Securities Rated Below
Investment Grade (Junk Bonds)........................................... 11
Hedging and Return Enhancement Strategies 12
Other Investments and Policies........................................... 15
Investment Restrictions.................................................. 18
HOW THE FUND IS MANAGED................................................... 18
Manager.................................................................. 18
Distributor.............................................................. 19
Fee Waivers and Subsidy.................................................. 21
Portfolio Transactions................................................... 21
Custodian and Transfer and Dividend Disbursing Agent..................... 21
HOW THE FUND VALUES ITS SHARES............................................ 21
HOW THE FUND CALCULATES PERFORMANCE....................................... 22
TAXES, DIVIDENDS AND DISTRIBUTIONS........................................ 22
GENERAL INFORMATION....................................................... 24
Description of Common Stock.............................................. 24
Additional Information................................................... 24
SHAREHOLDER GUIDE......................................................... 25
How to Buy Shares of the Fund............................................ 25
Alternative Purchase Plan................................................ 26
How to Sell Your Shares.................................................. 28
Conversion Feature--Class B Shares....................................... 31
How to Exchange Your Shares.............................................. 32
Shareholder Services..................................................... 33
APPENDIX.................................................................. A-1
Description of Security Ratings.......................................... A-1
Historical Performance Data--Fixed-Income
Securities.............................................................. A-4
THE PRUDENTIAL MUTUAL FUND FAMILY........................................ B-1
</TABLE>
- --------------------------------------------------------------------------------
MF166A
<TABLE>
<S> <C>
Class A: 74431J-10-2
CUSIP Nos.: Class B: 74431J-20-1
Class C: 74431J-30-0
</TABLE>
PRUDENTIAL
DIVERSIFIED BOND
FUND, INC.
PRUDENTIAL MUTUAL FUNDS
BUILDING YOUR FUTURE
ON OUR STRENGTH (SM) (LOGO)
<PAGE>
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
Statement of Additional Information
dated January 3, 1995
(as supplemented June 20, 1995)
Prudential Diversified Bond Fund, Inc. (the Fund), is an open-end,
diversified management investment company whose objective is high current income
consistent with an appropriate balance between risk and reward as determined by
the investment adviser. The Fund seeks to achieve this objective by allocating
its assets among sectors of the fixed-income securities markets, primarily U.S.
Government securities, mortgage-backed securities, corporate debt securities and
foreign securities (mainly government), based upon the investment adviser's
evaluation of current market and economic conditions. The Fund has the
flexibility to allocate its investments across different sectors of the
fixed-income securities markets in order to seek to reduce some of the risks
from negative market movements and interest rate changes in any one sector. The
Fund is not obligated to invest in all of these sectors at a given time and, at
times, may invest all of its assets in only one sector, subject to the
limitations described herein. Under normal circumstances, the Fund will maintain
at least 65% of its total assets in investment grade debt securities (as defined
herein). The Fund may also purchase preferred stock and engage in various
derivative securities transactions, including the purchase and sale of put and
call options on securities and financial indices and futures transactions on
securities, financial indices and currencies and the purchase and sale of
foreign currency exchange contracts to hedge its portfolio and to attempt to
enhance returns. The Fund may engage in short-selling and use leverage,
including reverse repurchase agreements, dollar rolls and bank borrowings, which
entail additional risks to the Fund. There can be no assurance that the Fund's
investment objective will be achieved. See ``Investment Objective and
Policies.''
The Fund's address is One Seaport Plaza, New York, New York 10292, and its
telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus dated January 3, 1995, as
supplemented on June 20, 1995, a copy of which may be obtained from the Fund
upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Cross-reference
to page in
Page Prospectus
----- ----------------
<S> <C> <C>
Investment Objective and Policies.......................................... B-2 5
Investment Restrictions.................................................... B-15 18
Directors and Officers..................................................... B-17 18
Manager.................................................................... B-19 18
Distributor................................................................ B-20 19
Portfolio Transactions and Brokerage....................................... B-22 21
Purchase and Redemption of Fund Shares..................................... B-23 25
Shareholder Investment Account............................................. B-25 32
Net Asset Value............................................................ B-28 21
Taxes...................................................................... B-28 22
Performance Information.................................................... B-30 22
Custodian, Transfer and Dividend Disbursing Agent and Independent
Accountants.............................................................. B-32 21
Independent Auditors' Report............................................... B-33 --
Financial Statements....................................................... B-34 --
- -------------------------------------------------------------------------------------------------------
MF166B
</TABLE>
<PAGE>
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is high current income consistent with an
appropriate balance between risk and reward as determined by the investment
adviser. The Fund seeks to achieve this objective by allocating its assets among
sectors of the fixed-income securities markets, primarily U.S. Government
securities, mortgage-backed securities, corporate debt securities and foreign
securities (mainly government), based upon the investment adviser's evaluation
of current market and economic conditions. 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.
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.
Securities Issued or Guaranteed by U.S. Government Agencies and
Instrumentalities. The Fund may invest in securities issued by agencies of the
U.S. Government or instrumentalities of the U.S. Government. These obligations,
including those which are guaranteed by Federal agencies or instrumentalities,
may or may not be backed by the full faith and credit of the United States.
Obligations of the Government National Mortgage Association (GNMA), the Farmers
Home Administration and the Small Business Administration are backed by the full
faith and credit of the United States. In the case of securities not backed by
the full faith and credit of the United States, the Fund must look principally
to the agency issuing or guaranteeing the obligation for ultimate repayment and
may not be able to assert a claim against the United States if the agency or
instrumentality does not meet its commitments. Securities in which the Fund may
invest which are not backed by the full faith and credit of the United States
include obligations such as those issued by the Federal Home Loan Bank, the
Federal Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage
Association (FNMA), the Student Loan Marketing Association, Resolution Funding
Corporation and the Tennessee Valley Authority, each of which has the right to
borrow from the U.S. Treasury to meet its obligations, and obligations of the
Farm Credit System, the obligations of which may be satisfied only by the
individual credit of the issuing agency. FHLMC investments may include
collateralized mortgage obligations. See ``Other Investments and Investment
Techniques'' below.
Stripped U.S. Government Securities. The Fund may invest in component parts
of U.S. Government securities, namely either the corpus (principal) of such
obligations or one or more 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.
The values of U.S. Government securities (like those of other fixed-income
securities generally) will change as interest rates fluctuate. During periods of
falling U.S. interest rates, the values of U.S. Government securities generally
rise and, 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-term maturities.
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
B-2
<PAGE>
<PAGE>
circumstances, however, it is likely that the proceeds of such sales would be
reinvested in lower yielding securities. See ``Risks of Options Transactions.''
Mortgage-Backed Securities
Mortgage-Related Securities Issued by U.S. Government Agencies and
Instrumentalities. The Fund may invest in mortgage-backed securities, including
those which represent undivided ownership interests in pools of mortgages. The
U.S. Government or the issuing agency or instrumentality guarantees the payment
of interest on and principal of these securities. However, the guarantees do not
extend to the yield or value of the securities nor do the guarantees extend to
the yield or value of the Fund's shares. 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 predominantly principal. All of these
mortgages can be used to create pass-through securities. A pass-through security
is formed when mortgages are pooled together and undivided interests in the pool
or pools are sold. The cash flow from the mortgages is passed through to the
holders of the securities in the form of periodic payments of interest,
principal and prepayments (net of a service fee). Prepayments occur when the
holder of an undivided mortgage prepays the remaining principal before the
mortgage's scheduled maturity date. As a result of the pass-through of
prepayments of principal on the underlying securities, mortgage-backed
securities are often subject to more rapid prepayment of principal than their
stated maturity would indicate. The remaining expected average life of a pool of
mortgage loans underlying a mortgage-backed security is a prediction of when the
mortgage loans will be repaid and is based upon a variety of factors, such as
the demographic and geographic characteristics of the borrowers and the
mortgaged properties, the length of time that each of the mortgage loans has
been outstanding, the interest rates payable on the mortgage loans and the
current interest rate environment.
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.
GNMA Certificates. Certificates of Government National Mortgage Association
(GNMA Certificates) are mortgage-backed securities, which evidence an undivided
interest in a pool or pools of mortgages. GNMA Certificates that the Fund may
purchase are the ``modified pass-through'' type, which entitle the holder to
receive timely payment of all interest and principal payments due on the
mortgage pool, net of fees paid to the ``issuer'' and GNMA, regardless of
whether or not the mortgagor actually makes the payment. The GNMA Certificates
will represent a pro rata interest in one or more pools of the following types
of mortgage loans: (i) fixed rate level payment mortgage loans; (ii) fixed rate
graduated payment mortgage loans; (iii) fixed rate growing equity mortgage
loans; (iv) fixed rate mortgage loans secured by manufactured (mobile) homes;
(v) mortgage loans on 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, as supplemented, 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.
B-3
<PAGE>
<PAGE>
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 Securities. The FHLMC was created in 1970 through enactment of Title
III of the Emergency Home Finance Act of 1970 (FHLMC Act). Its purpose is to
promote development of a nationwide secondary market in conventional residential
mortgages.
The FHLMC issues two types of mortgage pass-through securities, mortgage
participation certificates (PCs) and guaranteed mortgage certificates (GMCs).
PCs resemble GNMA Certificates in that each PC represents a pro rata share of
all interest and principal payments made and owned on the underlying pool. The
FHLMC guarantees timely monthly payment of interest on PCs and the ultimate
payment of principal.
GMCs also represent a pro rata interest in a pool of mortgages. However,
these instruments pay interest semi-annually and return principal once a year in
guaranteed minimum payments. The expected average life of these securities is
approximately ten years.
FHLMC Certificates. FHLMC is a corporate instrumentality of the United
States created pursuant to 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. A FHLMC Certificate group may
include whole loans, participation interests in whole loans and undivided
interests in whole loans and participations comprising another FHLMC Certificate
group.
The market value of mortgage securities, like other securities, will
generally vary inversely with changes in market interest rates, declining when
interest rates rise and rising when interest rates decline. However, mortgage
securities, while having comparable risk of decline during periods of rising
rates, usually have less potential for capital appreciation than other
investments of comparable maturities due to the likelihood of increased
prepayments of mortgages as interest rates decline. In addition, to the extent
such mortgage securities are purchased at a premium, mortgage foreclosures and
unscheduled principal prepayments generally will result in some loss of the
holders' principal to the extent of the premium paid. On the other hand, if such
mortgage securities are purchased at a discount, an unscheduled prepayment of
principal will increase current and total returns and will accelerate the
recognition of income which when distributed to shareholders will be taxable as
ordinary income.
Adjustable Rate Mortgage Securities. Adjustable rate mortgage securities
(ARMs) 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
B-4
<PAGE>
<PAGE>
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. In reliance on a Securities and
Exchange Commission (the SEC) interpretation, the Fund's investments in certain
qualifying collateralized mortgage obligations (CMOs), including CMOs that have
elected to be treated as Real Estate Mortgage Investment Conduits (REMICs), are
not subject to the limitation of the Investment Company Act of 1940, as amended
(Investment Company Act), on acquiring interests in other investment companies.
In order to be able to rely on the SEC's interpretation, the CMOs and REMICs
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 do not meet the above requirements, the Fund may not
invest more than 10% of its assets in all such entities and may not acquire more
than 3% of the voting securities of any single such entity.
The Fund will invest in both ARMs which are pass-through mortgage
securities collateralized by adjustable rate mortgages, and Fixed Rate Mortgage
Securities (FRMs), which are collateralized by fixed rate mortgages.
Corporate and Other Debt Obligations
Zero Coupon, Pay-in-Kind or Deferred Payment Securities
The Fund may also invest in zero coupon, pay-in-kind or deferred payment
securities. Zero coupon securities are securities that are sold at a discount to
par value and on which interest payments are not made during the life of the
security. Upon maturity, the holder is entitled to receive the par value of the
security. While interest payments are not made on such securities, holders of
such securities are deemed to have received annually ``phantom income.'' The
Fund accrues income with respect to these securities prior to the receipt of
cash payments. Pay-in-kind securities are securities that have interest payable
by delivery of additional securities. Upon maturity, the holder is entitled to
receive the aggregate par value of the securities. Deferred payment securities
are securities that remain a zero coupon security until a predetermined date, at
which time the stated coupon rate becomes effective and interest becomes payable
at regular intervals. Zero coupon, pay-in-kind and deferred payment securities
may be subject to greater fluctuation in value and lesser liquidity in the event
of adverse market conditions than comparable rated securities paying cash
interest at regular intervals.
Municipal Securities
Municipal securities include notes and bonds issued by or on behalf of
states, territories and possessions of the United States and their political
subdivisions, agencies and instrumentalities and the District of Columbia, the
interest on which is generally eligible for exclusion from federal income tax
and, in certain instances, applicable state or local income and personal
property taxes. Such securities are traded primarily in the over-the-counter
market. Under normal market conditions, the Fund intends to invest no more than
5% of its net assets in municipal securities.
Municipal Bonds. Municipal bonds are issued to obtain funds for various
public purposes, including the construction of a wide range of public facilities
such as airports, bridges, highways, housing, hospitals, mass transportation,
schools, streets, water and sewer works and gas and electric utilities.
Municipal bonds also may be issued in connection with the refunding of
outstanding obligations and obtaining funds to lend to other public institutions
or for general operating expenses.
The two principal classifications of municipal bonds are ``general
obligation'' and ``revenue.'' General obligation bonds are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source.
Industrial development bonds (IDBs) are issued by or on behalf of public
authorities to obtain funds to provide various privately-operated facilities for
business and manufacturing, housing, sports, pollution control, and for airport,
mass transit, port and parking facilities. Although IDBs are issued by municipal
authorities, they are generally secured by the revenues derived from payments of
the industrial user. The payment of the principal and interest on IDBs is
dependent solely on the ability of the user of the facilities financed by the
bonds to meet its financial obligations and the pledge, if any, of real and
personal property so financed as security for the payment.
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Municipal Notes. Municipal notes generally are used to provide for
short-term capital needs and generally have maturities of one year or less.
Municipal notes include:
1. Tax Anticipation Notes. Tax Anticipation Notes are issued to finance
working capital needs of municipalities. Generally, they are issued in
anticipation of various seasonal tax revenues, such as income, sales, use and
business taxes, and are payable from these specific future taxes.
2. Revenue Anticipation Notes. Revenue Anticipation Notes are issued in the
expectation of reception of other kinds of revenue, such as federal revenues
available under the Federal Revenue Sharing Programs.
3. Bond Anticipation Notes. Bond Anticipation Notes are issued to provide
interim financing until long-term financing can be arranged. In most cases, the
long-term bonds then provide the money for the repayment of the Notes.
4. Construction Loan Notes. Construction Loan Notes are sold to provide
construction financing. Permanent financing, the proceeds of which are applied
to the payment of Construction Loan Notes, is sometimes provided by a commitment
by the GNMA to purchase the loan, accompanied by a commitment by the Federal
Housing Administration to insure mortgage advances thereunder. In other
instances, permanent financing is provided by commitments of banks to purchase
the loan.
Tax-Exempt Commercial Paper. Issues of tax-exempt commercial paper, the
interest on which is generally exempt from federal income taxes, typically are
represented by short-term, unsecured, negotiable promissory notes. These
obligations are issued by agencies of state and local governments to finance
seasonal working capital needs of municipalities or to provide interim
construction financing and are paid from general revenues of municipalities or
are refinanced with long-term debt. In most cases, tax-exempt commercial paper
is backed by letters of credit, lending agreements, note repurchase agreements
or other credit facility agreements offered by banks or other institutions and
is actively traded.
Floating Rate and Variable Rate Securities. The Fund is permitted to invest
in floating rate and variable rate municipal securities, including participation
interests therein and inverse floaters. Floating or variable rate securities
often have a rate of interest that is set as a specific percentage of a
designated base rate, such as the rate on Treasury Bonds or Bills or the prime
rate at a major commercial bank. These securities also allow the holder to
demand payment of the obligation on short notice at par plus accrued interest,
which amount may be more or less than the amount the holder paid for them.
Variable rate securities provide for a specified periodic adjustment in the
interest rate. The interest rate on floating rate securities changes whenever
there is a change in the designated base interest rate. Floating rate and
variable rate securities typically have long maturities but afford the holder
the right to demand payment at earlier dates. Such floating rate and variable
rate securities will be treated as having maturities equal to the period of
adjustment of the interest rate.
An inverse floater is a debt instrument with a floating or variable
interest rate that moves in the opposite direction of the interest rate on
another security or the value of an index. Changes in the interest rate on the
other security or index inversely affect the residual interest rate paid on the
inverse floater, with the result that the inverse floater's price will be
considerably more volatile than that of a fixed rate bond. The market for
inverse floaters is relatively new.
Foreign Government Securities
Brady Bonds. The Fund is permitted to invest in debt obligations commonly
known as ``Brady Bonds'' which are created through the exchange of existing
commercial bank loans to foreign entities for new obligations in connection with
debt restructurings under a plan introduced by former U.S. Secretary of the
Treasury, Nicholas F. Brady (the Brady Plan). Brady Bonds have been issued in
connection with the restructuring of the bank loans, for example, of the
governments of Mexico, Venezuela and Argentina.
Brady Bonds have been issued only recently, and, accordingly, do not have a
long payment history. They may be collateralized or uncollateralized and issued
in various currencies (although most are dollar-denominated) and they are
actively traded in the over-the-counter secondary market.
Dollar-denominated, collateralized Brady Bonds, which may be fixed rate par
bonds or floating rate discount bonds, are generally collateralized in full as
to principal due at maturity by U.S. Treasury zero coupon obligations which have
the same maturity as the Brady Bonds. Interest payments on these Brady Bonds
generally are collateralized by cash or securities in an amount that, in the
case of fixed rate bonds, is equal to at least one year of rolling interest
payments based on the applicable interest rate at that time and is adjusted at
regular intervals thereafter. Certain Brady Bonds are entitled to ``value
recovery payments'' in certain circumstances, which in effect constitute
supplemental interest payments but generally are not collateralized. Brady Bonds
are often viewed as having three or four valuation components: (i) the
collateralized repayment of principal at final maturity; (ii) the collateralized
interest payments; (iii) the uncollateralized interest payments; and (iv) any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constitute the ``residual risk''). In the event of a default with
respect to collateralized Brady Bonds as a result of which the payment
obligations of the issuer are accelerated, the U.S. Treasury zero coupon
obligations held as collateral for the payment of principal will not
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be distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds which will continue to be
outstanding at which time the face amount of the collateral will equal the
principal payments which would have then been due on the Brady Bonds in the
normal course. In addition, in light of the residual risk of Brady Bonds and,
among other factors, the history of defaults with respect to commercial bank
loans by public and private entities of countries issuing Brady Bonds,
investments in Brady Bonds are to be viewed as speculative.
Options on Securities
The Fund may purchase put and call options and write covered put and call
options on debt securities, aggregates of debt securities or indices of prices
thereof, other financial indices and U.S. and foreign government debt
securities. These may include options traded on U.S. or foreign exchanges and
options traded on U.S. or foreign over-the-counter markets (OTC Options)
including OTC options with primary U.S. government securities dealers recognized
by the Federal Reserve Bank of New York.
The purchaser of a call option has the right, for a specified period of
time, to purchase the securities subject to the option at a specified price (the
``exercise price'' or ``strike price''). By writing a call option, the Fund
becomes obligated during the term of the option, upon exercise of the option, to
deliver the underlying securities or a specified amount of cash to the purchaser
against receipt of the exercise price. When the Fund writes a call option, the
Fund loses the potential for gain on the underlying securities in excess of the
exercise price of the option during the period that the option is open.
The purchaser of a put option has the right, for a specified period of
time, to sell the securities subject to the option to the writer of the put at
the specified exercise price. By writing a put option, the Fund becomes
obligated during the term of the option, upon exercise of the option, to
purchase the securities underlying the option at the exercise price. The Fund
might, therefore, be obligated to purchase the underlying securities for more
than their current market price.
The writer of an option retains the amount of the premium, although this
amount may be offset or exceeded, in the case of a covered call option, by a
decline and, in the case of a covered put option, by an increase in the market
value of the underlying security during the option period.
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
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exercised and the price of the underlying security declines, the amount of the
decline will be offset in part, or entirely, by the premium received.
Prior to being notified of exercise of the option, the writer of an
exchange-traded option that wishes to terminate its obligation may effect a
``closing purchase transaction'' by buying an option of the same series as the
option previously written. (Options of the same series are options with respect
to the same underlying security, having the same expiration date and the same
strike price.) The effect of the purchase is that the writer's position will be
cancelled by the exchange's affiliated clearing organization. Likewise, an
investor who is the holder of an exchange-traded option may liquidate a position
by effecting a ``closing sale transaction'' by selling an option of the same
series as the option previously purchase. There is no guarantee that either a
closing purchase or a closing sale transaction can be effected.
Exchange-traded options are issued by a clearing organization affiliated
with the exchange on which the option is listed which, in effect, gives its
guarantee to every exchange-traded option transaction. In contrast, OTC options
are contracts between the Fund and its contra-party with no clearing
organization guarantee. Thus, when the Fund purchases an OTC option, it relies
on the dealer from which it has purchased the OTC option to make or take
delivery of the securities underlying the option. Failure by the dealer to do so
would result in the loss of the premium paid by the Fund as well as the loss of
the expected benefit of the transaction. The Board of Directors of the Fund will
approve a list of dealers with which the Fund may engage in OTC options.
When the Fund writes an OTC option, it generally will be able to close out
the OTC option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Fund originally wrote the OTC option.
While the Fund will enter into OTC options only with dealers which agree to, and
which are expected to be capable of, entering into closing transactions with the
Fund, there can be no assurance that the Fund will be able to liquidate an OTC
option at a favorable price at any time prior to expiration. Until the Fund is
able to effect a closing purchase transaction in a covered OTC call option the
Fund has written, it will not be able to liquidate securities used as cover
until the option expires or is exercised or different cover is substituted. In
the event of insolvency of the contra-party, the Fund may be unable to liquidate
an OTC option.
OTC options purchased by the Fund will be treated as illiquid securities
subject to any applicable limitation on such securities. Similarly, the assets
used to ``cover'' OTC options written by the Fund will be treated as illiquid
unless the OTC options are sold to qualified dealers who agree that the Fund may
repurchase any OTC options it writes for a maximum price to be calculated by a
formula set forth in 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 put 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. 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.
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Options on GNMA Certificates. Options on GNMA Certificates are not
currently traded on any Exchange. However, the Fund may purchase and write such
options should they commence trading on any Exchange and may purchase or write
OTC Options on GNMA Certificates.
Since the remaining principal balance of GNMA Certificates declines each
month as a result of mortgage payments, the Fund, as a writer of a covered GNMA
call holding GNMA Certificates as ``cover'' to satisfy its delivery obligation
in the event of assignment of an exercise notice, may find that its GNMA
Certificates no longer have a sufficient remaining principal balance for this
purpose. Should this occur, the Fund will enter into a closing purchase
transaction or will purchase additional GNMA Certificates from the same pool (if
obtainable) or replacement GNMA Certificates in the cash market in order to
remain covered.
A GNMA Certificate held by the Fund to cover an option position in any but
the nearest expiration month may cease to represent cover for the option in the
event of a decline in the GNMA coupon rate at which new pools are originated
under the FHA/VA loan ceiling in effect at any given time. Should this occur,
the Fund will no longer be covered, and the Fund will either enter into a
closing purchase transaction or replace the GNMA Certificate with a GNMA
Certificate which represents cover. When the Fund closes its position or
replaces the GNMA Certificate, it may realize an unanticipated loss and incur
transaction costs.
Risks of Options Transactions
An exchange-traded option position may be closed out only on an Exchange
which provides a secondary market for an option of the same series. Although the
Fund will generally purchase or write only those options for which there appears
to be an active secondary market, there is no assurance that a liquid secondary
market on an Exchange will exist for any particular option at any particular
time, and for some exchange-traded options, no secondary market on an Exchange
may exist. In such event, it might not be possible to effect closing
transactions in particular options, with the result that the Fund would have to
exercise its exchange-traded options in order to realize any profit and may
incur transaction costs in connection therewith. If the Fund as a covered call
option writer is unable to effect a closing purchase transaction in a secondary
market, it will not be able to sell the underlying security until the option
expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an Exchange include
the following: (a) insufficient trading interest in certain options; (b)
restrictions on transactions imposed by an Exchange; (c) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities; (d) interruption of the normal
operations on an Exchange; (e) inadequacy of the facilities of an Exchange or
clearinghouse, such as the Options Clearing Corporation (the OCC) to handle
current trading volume; or (f) a decision by one or more Exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the secondary market on that Exchange (or in that class or series
of options) would cease to exist, although outstanding options on that Exchange
that had been issued by the OCC as a result of trades on that Exchange would
generally continue to be exercisable in accordance with their terms.
In the event of the bankruptcy of a broker through which the Fund engages
in options transactions, the Fund could experience delays and/or losses in
liquidating open positions purchased or sold through the broker and/or incur a
loss of all or part of its margin deposits with the broker. Similarly, in the
event of the bankruptcy of the writer of an OTC option purchased by the Fund,
the Fund could experience a loss of all or part of the value of the option.
Transactions are entered into by the Fund only with brokers or financial
institutions deemed creditworthy by the investment adviser.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the option markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be reflected
in the option markets.
Risks of Options on Foreign Currencies
Options on foreign currencies involve the currencies of two nations and
therefore, developments in either or both countries affect the values of options
on foreign currencies. Risks include those described in the Prospectus under
``How the Fund Invests--Risk Factors and Special Considerations of Investing in
Foreign Securities,'' including government actions affecting currency valuation
and the movements of currencies from one country to another. The quantity of
currency underlying option contracts represent odd lots in a market dominated by
transactions between banks; this can mean extra transaction costs upon exercise.
Option markets may be closed while round-the-clock interbank currency markets
are open, and this can create price and rate discrepancies.
Futures Contracts
As a purchaser of a 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, foreign currencies or composite foreign
currencies
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(such as the European Currency Unit) 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 ``Risks of
Options Transactions'' above.
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 or cash, 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 (or currency) and
the same delivery date. If the offsetting sale price exceeds the purchase price,
the purchaser would realize a gain, whereas if the purchase price exceeds the
offsetting sale price, the purchaser would realize a loss. There is no assurance
that the Fund will be able to enter into a closing transaction.
When the Fund enters into a futures contract it is initially required to
deposit with its Custodian, in a segregated account in the name of the broker
performing the transaction, an ``initial margin'' of cash or U.S. Government
securities equal to approximately 2-3% of the contract amount. Initial margin
requirements are established by the Exchanges on which futures contracts trade
and may, from time to time, change. In addition, brokers may establish margin
deposit requirements in excess of those required by the Exchanges.
Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing of
funds by a brokers' client but is, rather, a good faith deposit on a futures
contract which will be returned to the Fund upon the proper termination of the
futures contract. The margin deposits made are marked-to-market daily and the
Fund may be required to make subsequent deposits into the segregated account,
maintained at its Custodian for that purpose, of cash or U.S. Government
securities, called ``variation margin'', in the name of the broker, which are
reflective of price fluctuations in the futures contract.
Options on Futures Contracts
The Fund may purchase and sell call and put options on futures contracts
which are traded on an Exchange and enter into closing transactions with respect
to such options to terminate an existing position. An option on a futures
contract gives the purchaser the right (in return for the premium paid), and the
writer the obligation, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the term of the option. Upon
exercise of the option, the assumption of an offsetting futures position by the
writer and holder of the option will be accompanied by delivery of the
accumulated cash balance in the writer's futures margin account which represents
the amount by which the market price of the futures contract at exercise
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option on the futures contract.
The Fund may only write ``covered'' put and call options on futures
contracts. The Fund will be considered ``covered'' with respect to a call option
it writes on a futures contract if the Fund owns the assets which are
deliverable under the futures contract or an option to 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
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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.
Under regulations of the Commodity Exchange Act, investment companies
registered under the Investment Company Act are exempt from the definition of
``commodity pool operator,'' subject to compliance with certain conditions. The
exemption is conditioned upon a requirement that all of the Fund's futures or
options transactions constitute bona fide hedging transactions within the
meaning of the regulations of the Commodity Futures Trading Commission (CFTC).
The Fund will use futures and options on futures in a manner consistent with
this requirement. The Fund may also enter into futures or related options
contracts for return enhancement and risk management purposes if the aggregate
initial margin and option premiums do not exceed 5% of the liquidation value of
the Fund's total assets, after taking into account unrealized profits and
unrealized losses on any such contracts, provided, however, that in the case of
an option that is in-the-money, the in-the-money amount may be excluded in
computing such 5%. The above restriction does not apply to the purchase and sale
of futures and related options contracts for bona fide hedging purchases.
In order to assure that the Fund is entering into transactions in futures
contracts for hedging purposes as such term is defined by the CFTC, either: (1)
a substantial majority (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
hedge effectively its portfolio.
In the event of the bankruptcy of a broker through which the Fund engages
in transactions in futures or options thereon, the Fund could experience delays
and/or losses in liquidating open positions purchased or sold through the broker
and/or incur a loss of all or part of its margin deposits with the broker.
Transactions are entered into by the Fund only with brokers or financial
institutions deemed creditworthy by the investment adviser.
There are risks inherent in the use of futures contracts and options
transactions for the purpose of hedging the Fund's portfolio securities. One
such risk which may arise in employing futures contracts to protect against the
price volatility of portfolio securities is that the prices of securities
subject to futures contracts (and thereby the futures contract prices) may
correlate imperfectly with the behavior of the cash prices of the Fund's
portfolio securities. Another such risk is that prices of futures contracts may
not move in tandem with the changes in prevailing interest rates against which
the Fund seeks a hedge. A correlation may also be distorted by the fact that the
futures 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.
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There may exist an imperfect correlation between the price movements of
futures contracts purchased by the Fund and the movements in the prices of the
securities (or currencies) which are the subject of the hedge. If participants
in the futures market elect to close out their contracts through offsetting
transactions rather than meet margin deposit requirements, distortions in the
normal relationships between the debt securities (or currencies) and futures
market could result. Price distortions could also result if investors in futures
contracts elect to make or take delivery of underlying securities (or
currencies) rather than engage in closing transactions due to the resultant
reduction in the liquidity of the futures market. In addition, due to the fact
that, from the point of view of speculators, the deposit requirements in the
futures markets are less onerous than margin requirements in the cash market,
increased participation by speculators in the futures markets could cause
temporary price distortions. Due to the possibility of price distortions in the
futures market and because of the imperfect correlation between movements in the
prices of securities (or currencies) and movements in the prices of futures
contracts, a correct forecast of interest rate trends by the investment adviser
may still not result in a successful hedging transaction.
Compared to the purchase or sale of futures contracts, the purchase and
sale of call or put options on futures contracts involves less potential risk to
the Fund because the maximum amount at risk is the premium paid for the options
(plus transaction costs). However, there may be circumstances when the purchase
of a call or put option on a futures contract would result in a loss to the Fund
notwithstanding that the purchase or sale of a futures contract would not result
in a loss, as in the instance where there is no movement in the prices of the
futures contracts or underlying securities (or currencies).
Risks Related to Forward Foreign Currency Exchange Contracts
The Fund may enter into forward foreign currency exchange contracts in
several circumstances. When the Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, or when the Fund
anticipates the receipt in a foreign currency of dividends or interest payments
on a security which it holds, the Fund may desire to ``lock-in'' the U.S. dollar
price of the security or the U.S. dollar equivalent of such dividend or interest
payment, as the case may be. By entering into a forward contract for a fixed
amount of dollars, for the purchase or sale of the amount of foreign currency
involved in the underlying transactions, the Fund may be able to protect itself
against a possible loss resulting from an adverse change in the relationship
between the U.S. dollar and the foreign currency during the period between the
date on which the security is purchased or sold, or on which the dividend or
interest payment is declared, and the date on which such payments are made or
received.
Additionally, when the investment adviser believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, the Fund may enter into a forward contract for a fixed amount of
dollars, to sell the amount of foreign currency approximating the value of some
or all of the Fund's portfolio securities denominated in such foreign currency.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the forward
contract is entered into and the date it matures. The projection of short-term
currency market movement is extremely difficult, and the successful execution of
a short-term hedging strategy is highly uncertain. The Fund's Custodian will
place cash or liquid securities into a segregated account of the Fund in an
amount equal to the value of the Fund's total assets committed to the
consummation of forward foreign currency exchange contracts. If the value of the
securities placed in the segregated account declines, additional cash or
securities will be placed in the account on a daily basis so that the value of
the account will equal the amount of the Fund's commitments with respect to such
contracts.
The Fund generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, the Fund may
either sell the portfolio security and make delivery of the foreign currency, or
it may retain the security and terminate its contractual obligation to deliver
the foreign currency by purchasing an ``offsetting'' contract with the same
currency trader obligating it to purchase, on the same maturity date, the same
amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the forward contract.
Accordingly, if a decision is made to sell the security and make delivery of the
foreign currency and if the market value of the security is less than the amount
of foreign currency that the Fund is obligated to deliver, then it would be
necessary for the Fund to purchase additional foreign currency on the spot
market (and bear the expense of such purchase).
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. Should forward contract prices decline
during the period between the Fund's entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the Fund will realize a gain to the
extent that the price of the currency it has agreed to sell exceeds the price of
the currency it has agreed to purchase. Should forward contract prices increase,
the Fund will suffer a loss to the extent that the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell.
The Fund's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. Of course, the Fund is
not required to enter into such transactions with regard to its foreign
currency-denominated securities. It also should
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be recognized that this method of protecting the value of the Fund's portfolio
securities against a decline in the value of a currency does not eliminate
fluctuations in the underlying prices of the securities which are unrelated to
exchange rates. Additionally, although such contracts tend to minimize the risk
of loss due to a decline in the value of the hedged currency, at the same time
they tend to limit any potential gain which might result should the value of
such currency increase.
Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend physically to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will do so from time to time, and investors should
be aware of the costs of currency conversion. Although foreign exchange dealers
do not charge a fee for conversion, they do realize a profit based on the
difference (the spread) between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
Defensive Strategy and Short-Term Investments
When conditions dictate a defensive strategy, the Fund may temporarily
invest in money market instruments, including commercial paper of corporations,
certificates of deposit, bankers' acceptances and other obligations of domestic
and foreign banks, obligations issued or guaranteed by the U.S. Government, its
agencies or its instrumentalities and repurchase agreements (described more
fully below). Such investments may be subject to certain risks, including future
political and economic developments, the possible imposition of withholding
taxes on interest income, the seizure or nationalization of foreign deposits and
foreign exchange controls or other restrictions.
When-Issued and Delayed Delivery Securities
From time to time, in the ordinary course of business, the Fund may
purchase or sell securities on a when-issued or delayed delivery basis, that is,
delivery and payment can take place a month or more after the date of the
transaction. The Fund will limit such purchases to those in which the date for
delivery and payment falls within 120 days of the date of the commitment. The
Fund will make commitments for such when-issued transactions only with the
intention of actually acquiring the securities. The Fund's Custodian will
maintain, in a separate account of the Fund, cash, U.S. Government securities or
other liquid high-grade debt obligations having a value equal to or greater than
such commitments. The Fund has not established any additional limitations with
respect to when-issued and delayed delivery securities. If the Fund chooses to
dispose of the right to acquire a when-issued security prior to its acquisition,
it could, as with the disposition of any other portfolio security, incur a gain
or loss due to market fluctuations.
Repurchase Agreements
The Fund's repurchase agreements will be collateralized by U.S. Government
obligations. The Fund will enter into repurchase transactions only with parties
meeting creditworthiness standards approved by the Fund's 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 may participate in a joint repurchase agreement account with other
investment companies managed by Prudential Mutual Fund Management, Inc. (PMF or
the Manager) pursuant to an order of the SEC. On a daily basis, any uninvested
cash balances of the Fund may be aggregated with those of such investment
companies and invested in one or more repurchase agreements. Each fund
participates in the income earned or accrued in the joint account based on the
percentage of its investment.
Lending of Securities
Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to brokers, dealers and financial institutions, provided
that outstanding loans do not exceed in the aggregate 30% of the value of the
Fund's total assets and provided that such loans are callable at any time by the
Fund and are at all times secured by cash or equivalent collateral that is equal
to at least the market value, determined daily, of the loaned securities. The
advantage of such loans is that the Fund continues to receive payments in lieu
of the interest and dividends of the loaned securities, while at the same time
earning interest either directly from the borrower or on the collateral which
will be invested in short-term obligations.
A loan may be terminated by the Fund at any time without cause. If the
borrower fails to maintain the requisite amount of collateral, the loan
automatically terminates, and the Fund could use the collateral to replace the
securities while holding the borrower liable for any excess of replacement cost
over collateral. As with any extensions of credit, there are risks of delay in
recovery and in some cases loss of rights in the collateral should the borrower
of the securities fail financially. However, these loans of portfolio securities
will only be made to firms determined to be creditworthy pursuant to procedures
approved by the Board of Directors of the Fund. On termination of the loan, the
borrower is required to return the securities to the Fund, and any gain or loss
in the market price during the loan would inure to the Fund.
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Since voting or consent rights which accompany loaned securities pass to
the borrower, the Fund will follow the policy of calling the loan, in whole or
in part as may be appropriate, to permit the exercise of such rights if the
matters involved would have a material effect on the Fund's investment in the
securities which are the subject of the loan. The Fund will pay reasonable
finders', administrative and custodial fees in connection with a loan of its
securities or may share the interest earned on collateral with the borrower.
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 (either within or outside of the United States) or
legal or contractual restrictions on resale. Historically, illiquid securities
have included securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of 1933, as
amended (Securities Act), securities which are otherwise not readily marketable
and repurchase agreements having a maturity of longer than seven days.
Securities which have not been registered under the Securities Act are referred
to as private placements or restricted securities and are purchased directly
from the issuer or in the secondary market. Mutual funds do not typically hold a
significant amount of these restricted or other illiquid securities because of
the potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and a mutual fund might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. A mutual fund might also
have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a ``safe harbor'' from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The investment adviser anticipates that the
market for certain restricted securities such as institutional commercial paper
and foreign securities will expand further as a result of this regulation and
the development of automated systems for the trading, clearance and settlement
of unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc.
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act, commercial paper and municipal lease obligations 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). With respect to municipal lease obligations, the
investment adviser will also consider: (1) the willingness of the municipality
to continue, annually or biannually, to appropriate funds for payment of the
lease; (2) the general credit quality of the municipality and the essentiality
to the municipality of the property covered by the lease; (3) an analysis of
factors similar to that performed by nationally recognized statistical rating
organizations (NRSROs) in evaluating the credit quality of a municipal lease
obligation, including (i) whether the lease can be cancelled; (ii) if
applicable, what assurance there is that the assets represented by the lease can
be sold; (iii) the strength of the lessee's general credit (e.g., its debt,
administrative, economic and financial characteristics); (iv) the likelihood
that the municipality will discontinue appropriating funding for the leased
property because the property is no longer deemed essential to the operations of
the municipality (e.g., the potential for an event of nonappropriation); and (v)
the legal recourse in the event of failure to appropriate; and (4) any other
factors unique to municipal lease obligations as determined by the investment
adviser. 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 NRSROs, 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.
Interest Rate Swap Transactions
The Fund may enter into interest rate swaps, on either an asset-based or
liability-based basis, depending on whether it is hedging its assets or its
liabilities. Under normal circumstances, the Fund will enter into interest rate
swaps on a net basis, i.e., the two payment streams netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. The net amount of
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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 a segregated account will be the full amount of
the Fund's obligations, if any, with respect to such interest rate swaps,
accrued on a daily basis. Inasmuch as segregated accounts are established for
these hedging transactions the investment adviser and the Fund believe such
obligations do not constitute senior securities. 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 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.
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 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.
Securities of Other Investment Companies
The Fund may invest up to 10% of its total assets in securities of other
investment companies. Generally, the Fund does not intend to invest in such
securities. If the Fund does invest in securities of other investment companies,
shareholders of the Fund may be subject to duplicate management and advisory
fees.
Portfolio Turnover
As a result of the investment policies described above, the Fund may engage
in a substantial number of portfolio transactions, but the Fund's portfolio
turnover rate is not expected to exceed 300%. The portfolio turnover rate is
generally the percentage computed by dividing the lesser of portfolio purchases
or sales (excluding all securities, including options, whose maturities or
expiration date at acquisition were one year or less) by the monthly average
value of the portfolio. High portfolio turnover (over 100%) involves
correspondingly greater brokerage commissions and other transaction costs, which
are borne directly by the Fund. In addition, high portfolio turnover may also
mean that a proportionately greater amount of distributions to shareholders will
be taxed as ordinary income rather than long-term capital gains compared to
investment companies with lower portfolio turnover. See ``Portfolio Transactions
and Brokerage'' and ``Taxes.''
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 voting shares represented at a
meeting at which more than 50% of the outstanding voting shares are present in
person or represented by proxy or (ii) more than 50% of the outstanding voting
shares.
The Fund may not:
1. Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of transactions); provided that
the deposit or payment by the Fund of initial or maintenance margin in
connection with futures or options 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.
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3. Issue senior securities, borrow money or pledge its assets, except that
the Fund may borrow from banks up to 33 1/3% of the value of its total assets
(calculated when the loan is made) for temporary, extraordinary or emergency
purposes, for the clearance of transactions or for investment purposes. The Fund
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, forward foreign currency exchange
contracts and collateral arrangements relating thereto, and collateral
arrangements with respect to interest rate swap transactions, reverse repurchase
agreements, dollar roll transactions, options, futures contracts and options
thereon and obligations of the Fund to Directors pursuant to deferred
compensation arrangements are not 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 or instrumentalities) if as a result: (i) with respect to 75% of
the Fund's 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 the
investment) would be invested in a single industry.
5. Purchase any security if as a result the Fund would then have more than
5% of its total assets (determined at the time of investment) invested in
securities of companies (including predecessors) less than three years old,
except that the Fund may invest in the securities of any U.S. Government agency
or instrumentality, and in any security guaranteed by such an agency or
instrumentality.
6. Buy or sell real estate or interests in real estate, except that the
Fund may purchase and sell 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. Buy or sell commodities or commodity contracts, except that the Fund
may purchase and sell financial futures contracts and options thereon. (For
purposes of this restriction, futures contracts on securities, currencies and on
securities or financial indices and forward foreign currency exchange contracts
are not deemed to be commodities or commodity contracts.)
8. 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.
9. Make investments for the purpose of exercising control or management.
10. 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 of one or more investment companies, or except as part of a merger,
consolidation or other acquisition.
11. 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.
12. Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities limited to 30% of the Fund's total assets.
13. Purchase more than 10% of all outstanding voting securities of any one
issuer.
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 any officer or Director of the
Fund or the Fund's Manager or Subadviser (as defined below) 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. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, or securities of
issuers which are restricted as to disposition, if more than 15% of its total
assets would be invested in such securities. This restriction shall not apply to
mortgage-backed securities, asset-backed securities or obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
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5. Invest more than 10% of its total assets in securities of real estate
investment trusts.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the Fund's assets, it is intended that if the percentage
limitation is met at the time the investment is made, a later change in
percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that the Fund's
asset coverage for borrowings falls below 300%, the Fund will take prompt action
to reduce its borrowings, as required by applicable law.
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
Position with Principal Occupation
Name, Address and Age Fund During Past 5 Years
- ---------------------- -------------- --------------------------------------------------------
<S> <C> <C>
Thomas R. Anderson Director Retired. Until July 1991, Chairman, President and Chief
(57) Executive Officer of Kemper Financial Companies, Inc.;
c/o Prudential Mutual Executive Vice President and Director of Kemper
Fund Management, Inc. Corporation; Chairman and Chief Executive Officer of
One Seaport Plaza Kemper Financial Services, Inc.; and Kemper Investors
New York, NY Life Insurance Company. Until 1994, Trustee/Director
of Kemper Mutual Funds and Kemper Closed-End Funds.
Director of Hinsdale Financial Corporation, Hinsdale
Federal Bank for Savings, The Real Exchange
Corporation and Specialty Equipment Companies, Inc.
Eugene C. Dorsey (68) Director Retired President, Chief Executive Officer and Trustee
c/o Prudential Mutual of the Gannett Foundation (now Freedom Forum); former
Fund Management, Inc. Publisher of four Gannett newspapers and Vice
One Seaport Plaza President of the Gannett Company; past Chairman,
New York, NY Independent Sector, Washington D.C. (national
coalition of philanthropic organizations); former
Chairman of the American Council for the Arts;
Director of the Advisory Board of Chase Manhattan Bank
of Rochester.
*Richard A. Redeker President and President, Chief Executive Officer and Director (since
(51) Director October 1993), PMF; Executive Vice President, Director
One Seaport Plaza and Member of the Operating Committee (since October
New York, NY 1993), Prudential Securities; Director (since October
1993) of Prudential Securities Group, Inc.; 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.
Robin B. Smith (55) Director President (since September 1981) and Chief Executive
382 Channel Drive Officer (since January 1988), Publishers Clearing
Port Washington, NY House; Director of BellSouth Corporation, The Omnicon
Group, Inc., Texaco Inc., Spring Industries Inc.,
First Financial Fund, Inc., Huffy Corporation, The
Global Total Return Fund, Inc., The High Yield Income
Fund, Inc. and The High Yield Plus Fund, Inc.
Robert F. Gunia (48) Vice President Director (since January 1989), Chief Administrative
One Seaport Plaza Officer (since July 1990) 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;
Vice President and Director of The Asia Pacific Fund,
Inc. (since May 1989).
S. Jane Rose (49) Secretary Senior Vice President (since January 1991), Senior
One Seaport Plaza Counsel (since June 1987) and First Vice President
New York, NY (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.
</TABLE>
B-17
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupation
Name, Address and Age Fund During Past 5 Years
- ---------------------- -------------- --------------------------------------------------------
<S> <C> <C>
Eugene S. Stark (37) Treasurer and First Vice President (since January 1990) of PMF
One Seaport Plaza Principal
New York, NY Financial and
Accounting
Officer
Ellyn C. Acker (34) Assistant Vice President and Associate General Counsel (since
One Seaport Plaza Secretary 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.
- ---------------
* ``Interested'' director, as defined in the Investment Company Act, by reason of his or her
affiliation with Prudential Securities or PMF.
</TABLE>
Directors and officers of the Fund are also trustees, directors and
officers of some or all of the other investment companies distributed by
Prudential Securities or 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,'' oversee such actions and decide on general
policy.
Pursuant to the Management Agreement with the Fund, the Manager pays all
compensation of officers and employees of the Fund as well as the fees and
expenses of all Directors of the Fund who are affiliated persons of the Manager.
The Fund pays each of its Directors who is not an affiliated person of PMF
or The Prudential Investment Corporation (PIC) or the Subadviser annual
compensation of $7,500, in addition to certain out-of-pocket expenses.
Directors may receive their Directors' fees pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of Directors' fees in installments 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.
Currently, Mr. Dorsey and Ms. Smith have agreed to defer their fees at the Fund
rate.
The following table sets forth the aggregate compensation paid by the Fund
for the year ended December 31, 1994 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 that of any other investment companies managed
by Prudential Mutual Fund Management, Inc. (Fund Complex) for the same period.
Compensation Table
<TABLE>
<CAPTION>
Total
Pension or Compensation
Retirement From Fund
Aggregate Benefits Accrued Estimated Annual and Fund
Compensation As Part of Fund Benefits Upon Complex Paid
Name and Position From Fund Expenses Retirement To Directors
- ------------------ ------------ ------------------- ----------------- --------------
<S> <C> <C> <C> <C>
Thomas R. Anderson
Director $0 None N/A $39,500 (5)*
Eugene C. Dorsey**
Director 0 None N/A $61,000(18)*
Robin B. Smith**
Director 0 None N/A $68,800(16)*
</TABLE>
* Indicates number of funds in Fund Complex (including the Fund) to which
aggregate compensation relates.
** Aggregate compensation from the Fund Complex for the year ended December 31,
1994, including accrued interest, amounted to approximately $63,600 and
$68,800 for each of Mr. Dorsey and Ms. Smith, respectively.
As of May 26, 1995, the Directors and officers of the Fund, as a group,
owned less than 1% of the outstanding shares of the Fund, and there were no
shareholders who owned greater than 5% of the outstanding shares of any class of
the Fund.
B-18
<PAGE>
As of May 26, 1995, Prudential Securities was the record holder for other
beneficial owners of 327,175 Class A shares (approximately 70% of such shares
outstanding), 1,882,240 Class B shares (approximately 75% of such shares
outstanding) and 56,951 Class C shares (approximately 79% of such shares
outstanding). In the event of any meetings of shareholders, Prudential
Securities will forward, or cause the forwarding of, proxy materials to
beneficial owners for which it is the record holder.
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
to all of the other investment companies that, together with the Fund, comprise
the Prudential Mutual Funds. See ``How the Fund is Managed--Manager'' in the
Prospectus. As of September 30, 1994, PMF managed and/or administered open-end
and closed-end management investment companies with assets of approximately $47
billion. According to the Investment Company Institute, as of September 30,
1994, the Prudential Mutual Funds were the 12th largest family of mutual funds
in the United States.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PMF, subject to the supervision of the Fund's Board of Directors and
in conformity with the stated policies of the Fund, manages both the investment
operations of the Fund and the composition of the Fund's portfolio, including
the purchase, retention, disposition and loan of securities and other assets. 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 (the Custodian), and
Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent), the Fund's
transfer and dividend disbursing agent. The management services of PMF for the
Fund are not exclusive under the terms of the Management Agreement and PMF is
free to, and does, render management services to others.
For its services, PMF receives, pursuant to the Management Agreement, a fee
at an annual rate of .50 of 1% of the Fund's average daily net assets. The fee
is computed daily and payable monthly. The Management Agreement also provides
that, in the event the expenses of the Fund (including the fees of PMF, but
excluding interest, taxes, brokerage commissions, distribution fees and
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business) for any fiscal year
exceed the lowest applicable annual expense limitation established and enforced
pursuant to the statutes or regulations of any jurisdiction in which the Fund's
shares are qualified for offer and sale, the compensation due to PMF will be
reduced by the amount of such excess. Reductions in excess of the total
compensation payable to PMF will be paid by PMF to the Fund. Currently, the Fund
believes that the most restrictive expense limitation of state securities
commissions is 2 1/2% of the Fund's average daily net assets up to $30 million,
2% of the next $70 million of such assets and 1 1/2% of such assets in excess of
$100 million.
In connection with its management of the corporate affairs of the Fund, PMF
bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel except
the fees and expenses of Directors who are not affiliated persons of PMF or the
Fund's investment adviser;
(b) all expenses incurred by PMF or by the Fund in connection with managing
the ordinary course of the Fund's business, other than those assumed by the Fund
as described below; and
(c) the costs and expenses payable to 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 investment adviser, (c) the fees and certain expenses of the
Custodian and Transfer and Dividend Disbursing Agent, including the cost of
providing records to the Manager in connection with its obligation of
maintaining required records of the 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 stock
certificates representing shares of the Fund, (i) the cost of fidelity and
liability insurance, (j) certain organization expenses of the Fund and the fees
and expenses involved in registering and maintaining registration of the Fund
and of its shares with the 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.
B-19
<PAGE>
<PAGE>
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 last 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 June 13, 1995, and by the
initial shareholder of the Fund on December 29, 1994.
PMF has entered into the Subadvisory Agreement with PIC, a wholly-owned
subsidiary of 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 last approved by the Board of Directors,
including a majority of the Directors who are not parties to the contract or
interested persons of any such party, as defined in the Investment Company Act,
on June 13, 1995, and by the initial shareholder of the Fund on December 29,
1994.
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 subsidiaries of The Prudential which, as
of December 31, 1993, was the largest insurance company in the United States and
among the largest insurance companies in the world. 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 Incorporated (Prudential Securities or PSI), One Seaport
Plaza, New York, New York 10292, acts as the distributor of the Class B and
Class C shares of the Fund.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the Fund
under Rule 12b-1 under the Investment Company Act and separate distribution
agreements (the Distribution Agreements), PMFD and Prudential Securities
(collectively, the Distributor) incur the expenses of distributing the Fund's
Class A, Class B and Class C shares. See ``How the Fund is
Managed--Distributor'' in the Prospectus.
On June 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, Class B or Class C
Plan or in any agreement related to the Plans (the Rule 12b-1 Directors), at a
meeting called for the purpose of voting on each Plan, approved the continuance
of the Class A Plan, the Class B Plan and the Class C Plan. The Class A Plan
provides that (i) .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 .30 of 1%. The Class B and Class C
Plans provide that (i) .25 of 1% of the average daily net assets of the Class B
and Class C shares, respectively, may be paid as a service fee and (ii) .75 of
1% (not including the service fee) may be paid for distribution-related expenses
with respect to the Class B and Class C shares, respectively (asset-based sales
charge). The Plans were each approved by the sole shareholder of the Class A,
Class B and Class C shares on December 29, 1994.
Class A Plan. PMFD receives the proceeds of initial sales charges upon the
purchase of Class A shares.
Class B Plan. Prudential Securities receives the proceeds of contingent
deferred sales charges paid by holders of Class B shares upon certain
redemptions of Class B shares. See ``Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges'' in the Prospectus.
Class C Plan. Prudential Securities receives the proceeds of contingent
deferred sales charges paid by investors upon certain redemptions of Class C
shares. See ``Shareholder Guide--How to Sell Your Shares--Contingent Deferred
Sales Charges'' in the Prospectus.
B-20
<PAGE>
<PAGE>
The Class A, Class B and Class C Plans will continue in effect from year to
year, provided that each such continuance is approved at least annually by a
vote of the Board of Directors, including a majority vote of the Rule 12b-1
Directors, cast in person at a meeting called for the purpose of voting on such
continuance. The Plans may each be terminated at any time, without penalty, by
the vote of a majority of the Rule 12b-1 Directors or by the vote of the holders
of a majority of the outstanding shares of the applicable class on not more than
60 days', nor less than 30 days' written notice to any other party to the Plans.
The Plans may not be amended to increase materially the amounts to be spent for
the services described therein without approval by the shareholders of the
applicable class, 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 obligated to pay
expenses incurred under any Plan if it is terminated or not continued.
Pursuant to each Plan, the Board of Directors will review at least
quarterly a written report of the distribution expenses incurred on behalf of
each class of shares of the Fund by the Distributor. The report will include an
itemization of the distribution expenses and the purposes of such expenditures.
In addition, as long as the Plans remain in effect, the selection and nomination
of Rule 12b-1 Directors shall be committed to the Rule 12b-1 Directors.
Pursuant to 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.
NASD Maximum Sales Charge Rule
Pursuant to rules of the NASD, the Distributor is required to limit
aggregate initial sales charges, deferred sales charges and asset-based sales
charges to 6.25% of total gross sales of each class of shares. In the case of
Class B shares, interest charges 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 required to be included in the calculation
of the 6.25% limitation. The annual asset-based sales charge with respect to
Class B and Class C 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 any 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. 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
B-21
<PAGE>
<PAGE>
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 and options on securities and futures for the Fund, the selection of
brokers, dealers and futures commission merchants to effect the transactions and
the negotiation of brokerage commissions, if any. The term ``Manager'' as used
in this section includes the Subadviser. The Fund does not normally incur any
brokerage commission expense on its portfolio transactions although
broker-dealers may receive negotiated brokerage commissions on certain portfolio
transactions, including options and the purchase and sale of underlying
securities upon the exercise of options. On foreign securities exchanges,
commissions may be fixed. 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.
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 and U.S. Government agency securities may be purchased
directly from the issuer, in which case no commissions or discounts are paid.
The Fund will not deal with Prudential Securities or any affiliate in any
transaction in which Prudential Securities or any affiliate acts as principal.
Thus, it will not deal with Prudential Securities acting as market maker, and it
will not execute a negotiated trade with Prudential Securities if execution
involves Prudential Securities' acting as principal with respect to any part of
the Fund's order.
Portfolio securities may not be purchased from any underwriting or selling
syndicate of which Prudential Securities, or an affiliate, 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. 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. Within the framework of this policy, the Manager will
consider the research and investment services provided by brokers, dealers or
futures commission merchants 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 futures commission merchants furnishing such services may be selected for the
execution of transactions of such other accounts, whose aggregate assets are far
larger than the Fund's, and the services furnished by such brokers, dealers or
futures 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 in the light
of generally prevailing rates. The Manager's policy is to pay higher commissions
to brokers, 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 other than
Prudential Securities (or any affiliate) 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 or orders among brokers and the commission rates paid are
reviewed periodically by the Fund's Board of Directors. The Fund will not pay up
for research in principal transactions.
Subject to the above considerations, Prudential Securities (or any
affiliate) may act as a securities broker or futures commission merchant for the
Fund. In order for Prudential Securities (or any affiliate) to effect any
portfolio transactions for the Fund, the commissions, fees or other remuneration
received by Prudential Securities (or any affiliate) must be reasonable and fair
compared to the commissions, fees or other remuneration paid to other brokers or
futures commission merchants in connection with comparable transactions
involving similar securities or futures being purchased or sold on an exchange
during a comparable period of time. This standard would allow Prudential
Securities (or any affiliate) to receive no more than the remuneration which
would be expected to be received by an unaffiliated broker or futures commission
merchant 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 (or any affiliate) are consistent with the foregoing standard. In
accordance with Section 11(a) under the Securities Exchange Act of 1934,
Prudential
B-22
<PAGE>
<PAGE>
Securities may not retain compensation for effecting transactions on a national
securities exchange for the Fund unless the Fund has expressly authorized the
retention of such compensation. Prudential Securities must furnish to the Fund
at least annually a statement setting forth the total amount of all compensation
retained by Prudential Securities from transactions effected for the Fund during
the applicable period. Brokerage and futures transactions with Prudential
Securities are also subject to such fiduciary standards as may be imposed by
applicable law.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share plus a sales charge which, at the election of the
investor, may be imposed either (i) at the time of purchase (Class A shares) or
(ii) on a deferred basis (Class B or Class C shares). See ``Shareholder
Guide--How to Buy Shares of the Fund'' in the Prospectus.
Each class of shares represents an interest in the same portfolio of
investments of the Fund and has the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan, (except
that the Fund has agreed with the SEC in connection with the offering of a
conversion feature on Class B shares to submit any amendment of the Class A
distribution and service plan to both Class A and Class B shareholders) and
(iii) only Class B shares have a conversion feature. See ``Distributor.'' Each
class also has separate exchange privileges. See ``Shareholder Investment
Account--Exchange Privilege.''
Specimen Price Make-up
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares are sold with a maximum sales charge of 4% and Class
B* and Class C* shares are sold at net asset value. Using the Fund's net asset
value at April 30, 1995, the maximum offering price of the Fund's shares is as
follows:
<TABLE>
<CAPTION>
<S> <C>
Class A
Net asset value and redemption price per Class A share.................................... $13.00
Maximum sales charge (4% of offering price)............................................... .54
------
Offering price to public.................................................................. $13.54
------
------
<CAPTION>
Class B
Net asset value, redemption price and offering price to public per Class B share*......... $13.00
------
------
<CAPTION>
Class C
Net asset value, redemption price and offering price to public per Class C share*......... $13.00
------
------
- ------------------
*Class B and Class C shares are subject to a contingent deferred sales charge on certain
redemptions. See ``Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges''
in the Prospectus.
</TABLE>
Reduction and Waiver of Initial Sales Charges--Class A Shares
Combined Purchase and Cumulative Purchase Privilege. If an investor or
eligible group of related investors purchases Class A shares of the 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.
B-23
<PAGE>
<PAGE>
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
pension, profit-sharing or other employee benefit plans qualified under Section
401 of the Internal Revenue Code and deferred compensation and annuity plans
under Sections 457 and 403(b)(7) of the Internal Revenue Code.
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 in the Statement of Additional Information under
``Combined Purchase and Cumulative Purchase Privilege,'' may aggregate the value
of their existing holdings of shares of the Fund and shares of other Prudential
Mutual Funds (excluding money market funds other than those acquired pursuant to
the exchange privilege) to determine the reduced sales charge. 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.
Letters of Intent. Reduced sales charges are also available to investors
(or an eligible group of related investors, including retirement and group
plans) who enter into a written Letter of Intent providing for the purchase,
within a thirteen-month period, of shares of the Fund and shares of other
Prudential Mutual Funds. All shares of the Fund and shares of other Prudential
Mutual Funds (excluding money market funds other than those acquired pursuant to
the exchange privilege) which were previously purchased and are still owned are
also included in determining the applicable reduction. However, the value of
shares held directly with the Transfer Agent and through Prudential Securities
will not be aggregated to determine the 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 charges 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 purchase 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, except in the case of retirement and group plans where the employer
or plan sponsor will be responsible for paying any applicable sales charge.
Escrowed Class A shares totaling 5% of the dollar amount of the Letter of Intent
will be held by the Transfer Agent in the name of the purchaser. 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.
Waiver of the Contingent Deferred Sales Charge--Class B Shares
The contingent deferred sales charge is waived under circumstances
described in the Prospectus. See ``Shareholder Guide--How to Sell Your
Shares--Waiver of Contingent Deferred Sales Charges--Class B Shares'' in the
Prospectus. In connection with these waivers, the Transfer Agent will require
you to submit the supporting documentation set forth below.
<TABLE>
<S> <C>
Category of Waiver Required Documentation
Death A copy of the shareholder's death certificate
or, in the case of a trust, a copy of the
grantor's death certificate, plus a copy of
the trust agreement identifying the grantor.
</TABLE>
B-24
<PAGE>
<PAGE>
<TABLE>
<S> <C>
Category of Waiver Required Documentation
Disability - An individual will be A copy of the Social Security Administration
considered disabled if he or she is award letter or a letter from a physician on
unable to engage in any substantial the physician's letterhead stating that the
gainful activity by reason of any shareholder (or, in the case of a trust, the
medically determinable physical or grantor) is permanently disabled. The letter
mental impairment which can be must also indicate the date of disability.
expected to result in death or to be
of long-continued and indefinite
duration.
Distribution from an IRA or 403(b) A copy of the distribution form from the
Custodial Account custodial firm indicating (i) the date of
birth of the shareholder and (ii) that the
shareholder is over age 59 1/2 and is taking
a normal distribution--signed by the
shareholder.
Distribution from Retirement Plan A letter signed by the plan
administrator/trustee indicating the reason
for the distribution.
Excess Contributions A letter from the shareholder (for an IRA) or
the plan administrator/trustee on company
letterhead indicating the amount of the
excess and whether or not taxes have been
paid.
</TABLE>
The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which a record of the shares held is
maintained by the Transfer Agent. If a stock certificate is desired, it must be
requested in writing for each transaction. Certificates are issued only for full
shares and may be redeposited in the Account at any time. There is no charge to
the investor for issuance of a certificate. The Fund makes available to its
shareholders the following privileges and plans.
Automatic Reinvestment of Dividends and 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 record date
to have subsequent dividends or distributions sent in cash rather than
reinvested. In the case of recently purchased shares for which registration
instructions have not been received on the record date, cash payment will be
made directly to the dealer. Any shareholder who receives a cash payment
representing a dividend or distribution may reinvest such dividend or
distribution at net asset value by returning the check or the proceeds to the
Transfer Agent within 30 days after the payment date. Such investment will be
made at the net asset value per share next determined after receipt of the check
or proceeds by the Transfer Agent.
Exchange Privilege. The Fund makes available to its shareholders the
privilege of exchanging their shares of the Fund for shares of certain other
Prudential Mutual Funds, including one or more specified money market funds,
subject in each case to the minimum investment requirements of such funds.
Shares of such other Prudential Mutual Funds may also be exchanged for shares of
the Fund. All exchanges are made on the basis of 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. For retirement and group plans having a limited menu of
Prudential Mutual Funds, the Exchange Privilege is available for those funds
eligible for investment in the particular program.
It is contemplated that the Exchange Privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
Class A. Shareholders of the Fund may exchange their Class A shares for
Class A shares of certain other Prudential Mutual Funds, shares of Prudential
Government Securities Trust (Intermediate Term Series) and shares of the money
market funds specified below. No fee or sales load will be imposed upon the
exchange. Shareholders of money market funds who acquired such shares upon
exchange of Class A shares may use the Exchange Privilege only to acquire Class
A shares of the Prudential Mutual Funds participating in the Exchange Privilege.
B-25
<PAGE>
<PAGE>
The following money market funds participate in the Class A Exchange
Privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New York Money Market Series)
(New Jersey Money Market Series)
Prudential MoneyMart Assets
Prudential Tax-Free Money Fund
Class B and Class C. Shareholders of the Fund may exchange their Class B
and Class C shares for Class B and Class C shares, respectively, of certain
other Prudential Mutual Funds and shares of Prudential Special Money Market
Fund, a money market fund. No CDSC will be payable upon such exchange, but a
CDSC may be payable upon the redemption of the Class B and Class C shares
acquired as a result of the exchange. The applicable sales charge will be that
imposed by the fund in which shares were initially purchased and the purchase
date will be deemed to be the date of the initial purchase, rather than the date
of the exchange.
Class B and Class C shares of the Fund may also be exchanged for Class B
and Class C shares, respectively, of an eligible money market fund without
imposition of any CDSC at the time of exchange. Upon subsequent redemption from
such money market fund or after re-exchange into the Fund, such shares will be
subject to the CDSC calculated without regard to the time such shares were held
in the money market fund. In order to minimize the period of time in which
shares are subject to a CDSC, shares exchanged out of the money market fund will
be exchanged on the basis of their remaining holding periods, with the longest
remaining holding periods being transferred first. In measuring the time period
shares are held in a money market fund and ``tolled'' for purposes of
calculating the CDSC holding period, exchanges are deemed to have been made on
the last day of the month. Thus, if shares are exchanged into the Fund from a
money market fund during the month (and are held in the Fund at the end of the
month), the entire month will be included in the CDSC holding period.
Conversely, if shares are exchanged into a money market fund prior to the last
day of the month (and are held in the money market fund on the last day of the
month), the entire month will be excluded from the CDSC holding period.
At any time after acquiring shares of other funds participating in the
Class B or Class C exchange privilege, a shareholder may again exchange those
shares (and any reinvested dividends and distributions) for Class B or Class C
shares of the Fund, respectively, without subjecting such shares to any CDSC.
Shares of any fund participating in the Class B or Class C exchange privilege
that were acquired through reinvestment of dividends or distributions may be
exchanged for Class B or Class C shares of other funds, respectively, without
being subject to any CDSC.
Additional details about the Exchange Privilege and prospectuses for each
of the Prudential Mutual Funds 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-26
<PAGE>
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.''
Automatic Savings Accumulation Plan (ASAP). Under ASAP, an investor may
arrange to have a fixed amount automatically invested in 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. Stock certificates are not issued to ASAP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.
Systematic Withdrawal Plan. A systematic withdrawal plan is available to
shareholders through Prudential Securities or the Transfer Agent. Such
withdrawal plan provides for monthly or quarterly checks in any amount, except
as provided below, up to the value of the shares in the shareholder's account.
Withdrawals of Class B or Class C shares may be subject to a CDSC. See
``Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales
Charges'' in the Prospectus.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and (iii)
the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at net asset
value on shares held under this plan. See ``Shareholder Investment
Account--Automatic Reinvestment of Dividends and/or Distributions.''
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may be
terminated at any time, and the Distributor reserves the right to initiate a fee
of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.
Withdrawal payments should not 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 be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with purchases of additional shares are
inadvisable because of the sales charges applicable to (i) the purchase of Class
A shares and (ii) the withdrawal of Class B and Class C shares. Each shareholder
should consult his or her own tax adviser with regard to the tax consequences of
the plan, particularly if used in connection with a retirement plan.
Tax-Deferred Retirement Plans. Various qualified retirement 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
of 1986, as amended (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, and the administration, custodial fees an other
details are available from Prudential Securities or the Transfer Agent.
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.
Tax-Deferred Retirement Accounts
Individual Retirement Accounts. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account until
the earnings are withdrawn. The following chart represents a comparison of the
earnings in a personal
- ---------------
(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.
B-27
<PAGE>
savings account with those in an IRA, assuming a $2,000 annual contribution, an
8% rate of return and a 39.6% federal income tax bracket and shows how much more
retirement income can accumulate within an IRA as opposed to a taxable
individual savings account.
Tax-deferred compounding(1)
<TABLE>
<CAPTION>
Contributions Personal
Made Over: Savings IRA
-------------------------------------------------- -------- --------
<S> <C> <C>
10 years $ 26,165 $ 31,291
15 years 44,676 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
investments listed on a securities exchange (other than options on securities
and indices) are valued at the last sales price on the day of valuation, or, if
there was no sale on such day, the mean between the last bid and asked prices on
such day, as provided by a pricing service. Corporate bonds (other than
convertible debt securities) and U.S. Government securities that are actively
traded in the over-the-counter market, including listed securities for which the
primary market is believed to be over-the-counter, are valued on the basis of
valuations provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, agency ratings, market
transactions in comparable securities and various relationships between
securities in determining value. Convertible debt securities that are actively
traded in the over-the-counter market, including listed securities for which the
primary market is believed to be over-the-counter, are valued at the mean
between the last reported bid and asked prices provided by principal market
makers or independent pricing agents. Options on securities and indices traded
on an exchange are valued at the mean between the most recently quoted bid and
asked prices on the respective exchange and futures contracts and options
thereon are valued at their last sales prices as of the close of the commodities
exchange or board of trade. Should an extraordinary event, which is likely to
affect the value of the security, occur after the close of an exchange on which
a portfolio security is traded, such security will be valued at fair value
considering factors determined in good faith by the investment adviser under
procedures established by and under the general supervision of the Fund's Board
of Directors.
Securities or other assets for which market quotations are not readily
available are valued at their fair value as determined in good faith by the
Board of Directors. Short-term debt securities are valued at cost, with interest
accrued or discount amortized to the date of maturity, if their original
maturity was 60 days or less, unless this is determined by the Board of
Directors not to represent fair value. Short-term securities with remaining
maturities of 60 days or more, for which market quotations are readily
available, are valued at their current market quotations as supplied by an
independent pricing agent or principal market maker. The Fund will compute its
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.
Net asset value is calculated separately for each class. As long as the
Fund declares dividends daily, the net asset value of Class A, Class B and Class
C shares will generally be the same. It is expected, however, that the dividends
will differ by approximately the amount of the distribution-related expense
accrual differential among the classes.
TAXES
The Fund has elected to qualify and intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code.
This relieves the 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
B-28
<PAGE>
<PAGE>
respect to securities loans, and gains from the sale or other disposition of
securities or options thereon or foreign currencies, or other income (including
but not limited to gains from options, futures or forward contracts) derived
with respect to its business of investing in such securities or currencies; (b)
the 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, forward contracts and foreign currencies
held for less than three months (except for foreign currencies directly related
to the Fund's business of investing in foreign securities) (the short-short
rule); (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 securities and other securities limited in
respect of any one issuer to an amount not greater than 5% of the market value
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 securities); and (d)
the Fund distribute to its shareholders at least 90% of its net investment
income (including short-term capital gains) other than long-term capital gains
in each year.
Gains or losses on sales of securities by the Fund will be treated as
long-term capital gains or losses if the securities have been held by it for
more than one year except in certain cases where the Fund acquires a put or
writes a call thereon or makes a short sale against-the-box. Other gains or
losses on the sale of securities will be short-term capital gains or losses.
Gains and losses on the sale, lapse or other termination of options on
securities will generally be treated as gains and losses from the sale of
securities (assuming they do not qualify as Section 1256 contracts). If an
option written by the Fund on securities lapses or is terminated through a
closing transaction, such as a repurchase by the Fund of the option from its
holder, the Fund will generally realize capital gain or loss. If securities are
sold by the Fund pursuant to the exercise of a call option written by it, the
Fund will include the premium received in the sale proceeds of the securities
delivered in determining the amount of gain or loss on the sale. Certain of the
Fund's transactions may be subject to wash sale, short sale and straddle
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.
Special rules apply to ``regulated futures contracts,'' certain listed
options which are not ``equity options'', and certain forward foreign currency
exchange contracts. These investments will generally constitute Section 1256
contracts and will be required to be ``marked to market'' for federal income tax
purposes at the end of the Fund's taxable year; that is, treated as having been
sold at market value. Except with respect to forward foreign currency exchange
contracts, 60% 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.
Gain or loss on the sale, lapse or other termination of options on
securities and indices will be capital gain or loss and will be long-term or
short-term depending upon the holding period of the option. In addition,
positions which are part of a straddle will be subject to certain wash sale and
short sale provisions of the Internal Revenue Code. In the case of a straddle,
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 hold foreign currencies or engage in hedging
activities may be limited by the 30% short-short rule discussed above.
Under the Internal Revenue Code, gains or losses attributable to
fluctuations in exchange rates which occur between the time the Fund accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities are treated as ordinary income or ordinary
loss. Similarly, gains or losses on forward foreign currency exchange contracts
or dispositions of debt securities denominated in a foreign currency
attributable to fluctuations in the value of the foreign currency between the
date of acquisition of the security and the date of disposition also are treated
as ordinary gain or loss. These gains, referred to under the Internal Revenue
Code as ``Section 988'' gains or losses, increase or decrease the amount of the
Fund's investment company taxable income available to be distributed to its
shareholders as ordinary income, rather than increasing or decreasing the amount
of the Fund's net capital gain. If Section 988 losses exceed other investment
company taxable income during a taxable year, the Fund would not be able to make
any ordinary dividend distributions, or distributions made before the losses
were realized would be recharacterized as a return of capital to shareholders,
rather than as an ordinary dividend, reducing each shareholder's basis in his or
her Fund shares.
The Fund may purchase debt securities that contain original issue discount.
Original issue discount that accrues in a taxable year is treated as income
earned by the Fund and therefore is subject to the distribution requirements of
the Internal Revenue Code. Because the original issue discount income earned by
the Fund in a taxable year may not be represented by cash income, the Fund may
have to dispose of other securities and use the proceeds to make distributions
to satisfy the Internal Revenue Code's distribution requirements.
The Fund is required to distribute 98% of its ordinary income in the same
calendar year in which it is earned. The Fund is also required to distribute
during the calendar year 98% of the capital gain net income it earned during the
12 months ending on October 31 of such calendar year, as well as all
undistributed ordinary income and undistributed capital gain net income from the
prior year or the twelve-month period ending on October 31 of such prior year,
respectively. To the extent it does not meet these distribution
B-29
<PAGE>
<PAGE>
requirements, the Fund will be subject to a nondeductible 4% excise tax on the
undistributed amount. For purposes of this excise tax, income on which the Fund
pays income tax is treated as distributed.
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.
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.
The per share dividends on Class B and Class C shares will generally be
lower than the per share dividends on Class A shares as a result of the higher
distribution-related fee applicable to the Class B and Class C shares. The per
share capital gains distributions will be paid in the same amounts for Class A,
Class B and Class C shares. See ``Net Asset Value.''
Dividends of net investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a nominee
or fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Capital gain dividends paid to a foreign shareholder
are generally not subject to withholding tax. A foreign shareholder will,
however, be required to pay U.S. income tax on any dividends and capital gain
distributions which are effectively connected with a U.S. trade or business of
the foreign shareholder.
Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or eliminate
such taxes. It is impossible to determine in advance the effective rate of
foreign tax to which the Fund will be subject, since the amount of the Fund's
assets to be invested in various countries will vary.
PERFORMANCE INFORMATION
Yield. The Fund may from time to time advertise its yield as calculated
over a 30-day period. Yield is calculated separately for Class A, Class B and
Class C shares. This yield will be computed by dividing the Fund's net
investment income per share earned during this 30-day period by the maximum
offering price per share on the last day of this period. Yield is calculated
according to the following formula:
a - b
YIELD = 2 [( ----- +1)6 - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
B-30
<PAGE>
<PAGE>
The yield for the 30-day period ended April 30, 1995 for the Fund's Class
A, Class B and Class C shares was 7.14%, 6.84% and 6.84%, 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. Yields for the Fund will vary based on a number of factors
including changes in net asset value, market conditions, the level of interest
rates and the level of Fund income and expenses.
Average Annual Total Return. The Fund may also advertise its average annual
total return. Average annual total return is determined separately for Class A,
Class B and Class C shares. See ``How the Fund Calculates Performance'' in the
Prospectus.
Average annual total return is computed according to the following formula:
P ( 1+T ) n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 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).
Average annual total return takes into account any applicable initial or
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 the period from January 10, 1995
(commencement of operations) to April 30, 1995 for the Fund's Class A, Class B
and Class C shares was 1.96%, 1.00% and 5.00%, respectively.
Aggregate Total Return. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B and
Class C shares. See ``How the Fund Calculates Performance'' in the Prospectus.
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed according to the following formula:
ERV - P
P
Where: P = a hypothetical initial payment of $1,000.
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year periods at the end of the
1, 5 or 10 year periods (or fractional portion thereof).
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
The aggregate total return for the period from January 10, 1995
(commencement of operations) to April 30, 1995 for the Fund's Class A, Class B
and Class C shares was 6.21%, 6.00% and 6.00%, respectively.
B-31
<PAGE>
From time to time, the performance of the Fund may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long term and the rate of inflation.1
(CHART)
- ---------------
(1) 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. Subcustodians provide custodial
services for the Fund's foreign assets held outside the United States. See ``How
the Fund is Managed--Custodian and Transfer and Dividend Disbursing Agent'' in
the Prospectus.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison,
New Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the
Fund. PMFS 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 of $13.00 per
shareholder account, a new account set-up fee of $2.00 for each manually
established account and a monthly inactive zero balance account fee of $.20 per
shareholder account. PMFS is also reimbursed for its out-of-pocket expenses,
including but not limited to postage, stationery, printing, allocable
communication expenses and other costs.
Deloitte & Touche LLP, Two World Financial Center, New York, New York
10281, serves as the Fund's independent accountants, and in that capacity audits
the Fund's annual reports.
B-32
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholder and Board of Directors of
Prudential Diversified Bond Fund, Inc.
We have audited the accompanying statement of assets and liabilities of
Prudential Diversified Bond Fund, Inc. as of October 5, 1994. This financial
statement is the responsibility of the Fund's management. Our responsibility is
to express an opinion on this financial statement based on our audit.
We conducted our audit 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 statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of Prudential Diversified Bond
Fund, Inc. as of October 5, 1994, in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
New York, New York
October 5, 1994
B-33
<PAGE>
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
October 5,
Assets 1994
--------------
<S> <C>
Cash....................................................................................... $100,000
Deferred organization costs (Note 1)....................................................... 250,000
--------------
Total assets........................................................................... 350,000
--------------
Liabilities
Deferred organization costs payable (Note 1)............................................... 250,000
--------------
Net Assets (Note 1)
Applicable to 8,000 shares of common stock............................................... $100,000
--------------
--------------
Calculation of Offering Price
Class A:
Net asset value and redemption price per Class A share................................... $12.50
Maximum sales charge (4.0% of offering price)............................................ .52
--------------
Offering price to public................................................................. $13.02
--------------
--------------
Class B:
Net asset value, offering price and redemption price per Class B share................... $12.50
--------------
--------------
Class C:
Net asset value, offering price and redemption price per Class C share................... $12.50
--------------
--------------
</TABLE>
See Notes to Financial Statement.
B-34
<PAGE>
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
Notes to Financial Statement
Note 1. Prudential Diversified Bond
Fund, Inc. (``the Fund''), which was incorporated
in Maryland on September 1, 1994, is an open-end,
diversified management investment company. The Fund has had no significant
operations other than the issuance of 2,667 shares each of Class A and Class B
and 2,666 shares of Class C common stock for $100,000 on October 5, 1994 to
Prudential Mutual Fund Management, Inc. (PMF). There are 2 billion shares of
$.001 par value common stock authorized divided into three classes, designated
Class A, Class B and Class C, each of which consists of 1 billion, 500 million
and 500 million authorized shares, respectively.
Costs incurred and expected to be incurred in connection with the
organization and initial registration of the Fund will be paid initially by PMF
and will be repaid to PMF upon commencement of investment operations. These
costs will be deferred and amortized over the period of benefit not to exceed 60
months from the date the Fund commences investment operations. If any of the
initial shares of the Fund are redeemed by any holder thereof during the period
of amortization of organization expenses, the redemption proceeds will be
reduced by the pro-rata amount of unamortized organization expenses based on the
number of initial shares being redeemed to the number of the initial shares
outstanding.
Note 2. Agreements The Fund has entered into a
management agreement with PMF. PMF is an indirect
wholly-owned subsidiary of The Prudential Insurance Company of America
(Prudential).
The management fee paid PMF will be computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Fund.
Pursuant to a subadvisory agreement between PMF and The Prudential Investment
Corporation (PIC), a wholly-
owned subsidiary of Prudential, PIC furnishes investment advisory services in
connection with the management 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. PMF pays for the services of PIC,
the cost of compensation of officers and employees of the Fund, occupancy and
certain clerical and accounting costs of the Fund. The Fund bears all other
costs and expenses.
PMF has agreed that, in any fiscal year, it will reimburse the Fund for
expenses (including the fees of PMF but excluding interest, taxes, brokerage
commissions, distribution fees, litigation and indemnification expenses and
other extraordinary expenses) in excess of the most restrictive expense
limitation imposed by state securities commissions. The most restrictive expense
limitation is presently believed to be 2 1/2% of the Fund's average daily net
assets up to $30 million, 2% of the next $70 million of such assets and 1 1/2%
of such assets in excess of $100 million. Such expense reimbursement, if any,
will be estimated and accrued daily and payable monthly.
The Fund has entered into distribution agreements with Prudential Mutual Fund
Distributors, Inc. (PMFD), a
wholly-owned subsidiary of PMF, for distribution of the
Fund's Class A shares and with Prudential Securities Incor-
porated (PSI) for distribution of the Fund's Class B and
Class C shares.
Pursuant to separate Plans of Distribution (the Class A Plan, the Class B
Plan and the Class C Plan, collectively the ``Plans'') adopted by the Fund under
Rule 12b-1 of the Investment Company Act of 1940, PMFD and PSI (collectively the
``Distributor'') incur the expenses of distributing the Fund's Class A, Class B
and Class C shares. These expenses include commissions and account servicing
fees paid to, or on account of financial advisers of PSI and Pruco Securities
Corporation (Prusec), an affiliated broker-dealer, commissions paid to, or on
account of, other broker-dealers or certain financial institutions which have
entered into agreements with the Distributor, advertising expenses, the cost of
printing and mailing prospectuses to potential investors and indirect and
overhead costs of PSI and Prusec associated with the sale of Fund shares,
including lease, utility, communications and sales promotion expenses.
Pursuant to the Class A Plan, the Fund will compensate PMFD for its expenses
with respect to Class A shares at an annual rate of up to .30 of 1% of the
average daily net asset value of the Class A shares. PMFD has agreed to limit
its distribution-related fees payable under the Class A Plan to .15 of 1% of the
average daily net asset value of the Class A shares for the fiscal year ending
December 31, 1995.
Pursuant to the Class B and Class C Plans, the Fund compensates PSI for its
distribution-related expenses with respect to the Class B and C shares at an
annual rate of 1% of the average daily net assets of the Class B and C shares.
PSI has agreed to limit its distribution-related fees payable under the Class B
and Class C Plans to .75 of 1% of the average daily net asset value of the Class
B and Class C shares, respectively, for the fiscal year ending December 31,
1995.
B-35
<PAGE>
PRUDENTIAL DIVERSIFIED BOND FUND, INC. Portfolio of Investments
April 30, 1995 (Unaudited)
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (Note 1)
<C> <C> <S> <C>
LONG-TERM INVESTMENTS--85.6%
Corporate Bonds--84.1%
Domestic--74.7%
American Standard,
Inc.,
Sr. Deb.,
Ba3 $ 1,000 11.375%, 5/15/04 .... $ 1,092,500
(Consumer services)
Aramark Services,
Inc.,
Ba1 300 8.15%, 5/1/05 ....... 298,800
(Consumer services)
Capital One Bank,
Baa3 1,000# 8.125%, 2/27/98 ..... 1,008,920
(Financial services)
Delta Air Lines, Inc.
Sr. Notes,
Ba1 1,000 9.875%, 5/15/00 ..... 1,062,520
(Transportation)
Equitable Iowa Cos.,
Notes,
A3 500 8.50%, 2/15/05 ...... 514,820
(Financial services)
Enterprise Rent-A-Car
Co., Deb.,
Baa3 1,000 7.875%, 3/15/98 ..... 1,010,900
(Transportation)
Fleming Cos. Inc.,
Sr. Notes,
Ba1 500# 10.625%, 12/15/01..... 513,750
Ba1 500 10.625%, 12/10/01 ... 513,750
(Consumer services)
Ford Motor Credit Co.,
A1 1,000 7.75%, 3/15/05 ...... 1,001,640
(Financial services)
General Motors
Acceptance Corp.,
Baa1 500# 8.625%, 6/15/99 ..... 519,095
(Financial services)
Louisiana Land &
Exploration Co.,
Deb.,
Baa2 1,000 7.65%, 12/1/23 ...... 892,810
(Oil & gas)
Manufacturer's Life
Insurance Co.,
Sub. Notes,
A2 $ 1,000 7.875%, 4/15/05 ..... $ 995,000
(Financial services)
Massachusetts Mutual
Life Insurance Co.,
Aa3 600 7.625%, 11/15/23 .... 542,178
(Financial services)
Nat'l. Med.
Enterprises, Inc.,
Sr. Notes,
Ba2 1,000# 9.625%, 9/1/02 ...... 1,032,500
(Consumer services)
Nationwide Life
Insurance Co.,
Notes,
Aa3 1,000# 9.875%, 2/15/25 ..... 1,062,440
(Financial services)
News America Hldgs.,
Inc.,
Ba1 500# 9.125%, 10/15/99...... 526,760
Ba1 500 9.125%, 10/15/99 .... 526,760
(Media)
Niagara Mohawk Pwr.
Corp.,
First Mtge. Dated
9/1/93,
Baa2 500 5.875%, 9/1/02 ...... 436,710
(Utilities)
Occidental Petroleum
Corp., Notes,
Baa3 1,000 10.125%, 11/15/01..... 1,117,770
Sr. Notes,
Baa3 1,000 11.125%, 8/1/10 ..... 1,250,000
(Oil & gas)
Paramount
Communications Inc.,
Sr. Notes,
Ba2 1,000 5.875%, 7/15/00....... 910,600
Ba2 500 7.50%, 1/15/02 ...... 484,150
(Media)
Parker & Parsley
Petroleum Co., Sr.
Notes,
Ba2 1,250 8.875%, 4/15/05 ..... 1,268,550
(Oil & gas)
Rogers Cablesystems,
Ltd., Sr. Sec'd.
Notes,
NR 750 10.00%, 3/15/05 ..... 759,375
(Media)
</TABLE>
See Notes to Financial Statements.
B-36<PAGE>
<PAGE>
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (Note 1)
<C> <C> <S> <C>
Royal Caribbean,
Sr. Sub. Notes,
Ba2 $ 1,000 11.375%, 5/15/02 .... $ 1,095,000
(Miscellaneous)
TCI Communications,
Inc., Sr. Notes,
Baa3 700 8.65%, 9/15/04 ...... 698,229
(Media)
Transco Energy Co.,
Deb.,
Baa2 500# 9.125%, 5/1/98........ 521,905
Baa2 500# 9.375%, 8/15/01 ..... 539,870
(Oil & gas)
Ucar Global
Enterprises, Inc.,
Sr. Sub Notes,
B2 550# 12.00%, 1/15/05 ..... 591,250
(Miscellaneous)
United Air Lines,
Inc.,
Series B,
Baa3 1,000 11.21%, 5/1/14........ 1,119,500
Baa3 523 10.25%, 7/15/21 ..... 545,494
(Transportation)
Western Nat'l. Corp.,
Sr. Notes,
Baa1 400 7.125%, 2/15/04 ..... 373,540
(Financial services) -----------
Total Domestic
Corporate Bonds
(cost
$24,336,796)........ 24,827,086
-----------
Foreign--9.4%
Carter Holt Harvey
Ltd.,
Sr. Deb.,
Baa2 1,000 8.375%, 4/15/15 ..... 1,010,530
(Miscellaneous)
Kansallis Osake Pankki
Bank, Sub. Notes,
Baa1 1,000# 10.00%, 5/1/02 ...... 1,113,680
(Financial services)
Santander Fin'l.
Issuances Ltd., Gtd.
Sub. Notes,
A1 1,000 7.875%, 4/15/05 ..... 999,600
(Financial services) -----------
Total Foreign
Corporate Bonds
(cost $3,095,930)... 3,123,810
-----------
Total Corporate Bonds
(cost
$27,432,726)........ 27,950,896
-----------
Asset-Backed Security--1.5%
Mid-State Trust IV,
Aaa $ 497 8.33%, 4/1/30
(Financial services)
(cost $497,001)..... $ 505,156
-----------
Total Long-Term
Investments (cost
$27,929,727)........ 28,456,052
-----------
SHORT-TERM INVESTMENTS--11.9%
Corporate Bond--1.5%
Salomon Incorporated,
A3 500 7.10%, 2/14/96
(Financial services)
(cost $500,000)..... 499,230
-----------
Repurchase Agreement--10.4%
Joint Repurchase
Agreement Account,
NR 3,452 5.93%, 5/1/95, (Note
6)
(cost $3,452,000)... 3,452,000
-----------
Total Short-Term
Investments
(cost $3,952,000)... 3,951,230
-----------
Total Investments, Before
Outstanding Put Options
Written--97.5%
(cost $31,881,727;
Note 5)............. 32,407,282
-----------
OUTSTANDING PUT OPTIONS
ContractsD WRITTEN
-----------
United States Treasury
Notes,
100 expiring May '95 @
$98.188
(premium received
$3,047)............. (313)
-----------
Total Investments, Net
of Outstanding Put
Options
Written--97.5%...... 32,406,969
Other assets in excess
of
other
liabilities--2.5%... 847,281
-----------
Net Assets--100%...... $33,254,250
-----------
-----------
</TABLE>
- ---------------
NR--Not Rated by Moody's or Standard & Poor's.
D One contract equals $10,000 of par value.
# Principal amount segregated as collateral for options written. Aggregate
value of segregated securities $7,430,170.
The Fund's current Prospectus contains a description of Moody's and Standard &
Poor's ratings.
See Notes to Financial Statements.
B-37<PAGE>
<PAGE>
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
Statement of Assets and Liabilities
(Unaudited)
<TABLE>
<CAPTION>
Assets April 30, 1995
--------------
<S> <C>
Investments, at value (cost $31,881,727).................................................. $ 32,407,282
Cash...................................................................................... 41,638
Receivable for Fund shares sold........................................................... 782,583
Interest receivable....................................................................... 668,675
Receivable for investments sold........................................................... 200,427
Due from Manager.......................................................................... 45,341
Deferred expenses and other assets........................................................ 235,329
--------------
Total assets............................................................................ 34,381,275
--------------
Liabilities
Payable for investments purchased......................................................... 755,546
Payable for Fund shares reacquired........................................................ 119,958
Dividends payable......................................................................... 62,281
Distribution fees payable................................................................. 15,960
Outstanding options written, at value (premium received $3,047)........................... 313
Accrued expenses and other liabilities.................................................... 172,967
--------------
Total liabilities....................................................................... 1,127,025
--------------
Net Assets................................................................................ $ 33,254,250
--------------
--------------
Net assets were comprised of:
Common stock, at par.................................................................... $ 2,557
Paid-in capital in excess of par........................................................ 32,487,579
--------------
32,490,136
Accumulated net realized gain on investments............................................ 235,825
Net unrealized appreciation on investments.............................................. 528,289
--------------
Net assets, April 30, 1995............................................................ $ 33,254,250
--------------
--------------
Class A:
Net asset value and redemption price per share
($5,456,233 / 419,668 shares of common stock issued and outstanding).................. $13.00
Maximum sales charge (4.0% of offering price)........................................... .54
--------------
Maximum offering price to public........................................................ $13.54
--------------
--------------
Class B:
Net asset value, offering price and redemption price per share
($26,911,311 / 2,069,608 shares of common stock issued and outstanding)............... $13.00
--------------
--------------
Class C:
Net asset value, offering price and redemption price per share
($886,706 / 68,193 shares of common stock issued and outstanding)..................... $13.00
--------------
--------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
B-38 <PAGE>
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
January 10,
1995D
Through
April 30,
Net Investment Income 1995
-----------
<S> <C>
Income
Interest and discount earned........ $ 501,523
-----------
Expenses
Distribution fee--Class A........... 1,727
Distribution fee--Class B........... 36,897
Distribution fee--Class C........... 1,209
Management fee, net waiver of
$24,928........................... 6,232
Custodian's fees and expenses....... 38,000
Amortization of deferred
organization costs................ 15,068
Transfer agent's fees and
expenses.......................... 14,000
Reports to shareholders............. 10,000
Audit fees.......................... 10,000
Directors' fees..................... 9,000
Legal fee........................... 6,000
Registration fees................... 2,000
Miscellaneous....................... 4,961
-----------
Total expenses................. 155,094
Less: expense subsidy (Note 4)........ (68,521)
-----------
Net expenses................... 86,573
-----------
Net investment income................. 414,950
-----------
Realized and Unrealized
Gain on Investments
Net realized gain on investment
transactions........................ 235,825
-----------
Net unrealized appreciation:
Investments......................... 525,555
Written options..................... 2,734
-----------
528,289
-----------
Net gain on investments............... 764,114
-----------
Net Increase in Net Assets
Resulting from Operations............. $1,179,064
-----------
-----------
- ---------------
D Commencement of investment operations.
</TABLE>
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
Statement of Changes in Net Assets
(Unaudited)
<TABLE>
<CAPTION>
January 10,
1995D
Increase (Decrease) Through
in Net Assets April 30, 1995
---------------
<S> <C>
Operations
Net investment income................ $ 414,950
Net realized gain on investment
transactions....................... 235,825
Net unrealized appreciation on
investments........................ 528,289
---------------
Net increase in net assets resulting
from operations.................... 1,179,064
---------------
Dividends to shareholders from net
investment income
(Note 1)
Class A.............................. (82,329)
Class B.............................. (322,344)
Class C.............................. (10,277)
---------------
(414,950)
---------------
Fund share transactions (Note 7)
Net proceeds from shares sold........ 34,140,314
Net asset value of shares issued to
shareholders in reinvestment of
dividends.......................... 211,667
Cost of shares reacquired............ (1,961,845)
---------------
Net increase in net assets from Fund
share transactions................. 32,390,136
---------------
Total increase......................... 33,154,250
Net Assets
Beginning of period.................... 100,000
---------------
End of period.......................... $ 33,254,250
---------------
---------------
- ---------------
D Commencement of investment operations.
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
<PAGE>
B-39 <PAGE>
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
Notes to Financial Statements
(Unaudited)
Prudential Diversified Bond Fund, Inc. (the ``Fund''), which was incorporated
in Maryland on September 1, 1994, is registered under the Investment Company Act
of 1940 as a diversified, open-end management investment company. The Fund had
no significant operations other than the issuance of 2,667 shares each of Class
A and Class B and 2,666 shares of Class C common stock for $100,000 on October
5, 1994 to Prudential Mutual Fund Management, Inc. (PMF). There are 2 billion
shares of $.001 par value common stock authorized divided into three classes,
designated Class A, Class B and Class C, each of which consists of 1 billion,
500 million and 500 million authorized shares, respectively. Investment
operations commenced on January 10, 1995.
The Fund's investment objective is to achieve high current income consistent
with an appropriate balance between risk and reward. The Fund will seek to
achieve this objective by allocating its assets among sectors of the fixed
income securities markets, U.S. Government securities, mortgage-backed
securities, corporate debt and foreign securities (mainly government) based upon
an evaluation of current market and economic conditions.
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.
Security Valuation: Securities listed on a securities exchange (other than
options in securities and indices) are valued at the last sales price on the day
of valuation, or, if there was no sale on such day, at the average of readily
available closing bid and asked prices on such day as provided by a pricing
service. Corporate bonds (other than convertible debt securities) and U.S.
Government securities that are actively traded in the over-the-counter market,
including listed securities for which the primary market is believed to be
over-the-counter, shall be valued by an independent pricing service. Convertible
debt securities that are actively traded in the over-the-counter market,
including listed securities for which the primary is believed to be
over-the-counter, shall be valued at the average of the most recently quoted bid
and asked prices provided by a principal market maker or dealer. Options on
securities and indices traded on an exchange shall be valued at the average of
the most recently quoted bid and asked prices provided by the respective
exchange and futures contracts and options thereon are valued at the last sales
price as of the close of the exchange. Securities for which market quotations
are not readily available are valued at fair value as determined in good faith
by or under the direction of the Board of Directors of the Fund.
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 repurchase agreement transactions, the Fund's custodian,
or designated subcustodians, as the case may be under triparty repurchase
agreements, takes possession of the underlying collateral securities, the value
of which exceeds the principal amount of the repurchase transaction, including
accrued interest. To the extent that any repurchase transaction exceeds one
business day, the value of the collateral is marked-to-market on a daily basis
to ensure the adequacy of the collateral. If the seller defaults and the value
of the collateral declines or if bankruptcy proceedings are commenced with
respect to the seller of the security, realization of the collateral by the Fund
may be delayed or limited.
Options: The Fund may either purchase or write options in order to hedge against
adverse market movements or fluctuations in value caused by changes in
prevailing interest rates or foreign currency exchange rates with respect to
securities or currencies which the Fund currently owns or intends to purchase.
When the Fund purchases an option, it pays a premium and an amount equal to that
premium is recorded as an investment. When the Fund writes an option, it
receives a premium and an amount equal to that premium is recorded as a
liability. The investment or liability is adjusted daily to reflect the current
market value of the option. If an option expires unexercised, the Fund realizes
a gain or loss to the extent of the premium received or paid. If an option is
exercised, the premium received or paid is an adjustment to the proceeds from
the sale or the cost of the purchase in determining whether the Fund has
realized a gain or loss. The difference between the premium and the amount
received or paid on effecting a closing purchase or sale transaction is also
treated as a realized gain or loss. Gain or loss on purchased options is
included in net realized gain (loss) on investment transactions. Gain or loss on
written options is presented separately as net realized gain (loss) on written
option transactions.
The Fund, as a writer of an option, has no control over whether the
underlying securities may be sold (called) or
<PAGE>
B-40 <PAGE>
purchased (put). As a result, the Fund bears the market risk of an unfavorable
change in the price of the security or currency underlying the written option.
The Fund, as purchaser of an option, bears the risk of the potential inability
of the counterparties to meet the terms of their contracts.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains or losses on sales of securities 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.
Dividends and Distributions: The Fund declares daily and pays monthly dividends
from net investment income. The Fund will distribute at least annually any net
capital gains in excess of loss carryforwards. 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.
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.
Deferred Organization Expenses: Approximately $250,000 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 cost of the subadviser's services, the 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. For the
period ended April 30, 1995, PMF waived 80% of its management fee. The amount of
fees waived for the period ended April 30, 1995 amounted to $24,928 ($.01 per
share for Class A, B and C shares; .40 of 1% of average daily net assets,
annualized). The Fund is not required to reimburse PMF for such waiver.
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 and Class C shares of the Fund (collectively
the ``Distributors''). The Fund compensates the Distributors for distributing
and servicing the Fund's Class A, Class B and Class C shares, pursuant to plans
of distribution, (the ``Class A, B and C Plans'') regardless of expenses
actually incurred by them. The distribution fees are accrued daily and payable
monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates the Distributors
for distribution-related activities at an annual rate of up to .30 of 1%, 1% and
1%, of the average daily net assets of the Class A, B and C shares,
respectively. With respect to the Class A Plan, PMFD has agreed to limit its
distribution-related fees to .15 of 1% of average daily net assets for the
fiscal year ending December 31, 1995. With respect to the Class B and Class C
plan, PMFD has agreed to limit its distribution fee, to .75 of 1% of average
daily net assets of Class B and Class C shares, respectively, for the fiscal
year ending December 31, 1995.
PMFD has advised the Fund that it has received approximately $137,000 in
front-end sales charges resulting from sales of Class A shares during the period
ended April 30, 1995. From these fees, PMFD paid such sales charges to PSI and
Pruco Securities Corporation, affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Fund that for the period ended April 30, 1995, it
received approximately $3,000 in contingent deferred sales charges imposed upon
redemptions by certain Class B and Class C shareholders.
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 period ended April 30, 1995, the Fund incurred fees of approximately $9,600
for the services
<PAGE>
B-41 <PAGE>
of PMFS. As of April 30, 1995, approximately $4,200 of such fees were due to
PMFS. Transfer agent fees and expenses in the Statement of Operations also
include certain out-of-pocket expenses paid to non-affiliates.
Note 4. Expense PMF voluntarily agreed to
Subsidy subsidize operating expenses
so that total Fund operating expenses do not
exceed .90%, 1.50% and 1.50% of the average daily net assets of the Class A,
Class B and Class C shares, respectively. For the period ended April 30, 1995,
PMF subsidized $68,521 ($.025 per share for Class A, B and C shares; 1.10% of
average daily net assets, annualized) of the Fund's expenses. The Fund is not
required to reimburse PMF for such subsidy.
Note 5. Portfolio Purchases and sales of invest-
Securities ment securities, other than
short-term investments, for the period ended April
30, 1995, were $48,715,942 and $21,036,691, respectively.
The federal income tax cost basis of the Fund's investments, excluding
options written, at April 30, 1995 was the same as for book purposes and,
accordingly, net unrealized appreciation for federal income tax purposes was
$525,555 (gross unrealized appreciation-$532,622; gross unrealized
depreciation-$7,067).
Transactions in written options during the period ended April 30, 1995 were
as follows:
<TABLE>
<CAPTION>
Number of Premiums
Contracts Received
<S> <C> <C>
---------- ------
Options written........................... 200 $9,688
Options terminated in closing purchase
transactions............................ (100) (6,641)
---------- ------
Options outstanding at April 30, 1995..... 100 $3,047
---------- ------
---------- ------
</TABLE>
Note 6. 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 April 30, 1995, the Fund had a .51% undivided interest in the
repurchase agreements in the joint account. The undivided interest for the Fund
represents $3,452,000 in principal amount. As of such date, each repurchase
agreement in the joint account and the value of the collateral therefor were as
follows:
Bear, Stearns & Co., Inc., 5.92%, in the principal amount of $125,000,000,
repurchase price $125,061,666, due 5/1/95. The value of the collateral including
accrued interest is $127,647,875.
UBS Securities Inc., 5.93%, in the principal amount of $100,000,000,
repurchase price $100,049,416, due 5/1/95. The value of the collateral including
accrued interest is $102,001,215.
Morgan Stanley and Co., Inc., 5.93%, in the principal amount of $225,000,000,
repurchase price $225,111,187, due 5/1/95. The value of the collateral including
accrued interest is $229,982,534.
CS First Boston Corp., 5.93%, in the principal amount of $225,000,000,
repurchase price $225,111,187, due 5/1/95. The value of the collateral including
accrued interest is $229,725,279.
Note 7. Capital The Fund offers Class A,
Class B and Class C shares. Class A shares are
sold with a front-end sales charge of up to 4.0%. Class B shares are sold with a
contingent deferred sales charge which declines from 5.0% to zero depending on
the period of time the shares are held. Class C shares are sold with a
contingent deferred sales charge of 1% during the first year. Class B shares
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase.
There are 2 billion shares of common stock, $.001 par value per share,
divided into three classes, designated Class A, B and Class C common stock.
Transactions in shares of common stock for the period ended April 30, 1995,
were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
<S> <C> <C>
--------- -----------
January 10, 1995D through April
30, 1995:
Shares sold....................... 478,656 $ 6,069,772
Shares issued in reinvestment of
dividends....................... 3,917 50,462
Shares reacquired................. (65,572) (841,180)
--------- -----------
Net increase in shares
outstanding..................... 417,001 $ 5,279,054
--------- -----------
--------- -----------
<CAPTION>
Class B
<S> <C> <C>
January 10, 1995D through April
30, 1995:
Shares sold....................... 2,143,483 $27,241,257
Shares issued in reinvestment of
dividends....................... 12,111 156,168
Shares reacquired................. (88,653) (1,119,369)
--------- -----------
Net increase in shares
outstanding..................... 2,066,941 $26,278,056
--------- -----------
--------- -----------
- ---------------
D Commencement of investment operations.
</TABLE>
<PAGE>
B-42<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Class C Shares Amount
--------- -----------
<S> <C> <C>
January 10, 1995D through
April 30, 1995:
Shares sold....................... 65,237 $ 829,285
Shares issued in reinvestment of
dividends....................... 390 5,037
Shares reacquired................. (100) (1,296)
--------- -----------
Net increase in shares
outstanding..................... 65,527 $ 833,026
--------- -----------
--------- -----------
</TABLE>
- ---------------
D Commencement of investment operations.
<PAGE>
B-43<PAGE>
<PAGE>
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
Financial Highlights
(Unaudited)
<TABLE>
<CAPTION>
Class A Class B Class C
----------- ----------- -----------
January 10, January 10, January 10,
1995D 1995D 1995D
Through Through Through
April 30, April 30, April 30,
1995 1995 1995
----------- ----------- -----------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................................... $ 12.50 $ 12.50 $ 12.50
----------- ----------- -----------
Income from investment operations
Net investment incomeDD........................................................ .27 .25 .25
Net realized and unrealized gain on investment transactions.................... .50 .50 .50
----------- ----------- -----------
Total from investment operations............................................. .77 .75 .75
----------- ----------- -----------
Less distributions
Dividends from net investment income........................................... (.27) (.25) (.25)
----------- ----------- -----------
Net asset value, end of period................................................. $ 13.00 $ 13.00 $ 13.00
----------- ----------- -----------
----------- ----------- -----------
TOTAL RETURN#:................................................................. 6.21% 6.00% 6.00%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................................................ $5,456 $26,911 $887
Average net assets (000)....................................................... $3,820 $16,324 $535
Ratios to average net assetsDD/*:
Expenses, including distribution fees........................................ .90% 1.50% 1.50%
Expenses, excluding distribution fees........................................ .75% .75% .75%
Net investment income........................................................ 7.15% 6.55% 6.37%
Portfolio turnover rate........................................................ 120% 120% 120%
</TABLE>
- ---------------
D Commencement of investment operations.
DD Net of expense subsidy and fee waiver.
* Annualized.
# Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of each period reported and includes reinvestment
of dividends and distributions. Total returns for periods of less than
a full year are not annualized.
See Notes to Financial Statements.
<PAGE>
B-44
<PAGE>
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:
Independent Auditor's Report.
Statement of Assets and Liabilities as of October 5, 1994 (audited).
Notes to Financial Statements (audited).
Portfolio of Investments at April 30, 1995 (unaudited).
Statement of Assets and Liabilities at April 30, 1995 (unaudited).
Statement of Operations for the period ended April 30, 1995
(unaudited).
Statement of Changes in Net Assets for the period ended April 30, 1995
(unaudited).
Notes to Financial Statements (unaudited).
(b) Exhibits:
1. Articles of Incorporation incorporated by reference to Exhibit 1
to the Registration Statement on Form N-1A (File No. 33-55441)
filed on September 12, 1994.
2. By-Laws incorporated by reference to Exhibit 2 to the Registration
Statement on Form N-1A (File No. 33-55441) filed on September 12,
1994.
3. Not Applicable.
4. Instruments defining rights of shareholders incorporated by
reference to Exhibit 4 to the Registration Statement on Form
N-1A (File No. 33-55441) filed on September 12, 1994.
5. (a) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc.*
(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation.*
6. (a) Distribution Agreement between the Registrant and Prudential
Mutual Fund Distributors, Inc. (Class A Shares).*
(b) Distribution Agreement between the Registrant and Prudential
Securities Incorporated (Class B shares).*
(c) Distribution Agreement between the Registrant and Prudential
Securities Incorporated (Class C shares).*
(d) Form of Selected Dealer Agreement.*
7. Not Applicable.
8. Custodian Contract between the Registrant and State Street Bank and
Trust Company.*
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc.*
10. Opinion of Shereff, Friedman, Hoffman & Goodman, LLP, incorporated
by reference to Pre-Effective Amendment No. 1 to the Registration
Statement on Form N-1A (File No. 33-55441) filed on October 18,
1994.
11. Consent of Independent Auditors.*
12. Not Applicable.
14. Not Applicable.
C-1
<PAGE>
<PAGE>
15. (a) Distribution and Service Plan for Class A Shares.*
(b) Distribution and Service Plan for Class B Shares.*
(c) Distribution and Service Plan for Class C Shares.*
16. Schedule of Computation of Performance Quotations.*
27. (a) Financial Data Schedule for Class A shares.*
(b) Financial Data Schedule for Class B shares.*
(c) Financial Data Schedule for Class C shares.*
- ------------------
*Filed herewith.
Item 25. Persons Controlled by or under Common Control with Registrant.
None.
Item Item 26. Number of Holders of Securities.
As of May 26, 1995, there were 469,701.221, 2,499,229.974 and 72,431.055
record holders of Class A, Class B and Class C shares of Common Stock,
respectively, $.001 par value per share, of the Registrant.
Item 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 VI 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 the 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 (Exhibit 6 to
the Registration Statement), each Distributor of the Registrant may be
indemnified against liabilities which it may incur, except liabilities arising
from bad faith, gross negligence, willful misfeasance or reckless disregard of
duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (Securities Act) may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1940 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in connection with the successful defense of any
action, suit or proceeding) is asserted against the Registrant by such director,
officer or controlling person in connection with the shares being registered,
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the 1940 Act and will be governed by the final adjudication of such
issue.
The Registrant 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.
Under Section 17(h) of the 1940 Act, it is the position of the staff of the
Securities and Exchange Commission that if there is neither a court
determination on the merits that the defendant is not liable nor a court
determination that the defendant was not guilty of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of one's office, no indemnification
C-2
<PAGE>
<PAGE>
will be permitted unless an independent legal counsel (not including a counsel
who does work for either the Registrant, its investment adviser, its principal
underwriter or persons affiliated with these persons) determines, based upon a
review of the facts, that the person in question was not guilty of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
Under its Articles of Incorporation, the Registrant may advance funds to
provide for indemnification. Pursuant to the Securities and Exchange Commission
staff's position on Section 17(h) advances will be limited in the following
respect:
(1) Any advances must be limited to amounts used, or to be used, for the
preparation and/or presentation of a defense to the action (including cost
connected with preparation of a settlement);
(2) Any advances must be accompanied by a written promise by, or on behalf
of, the recipient to repay that amount of the advance which exceeds the amount
to which it is ultimately determined that he is entitled to receive from the
Registrant by reason of indemnification;
(3) Such promise must be secured by a surety bond or other suitable
insurance; and
(4) Such surety bond or other insurance must be paid for by the recipient
of such advance.
Item Item 28. Business and other Connections of Investment Adviser
(a) Prudential Mutual Fund Management, Inc.
See ``Management of the Fund--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)
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 and PMFD; Director, PMFS
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 the
Director Operating Committee, Prudential Securities; Director,
Prudential Securities Group, Inc. (PSG); Executive Vice
President, PIC; Director, PMFD; Director, PMFS
</TABLE>
C-3
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Name and Address Position with PMF Principal Occupations
- ------------------------ ---------------------- ---------------------------------------------------------
<S> <C> <C>
S. Jane Rose Senior Vice President, Senior Vice President, Senior Counsel and Assistant
Senior Counsel and Secretary, PMF; Senior Vice President and Senior
Assistant Secretary Counsel, Prudential Securities
</TABLE>
(b) The Prudential Investment Corporation (PIC)
See ``Management of the Fund--Subadviser'' in the Prospectus constituting
Part A of this Registration Statement and ``Subadviser'' 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;
Director, PMF
Harry E. Knapp, Jr. President, Director Vice President, Prudential; President, Director and Chief
and Chief Executive Executive Officer, PIC
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
Eric A. Simonson Vice President and Executive Vice President, Prudential; Vice President and
Director Director, PIC
Claude J. Zinngrabe, Jr. Executive Vice Vice President, Prudential; Executive Vice President, PIC
President
</TABLE>
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
IncomeVertiblet 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
C-4
<PAGE>
<PAGE>
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 Inc. (d/b/a Prudential MoneyMart
Assets), Prudential Municipal Series Fund (Connecticut Money Market Series,
Massachusetts Money Market Series, New York Money Market Series and New Jersey
Money Market Series), Prudential 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 IncomeVertiblet 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, New York 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,
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 Director None
Vincent T. Pica, II.............. Executive Vice President and Director None
Richard A. Redeker............... Executive Vice President and Director President and Director
Gregory W. Scott................. Executive Vice President, Chief None
Financial Officer and Director
Hardwick Simmons................. Chief Executive Officer, President and None
Director
Lee B. Spencer, Jr............... General Counsel, Executive Vice None
President and Director
</TABLE>
C-5
<PAGE>
<PAGE>
(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 President and Director
Andrew J. Varley................. Vice President None
Anita L. Whelan.................. Vice President and Assistant Secretary None
- ------------------
(1)The address of each person named is One Seaport Plaza, New York, NY 10292 unless otherwise
indicated.
</TABLE>
(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, 02171. The Prudential Investment Corporation, Prudential
Plaza, 751 Broad Street, Newark, New Jersey, 07102 the Registrant, One Seaport
Plaza, New York, New York, 10292, and Prudential Mutual Fund Services, Inc.,
Raritan Plaza One, Edison, New Jersey, 08837. 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 ``Management of the
Fund--Manager'' and ``Management of the Fund-Distributor'' in the Prospectus and
the captions ``Manager'' and ``Distributor'' in the Statement of Additional
Information, constituting Parts A and B, respectively, of this Registration
Statement, Registrant is not a party to any management-related service contract.
Item 32. Undertakings
Registrant makes the following undertaking:
To furnish each person to whom a prospectus is delivered with a copy of the
Fund's latest annual report upon request and without charge.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
and the State of New York, on the 20th day of June, 1995.
PRUDENTIAL DIVERSIFIED BOND 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.
Signature Title Date
- ------------------------- ------------------------------ ---------------
/s/ Thomas R. Anderson Director June 20, 1995
- -------------------------
Thomas R. Anderson
/s/ Eugene C. Dorsey Director June 20, 1995
- -------------------------
Eugene C. Dorsey
/s/ Richard A. Redeker President and Director June 20, 1995
- -------------------------
Richard A. Redeker
/s/ Robin B. Smith Director June 20, 1995
- -------------------------
Robin B. Smith
/s/ Eugene S. Stark Treasurer and Principal June 20, 1995
- ------------------------- Financial and
Eugene S. Stark Accounting Officer
<PAGE>
EXHIBIT INDEX
1. Articles of Incorporation incorporated by reference to Exhibit No. 1 to the
Registration Statement on Form N-1A (File No. 33-55441) filed on September
12, 1994.
2. (a) By-Laws incorporated by reference to Exhibit No. 2 to the Registration
Statement on Form N-1A (File No. 33-55441) filed on September 12, 1994.
3. Not Applicable.
4. Instruments defining rights of shareholders incorporated by reference to
Exhibit 4 to the Registration Statement on Form N-1A (File No. 33-55441)
filed on September 12, 1994.
5. (a) Management Agreement between the Registrant and Prudential Mutual Fund
Management, Inc.*
(b) Subadvisory Agreement between Prudential Mutual Fund Management, Inc.
and The Prudential Investment Corporation.*
6. (a) Distribution Agreement between the Registrant and Prudential Mutual Fund
Distributors Inc. (Class A Shares).*
(b) Distribution Agreement between the Registrant and Prudential Securities
Incorporated (Class B Shares).*
(c) Distribution Agreement between the Registrant and Prudential Securities
Incorporated (Class C Shares).*
(d) Form of Selected Dealer Agreement.*
7. Not Applicable.
8. Custodian Contract between the Registrant and State Street Bank and Trust
Company.*
9. Transfer Agency and Service Agreement between the Registrant and Prudential
Mutual Fund Services, Inc.*
10. (a) Opinion of Shereff, Friedman, Hoffman & Goodman, LLP, incorporated by
reference to Pre-Effective Amendment No. 1 to the Registration Statement on
Form N-1A (File No. 33-55441) filed on October 18, 1994.
11. Consent of Independent Auditors.*
12. Not Applicable.
14. Not Applicable.
15. (a) Distribution and Service Plan for Class A Shares.*
(b) Distribution and Service Plan for Class B Shares.*
(c) Distribution and Service Plan for Class C Shares.*
16. Schedule of Computation of Performance Quotations.*
27. (a) Financial Data Schedule for Class A Shares.*
(b) Financial Data Schedule for Class B Shares.*
(c) Financial Data Schedule for Class C Shares.*
- ------------------
*Filed herewith.
<PAGE>
<PAGE>
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
Management Agreement
Agreement made this 3rd day of January, 1995 between
Prudential Diversified Bond Fund, Inc., a Maryland corporation (the
Fund), and Prudential Mutual Fund Management, Inc., a Delaware
corporation (the Manager).
W I T N E S S E T H
WHEREAS, the Fund is a diversified, open-end management
investment company registered under the Investment Company Act of
1940, as amended (the 1940 Act); and
WHEREAS, the Fund desires to retain the Manager to render
or contract to obtain as hereinafter provided investment advisory
services to the Fund and the Fund also desires to avail itself of
the facilities available to the Manager with respect to the
administration of its day to day corporate affairs, and the Manager
is willing to render such investment advisory and administrative
services;
NOW, THEREFORE, the parties agree as follows:
1. The Fund hereby appoints the Manager to act as manager
of the Fund and administrator of its corporate affairs for the
period and on the terms set forth in this Agreement. The Manager
accepts such appointment and agrees to render the services herein
described, for the compensation herein provided. The Manager is
authorized to enter into an agreement with The Prudential
Investment Corporation (PIC) pursuant to which PIC shall furnish to
the Fund the investment advisory services in connection with the
<PAGE>
management of the Fund (the Subadvisory Agreement). The Manager
will continue to have responsibility for all investment advisory
services furnished pursuant to the Subadvisory Agreement.
2. Subject to the supervision of the Board of Directors
of the Fund, the Manager shall administer the Fund's corporate
affairs and, in connection therewith, shall furnish the Fund with
office facilities and with clerical, bookkeeping and recordkeeping
services at such office facilities and, subject to Section 1 hereof
and the Subadvisory Agreement, the Manager shall manage the
investment operations of the Fund and the composition of the Fund's
portfolio, including the purchase, retention and disposition
thereof, in accordance with the Fund's investment objectives,
policies and restrictions as stated in the Prospectus (hereinafter
defined) and subject to the following understandings:
(a) The Manager shall provide supervision of the Fund's
investments and determine from time to time what investments
or securities will be purchased, retained, sold or loaned by
the Fund, and what portion of the assets will be invested or
held uninvested as cash.
(b) The Manager, in the performance of its duties and
obligations under this Agreement, shall act in conformity with
the Articles of Incorporation, By-Laws and Prospectus
(hereinafter defined) of the Fund and with the instructions and
directions of the Board of Directors of the Fund and will
conform to and comply with the requirements of the 1940 Act and
all other applicable federal and state laws and regulations.
2
<PAGE>
(c) The Manager shall determine the securities and
futures contracts to be purchased or sold by the Fund and will
place orders pursuant to its determinations with or through
such persons, brokers, dealers or futures commission merchants
(including but not limited to Prudential Securities
Incorporated) in conformity with the policy with respect to
brokerage as set forth in the Fund's Registration Statement and
Prospectus (hereinafter defined) or as the Board of Directors
may direct from time to time. In providing the Fund with
investment supervision, it is recognized that the Manager will
give primary consideration to securing the most favorable price
and efficient execution. Consistent with this policy, the
Manager may consider the financial responsibility, research and
investment information and other services provided by brokers,
dealers or futures commission merchants who may effect or be
a party to any such transaction or other transactions to which
other clients of the Manager may be a party. It is understood
that Prudential Securities Incorporated may be used as
principal broker for securities transactions but that no
formula has been adopted for allocation of the Fund's
investment transaction business. It is also understood that
it is desirable for the Fund that the Manager have access to
supplemental investment and market research and security and
economic analysis provided by brokers or futures commission
merchants and that such brokers may execute brokerage
transactions at a higher cost to the Fund than may result when
3
<PAGE>
allocating brokerage to other brokers or futures commission
merchants on the basis of seeking the most favorable price and
efficient execution. Therefore, the Manager is authorized to
pay higher brokerage commissions for the purchase and sale of
securities and futures contracts for the Fund to brokers or
futures commission merchants who provide such research and
analysis, subject to review by the Fund's Board of Directors
from time to time with respect to the extent and continuation
of this practice. It is understood that the services provided
by such broker or futures commission merchant may be useful to
the Manager in connection with its services to other clients.
On occasions when the Manager deems the purchase or sale
of a security or a futures contract to be in the best interest
of the Fund as well as other clients of the Manager or the
Subadviser, the Manager, to the extent permitted by applicable
laws and regulations, may, but shall be under no obligation to,
aggregate the securities or futures contracts to be so sold or
purchased in order to obtain the most favorable price or lower
brokerage commissions and efficient execution. In such event,
allocation of the securities or futures contracts so purchased
or sold, as well as the expenses incurred in the transaction,
will be made by the Manager in the manner it considers to be
the most equitable and consistent with its fiduciary
obligations to the Fund and to such other clients.
(d) The Manager shall maintain all books and records with
respect to the Fund's portfolio transactions and shall render
4
<PAGE>
to the Fund's Board of Directors such periodic and special
reports as the Board may reasonably request.
(e) The Manager shall be responsible for the financial
and accounting records to be maintained by the Fund (including
those being maintained by the Fund's Custodian).
(f) The Manager shall provide the Fund's Custodian on
each business day with information relating to all transactions
concerning the Fund's assets.
(g) The investment management services of the Manager to
the Fund under this Agreement are not to be deemed exclusive,
and the Manager shall be free to render similar services to
others.
3. The Fund has delivered to the Manager copies of each
of the following documents and will deliver to it all future
amendments and supplements, if any:
(a) Articles of Incorporation of the Fund, as filed with
the Secretary of State of Maryland (such Articles of
Incorporation, as in effect on the date hereof and as amended
from time to time, are herein called the "Articles of
Incorporation");
(b) By-Laws of the Fund (such By-Laws, as in effect on
the date hereof and as amended from time to time, are herein
called the "By-Laws");
(c) Certified resolutions of the Board of Directors of
the Fund authorizing the appointment of the Manager and
approving the form of this agreement;
5
<PAGE>
(d) Registration Statement under the 1940 Act and the
Securities Act of 1933, as amended, on Form N-1A (the
Registration Statement), as filed with the Securities and
Exchange Commission (the Commission) relating to the Fund and
shares of the Fund's Common Stock and all amendments thereto;
(e) Notification of Registration of the Fund under the
1940 Act on Form N-8A as filed with the Commission and all
amendments thereto; and
(f) Prospectus of the Fund (such Prospectus and Statement
of Additional Information, as currently in effect and as
amended or supplemented from time to time, being herein called
the "Prospectus").
4. The Manager shall authorize and permit any of its
directors, officers and employees who may be elected as directors
or officers of the Fund to serve in the capacities in which they
are elected. All services to be furnished by the Manager under this
Agreement may be furnished through the medium of any such
directors, officers or employees of the Manager.
5. The Manager shall keep the Fund's books and records
required to be maintained by it pursuant to paragraph 2 hereof.
The Manager agrees that all records which it maintains for the Fund
are the property of the Fund and it will surrender promptly to the
Fund any such records upon the Fund's request, provided however
that the Manager may retain a copy of such records. The Manager
further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act any such records as are required to be
6
<PAGE>
maintained by the Manager pursuant to Paragraph 2 hereof.
6. During the term of this Agreement, the Manager shall
pay the following expenses:
(i) the salaries and expenses of all personnel of the Fund
and the Manager except the fees and expenses of directors who
are not affiliated persons of the Manager or the Fund's
investment adviser,
(ii) all expenses incurred by the Manager or by the Fund
in connection with managing the ordinary course of the Fund's
business other than those assumed by the Fund herein, and
(iii) the costs and expenses payable to PIC pursuant to
the Subadvisory Agreement.
The Fund assumes and will pay the expenses described below:
(a) the fees and expenses incurred by the Fund in
connection with the management of the investment and
reinvestment of the Fund's assets,
(b) the fees and expenses of directors who are not
affiliated persons of the Manager or the Fund's investment
adviser,
(c) the fees and expenses of the Custodian that relate
to (i) the custodial function and the recordkeeping connected
therewith, (ii) preparing and maintaining the general
accounting records of the Fund and the providing of any such
records to the Manager useful to the Manager in connection with
the Manager's responsibility for the accounting records of the
Fund pursuant to Section 31 of the 1940 Act and the rules
7
<PAGE>
promulgated thereunder, (iii) the pricing of the shares of the
Fund, including the cost of any pricing service or services
which may be retained pursuant to the authorization of the
Board of Directors of the Fund, and (iv) for both mail and wire
orders, the cashiering function in connection with the issuance
and redemption of the Fund's securities,
(d) the fees and expenses of the Fund's Transfer and
Dividend Disbursing Agent, which may be the Custodian, that
relate to the maintenance of each shareholder account,
(e) the charges and expenses of legal counsel and
independent accountants for the Fund,
(f) brokers' commissions and any issue or transfer taxes
chargeable to the Fund in connection with its securities and
futures transactions,
(g) all taxes and corporate fees payable by the Fund to
federal, state or other governmental agencies,
(h) the fees of any trade associations of which the Fund
may be a member,
(i) the cost of stock certificates representing, and/or
non-negotiable share deposit receipts evidencing, shares of the
Fund,
(j) the cost of fidelity, directors and officers and
errors and omissions insurance,
(k) the fees and expenses involved in registering and
maintaining registration of the Fund and of its shares with the
Securities and Exchange Commission, registering the Fund as a
8
<PAGE>
broker or dealer and qualifying its shares under state
securities laws, including the preparation and printing of the
Fund's registration statements, prospectuses and statements of
additional information for filing under federal and state
securities laws for such purposes,
(l) allocable communications expenses with respect to
investor services and all expenses of shareholders' and
directors' meetings and of preparing, printing and mailing
reports to shareholders in the amount necessary for
distribution to the shareholders,
(m) litigation and indemnification expenses and other
extraordinary expenses not incurred in the ordinary course of
the Fund's business, and
(n) any expenses assumed by the Fund pursuant to a Plan
of Distribution adopted in conformity with Rule 12b-1 under the
1940 Act.
7. In the event the expenses of the Fund for any fiscal
year (including the fees payable to the Manager 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) exceed the lowest applicable annual expense limitation
established and enforced pursuant to the statute or regulations of
any jurisdictions in which shares of the Fund are then qualified
for offer and sale, the compensation due the Manager will be
reduced by the amount of such excess, or, if such reduction exceeds
9
<PAGE>
the compensation payable to the Manager, the Manager will pay to
the Fund the amount of such reduction which exceeds the amount of
such compensation.
8. For the services provided and the expenses assumed
pursuant to this Agreement, the Fund will pay to the Manager as
full compensation therefor a fee at an annual rate of .50 of 1% of
the Fund's average daily net assets. This fee will be computed
daily and will be paid to the Manager monthly. Any reduction in
the fee payable and any payment by the Manager to the Fund pursuant
to paragraph 7 shall be made monthly. Any such reductions or
payments are subject to readjustment during the year.
9. The Manager shall not be liable for any error of
judgment or for any loss suffered by the Fund in connection with
the matters to which this Agreement relates, except a loss
resulting from a breach of fiduciary duty with respect to the
receipt of compensation for services (in which case any award of
damages shall be limited to the period and the amount set forth in
Section 36(b)(3) of the 1940 Act) or loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement.
10. This Agreement shall continue in effect for a period
of more than two years from the date hereof only so long as such
continuance is specifically approved at least annually in
conformity with the requirements of the 1940 Act; provided,
however, that this Agreement may be terminated by the Fund at any
10
<PAGE>
time, without the payment of any penalty, by the Board of Directors
of the Fund or by vote of a majority of the outstanding voting
securities (as defined in the 1940 Act) of the Fund, or by the
Manager at any time, without the payment of any penalty, on not
more than 60 days' nor less than 30 days' written notice to the
other party. This Agreement shall terminate automatically in the
event of its assignment (as defined in the 1940 Act).
11. Nothing in this Agreement shall limit or restrict the
right of any director, officer or employee of the Manager who may
also be a director, officer or employee of the Fund to engage in
any other business or to devote his or her time and attention in
part to the management or other aspects of any business, whether of
a similar or dissimilar nature, nor limit or restrict the right of
the Manager to engage in any other business or to render services
of any kind to any other corporation, firm, individual or
association.
12. Except as otherwise provided herein or authorized by
the Board of Directors of the Fund from time to time, the Manager
shall for all purposes herein be deemed to be an independent
contractor and shall have no authority to act for or represent the
Fund in any way or otherwise be deemed an agent of the Fund.
13. During the term of this Agreement, the Fund agrees
to furnish the Manager at its principal office all prospectuses,
proxy statements, reports to shareholders, sales literature, or
other material prepared for distribution to shareholders of the
Fund or the public, which refer in any way to the Manager, prior to
11
<PAGE>
use thereof and not to use such material if the Manager reasonably
objects in writing within five business days (or such other time as
may be mutually agreed) after receipt thereof. In the event of
termination of this Agreement, the Fund will continue to furnish to
the Manager copies of any of the above mentioned materials which
refer in any way to the Manager. Sales literature may be furnished
to the Manager hereunder by first-class or overnight mail,
facsimile transmission equipment or hand delivery. The Fund shall
furnish or otherwise make available to the Manager such other
information relating to the business affairs of the Fund as the
Manager at any time, or from time to time, reasonably requests in
order to discharge its obligations hereunder.
14. This Agreement may be amended by mutual consent, but
the consent of the Fund must be obtained in conformity with the
requirements of the 1940 Act.
15. Any notice or other communication required to be
given pursuant to this Agreement shall be deemed duly given if
delivered or mailed by registered mail, postage prepaid, (1) to the
Manager at One Seaport Plaza, New York, N.Y. 10292, Attention:
Secretary; or (2) to the Fund at One Seaport Plaza, New York, N.Y.
10292, Attention: President.
16. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
17. The Fund may use the name "Prudential Diversified
Bond Fund, Inc. " or any name including the word "Prudential" only
for so long as this Agreement or any extension, renewal or
12
<PAGE>
amendment hereof remains in effect, including any similar agreement
with any organization which shall have succeeded to the Manager's
business as Manager or any extension, renewal or amendment thereof
remain in effect. At such time as such an agreement shall no
longer be in effect, the Fund will (to the extent that it lawfully
can) cease to use such a name or any other name indicating that it
is advised by, managed by or otherwise connected with the Manager,
or any organization which shall have so succeeded to such
businesses. In no event shall the Fund use the name "Prudential
Diversified Bond Fund, Inc." or any name including the word
"Prudential" if the Manager's function is transferred or assigned
to a company of which The Prudential Insurance Company of America
does not have control.
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed by their officers designated below as of
the day and year first above written.
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
By/s/ Robert F. Gunia
Robert F. Gunia
Vice President
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC.
By/s/ Richard A. Redeker
Richard A. Redeker
President
13
<PAGE>
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
Subadvisory Agreement
Agreement made as of this 3rd day of January, 1995 between
Prudential Mutual Fund Management Inc., a Delaware Corporation (PMF
or the Manager), and The Prudential Investment Corporation, a New
Jersey Corporation (the Subadviser).
WHEREAS, the Manager has entered into a Management Agreement,
dated January 3, 1995 (the Management Agreement), with Prudential
Diversified Bond Fund, Inc. (the Fund), a Maryland corporation and
a diversified open-end management investment company registered
under the Investment Company Act of 1940 (the 1940 Act), pursuant
to which PMF will act as Manager of the Fund.
WHEREAS, PMF desires to retain the Subadviser to provide
investment advisory services to the Fund in connection with the
management of the Fund and the Subadviser is willing to render such
investment advisory services.
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the
Board of Directors of the Fund, the Subadviser shall manage
the investment operations of the Fund and the composition of
the Fund's portfolio, including the purchase, retention and
disposition thereof, in accordance with the Fund's investment
objectives, policies and restrictions as stated in the
Prospectus, (such Prospectus and Statement of Additional
Information as currently in effect and as amended or
supplemented from time to time, being herein called the
"Prospectus"), and subject to the following understandings:
(i) The Subadviser shall provide supervision of the
Fund's investments and determine from time to time what
investments and securities will be purchased, retained,
sold or loaned by the Fund, and what portion of the
assets will be invested or held uninvested as cash.
(ii) In the performance of its duties and
obligations under this Agreement, the Subadviser shall
act in conformity with the Articles of Incorporation,
By-Laws and Prospectus of the Fund and with the
instructions and directions of the Manager and of the
Board of Directors of the Fund and will conform to and
comply with the requirements of the 1940 Act, the
Internal Revenue Code of 1986 and all other applicable
federal and state laws and regulations.
<PAGE>
(iii) The Subadviser shall determine the securities
and futures contracts to be purchased or sold by the
Fund and will place orders with or through such persons,
brokers, dealers or futures commission merchants
(including but not limited to Prudential Securities
Incorporated) to carry out the policy with respect to
brokerage as set forth in the Fund's Registration
Statement and Prospectus or as the Board of Directors
may direct from time to time. In providing the Fund
with investment supervision, it is recognized that the
Subadviser will give primary consideration to securing
the most favorable price and efficient execution.
Within the framework of this policy, the Subadviser may
consider the financial responsibility, research and
investment information and other services provided by
brokers, dealers or futures commission merchants who may
effect or be a party to any such transaction or other
transactions to which the Subadviser's other clients may
be a party. It is understood that Prudential Securities
Incorporated may be used as principal broker for
securities transactions but that no formula has been
adopted for allocation of the Fund's investment
transaction business. It is also understood that it is
desirable for the Fund that the Subadviser have access
to supplemental investment and market research and
security and economic analysis provided by brokers or
futures commission merchants who may execute brokerage
transactions at a higher cost to the Fund than may
result when allocating brokerage to other brokers on the
basis of seeking the most favorable price and efficient
execution. Therefore, the Subadviser is authorized to
place orders for the purchase and sale of securities and
futures contracts for the Fund with such brokers or
futures commission merchants, subject to review by the
Fund's Board of Directors from time to time with respect
to the extent and continuation of this practice. It is
understood that the services provided by such brokers or
futures commission merchants may be useful to the
Subadviser in connection with the Subadviser's services
to other clients.
On occasions when the Subadviser deems the
purchase or sale of a security or futures contract to be
in the best interest of the Fund as well as other
clients of the Subadviser, the Subadviser, to the extent
permitted by applicable laws and regulations, may, but
shall be under no obligation to, aggregate the
securities or futures contracts to be sold or purchased
in order to obtain the most favorable price or lower
brokerage commissions and efficient execution. In such
event, allocation of the securities or futures contracts
so purchased or sold, as well as the expenses incurred
2
<PAGE>
in the transaction, will be made by the Subadviser in
the manner the Subadviser considers to be the most
equitable and consistent with its fiduciary obligations
to the Fund and to such other clients.
(iv) The Subadviser shall maintain all books and
records with respect to the Fund's portfolio
transactions required by subparagraphs (b)(5), (6), (7),
(9), (10) and (11) and paragraph (f) of Rule 31a-1 under
the 1940 Act and shall render to the Fund's Board of
Directors such periodic and special reports as the
Directors may reasonably request.
(v) The Subadviser shall provide the Fund's Custodian
on each business day with information relating to all
transactions concerning the Fund's assets and shall
provide the Manager with such information upon request
of the Manager.
(vi) The investment management services provided by
the Subadviser hereunder are not to be deemed exclusive,
and the Subadviser shall be free to render similar
services to others.
(b) The Subadviser shall authorize and permit any of its
directors, officers and employees who may be elected as
directors or officers of the Fund to serve in the capacities
in which they are elected. Services to be furnished by the
Subadviser under this Agreement may be furnished through the
medium of any of such directors, officers or employees.
(c) The Subadviser shall keep the Fund's books and records
required to be maintained by the Subadviser pursuant to
paragraph 1(a) hereof and shall timely furnish to the Manager
all information relating to the Subadviser's services
hereunder needed by the Manager to keep the other books and
records of the Fund required by Rule 31a-1 under the 1940
Act. The Subadviser agrees that all records which it
maintains for the Fund are the property of the Fund and the
Subadviser will surrender promptly to the Fund any of such
records upon the Fund's request, provided however that the
Subadviser may retain a copy of such records. The Subadviser
further agrees to preserve for the periods prescribed by Rule
31a-2 of the Commission under the 1940 Act any such records
as are required to be maintained by it pursuant to paragraph
1(a) hereof.
2. The Manager shall continue to have responsibility for
all services to be provided to the Fund pursuant to the
Management Agreement and shall oversee and review the
Subadviser's performance of its duties under this Agreement.
3
<PAGE>
3. The Manager shall reimburse the Subadviser for
reasonable costs and expenses incurred by the Subadviser
determined in a manner acceptable to the Manager in
furnishing the services described in paragraph 1 hereof.
4. The Subadviser shall not be liable for any error of
judgment or for any loss suffered by the Fund or the Manager
in connection with the matters to which this Agreement
relates, except a loss resulting from willful misfeasance,
bad faith or gross negligence on the Subadviser's part in the
performance of its duties or from its reckless disregard of
its obligations and duties under this Agreement.
5. This Agreement shall continue in effect for a period of
more than two years from the date hereof only so long as such
continuance is specifically approved at least annually in
conformity with the requirements of the 1940 Act; provided,
however, that this Agreement may be terminated by the Fund at
any time, without the payment of any penalty, by the Board of
Directors of the Fund or by vote of a majority of the
outstanding voting securities (as defined in the 1940 Act) of
the Fund, or by the Manager or the Subadviser at any time,
without the payment of any penalty, on not more than 60 days'
nor less than 30 days' written notice to the other party.
This Agreement shall terminate automatically in the event of
its assignment (as defined in the 1940 Act) or upon the
termination of the Management Agreement.
6. Nothing in this Agreement shall limit or restrict the
right of any of the Subadviser's directors, officers, or
employees who may also be a director, officer or employee of
the Fund to engage in any other business or to devote his or
her time and attention in part to the management or other
aspects of any business, whether of a similar or a dissimilar
nature, nor limit or restrict the Subadviser's right to
engage in any other business or to render services of any
kind to any other corporation, firm, individual or
association.
7. During the term of this Agreement, the Manager agrees to
furnish the Subadviser at its principal office all
prospectuses, proxy statements, reports to stockholders,
sales literature or other material prepared for distribution
to stockholders of the Fund or the public, which refer to the
Subadviser in any way, prior to use thereof and not to use
material if the Subadviser reasonably objects in writing five
business days (or such other time as may be mutually agreed)
after receipt thereof. Sales literature may be furnished to
the Subadviser hereunder by first-class or overnight mail,
facsimile transmission equipment or hand delivery.
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<PAGE>
8. This Agreement may be amended by mutual consent, but the
consent of the Fund must be obtained in conformity with the
requirements of the 1940 Act.
9. This Agreement shall be governed by the laws of the
State of New York.
IN WITNESS WHEREOF, the Parties hereto have caused this
instrument to be executed by their officers designated below as of
the day and year first above written.
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC.
BY /s/ Richard A. Redeker
Richard A. Redeker
President
THE PRUDENTIAL INVESTMENT CORPORATION
BY /s/ Jerry A. Webman
Vice President
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<PAGE>
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
Distribution Agreement
(Class A Shares)
Agreement made as of January 3, 1995 and amended and
restated as of June 13, 1995, between Prudential Diversified Bond
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, upon approval by the Class A shareholders of the
Fund it is contemplated that the Fund will adopt a plan of
distribution 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.
<PAGE>
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
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.
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<PAGE>
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
3
<PAGE>
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
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.
4
<PAGE>
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. Payment of the Distributor under the Plan
8.1 The Fund shall pay to the Distributor as
compensation for services under the Distribution and Service Plan
and this Agreement a fee of .30 of 1% (including an asset-based
sales charge of .05 of 1% and a service fee of .25 of 1%) per annum
5
<PAGE>
of the average daily net assets of the Class A shares of the Fund.
Amounts payable under the Plan shall be accrued daily and paid
monthly or at such other intervals as the Board of Directors may
determine. Amounts payable under the Plan shall be subject to the
limitations of Article III, Section 26 of the NASD Rules of Fair
Practice.
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 Expenses of distribution with respect to the Class
A shares of the Fund include, among others:
(a) amounts paid to Prudential Securities for
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 for 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.
6
<PAGE>
(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.
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
7
<PAGE>
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
8
<PAGE>
the Fund for use in the Registration Statement or Prospectus or
shall arise out of or be based upon any alleged omission to state
a material fact in connection with such information required to be
stated in the Registration Statement or Prospectus or necessary to
make such information not misleading. The Distributor's agreement
to indemnify the Fund, its officers and Directors and any such
controlling person as aforesaid, is expressly conditioned upon the
Distributor's being promptly notified of any action brought against
the Fund, its officers and Directors or any such controlling
person, such notification being given to the Distributor at its
principal business office.
Section 11. Duration and Termination of this Agreement
11.1 This Agreement shall become effective as of the date
first above written and shall remain in force for two years from
the date hereof and thereafter, but only so long as such
continuance is specifically approved at least annually by (a) the
Board of Directors of the Fund, or by the vote of a majority of the
outstanding voting securities of the Class A shares of the Fund,
and (b) by the vote of a majority of those Directors who are not
parties to this Agreement or interested persons of any such parties
and who have no direct or indirect financial interest in this
Agreement or in the operation of the Fund's Plan or in any
agreement related thereto (Rule 12b-1 Directors), cast in person at
a meeting called for the purpose of voting upon such approval.
11.2 This Agreement may be terminated at any time,
without the payment of any penalty, by a majority of the Rule 12b-1
Directors or by vote of a majority of the outstanding voting
securities of 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.
9
<PAGE>
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 Diversified Bond Fund, Inc.
By: /s/ Richard A. Redeker
Richard A. Redeker
President
10
<PAGE>
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
Distribution Agreement
(Class B Shares)
Agreement made as of January 3, 1995 and amended and
restated as of June 13, 1995, between Prudential Diversified Bond
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.
<PAGE>
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.
2
<PAGE>
3.3 The Fund shall have the right to suspend the sale of
its Class B shares at times when redemption is suspended pursuant
to the conditions in Section 4.3 hereof or at such other times as
may be determined by the Board of Directors. The Fund shall also
have the right to suspend the sale of its Class B shares if a
banking moratorium shall have been declared by federal or New York
authorities.
3.4 The Fund, or any agent of the Fund designated in
writing by the Fund, shall be promptly advised of all purchase
orders for Class B shares received by the Distributor. Any order
may be rejected by the Fund; provided, however, that the Fund will
not arbitrarily or without reasonable cause refuse to accept or
confirm orders for the purchase of Class B shares. The Fund (or
its agent) will confirm orders upon their receipt, will make
appropriate book entries and upon receipt by the Fund (or its
agent) of payment therefor, will deliver deposit receipts for such
Class B shares pursuant to the instructions of the Distributor.
Payment shall be made to the Fund in New York Clearing House funds
or federal funds. The Distributor agrees to cause such payment and
such instructions to be delivered promptly to the Fund (or its
agent).
Section 4. Repurchase or Redemption of Class B Shares by the Fund
4.1 Any of the outstanding Class B shares may be
tendered for redemption at any time, and the Fund agrees to
repurchase or redeem the Class B shares so tendered in accordance
with its Articles of Incorporation as amended from time to time,
and in accordance with the applicable provisions of the Prospectus.
The price to be paid to redeem or repurchase the Class B shares
shall be equal to the net asset value determined as set forth in
the Prospectus. All payments by the Fund hereunder shall be made
in the manner set forth in Section 4.2 below.
4.2 The Fund shall pay the total amount of the
redemption price as defined in the above paragraph pursuant to the
instructions of the Distributor on or before the seventh day
subsequent to its having received the notice of redemption in
proper form. The proceeds of any redemption of Class B shares
shall be paid by the Fund as follows: (a) any applicable
contingent deferred sales charge shall be paid to the Distributor
and (b) the balance shall be paid to or for the account of the
redeeming shareholder, in each case in accordance with applicable
provisions of the Prospectus.
4.3 Redemption of Class B shares or payment may be
suspended at times when the New York Stock Exchange is closed for
other than customary weekends and holidays, when trading on said
Exchange is restricted, when an emergency exists as a result of
which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the
3
<PAGE>
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.
4
<PAGE>
Section 6. Duties of the Distributor
6.1 The Distributor shall devote reasonable time and
effort to effect sales of Class B shares of the Fund, but shall not
be obligated to sell any specific number of Class B shares. Sales
of the Class B shares shall be on the terms described in the
Prospectus. The Distributor may enter into like arrangements with
other investment companies. The Distributor shall compensate the
selected dealers as set forth in the Prospectus.
6.2 In selling the Class B shares, the Distributor shall
use its best efforts in all respects duly to conform with the
requirements of all federal and state laws relating to the sale of
such securities. Neither the Distributor nor any selected dealer
nor any other person is authorized by the Fund to give any
information or to make any representations, other than those
contained in the Registration Statement or Prospectus and any sales
literature approved by appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures
for the confirmation of sales to investors and selected dealers,
the collection of amounts payable by investors and selected dealers
on such sales and the cancellation of unsettled transactions, as
may be necessary to comply with the requirements of the National
Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into
selected dealer agreements with registered and qualified securities
dealers and other financial institutions of its choice for the sale
of Class B shares, provided that the Fund shall approve the forms
of such agreements. Within the United States, the Distributor
shall offer and sell Class B shares only to such selected dealers
as are members in good standing of the NASD. Class B shares sold
to selected dealers shall be for resale by such dealers only at the
offering price determined as set forth in the Prospectus.
Section 7. Payments to the Distributor
The Distributor shall receive and may retain any
contingent deferred sales charge which is imposed with respect to
repurchases and redemptions of Class B shares as set forth in the
Prospectus, subject to the limitations of Article III, Section 26
of the NASD Rules of Fair Practice. Payment of these amounts to the
Distributor is not contingent upon the adoption or continuation of
the Plan.
Section 8. Payment of the Distributor under the Plan
8.1 The Fund shall pay to the Distributor as
compensation for services under the Distribution and Service Plan
and this Agreement a fee of 1% (including an asset-based sales
charge of .75 of 1% and a service fee of .25 of 1%) per annum of
5
<PAGE>
the average daily net assets of the Class B shares of the Fund.
Amounts payable under the Plan shall be accrued daily and paid
monthly or at such other intervals as the Board of Directors may
determine. Amounts payable under the Plan shall be subject to the
limitations of Article III, Section 26 of the NASD Rules of Fair
Practice.
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 Expenses of distribution with respect to the Class
B shares of the Fund include, among others:
(a) sales commissions (including trailer
commissions) paid to, or on account of,
account executives of the Distributor;
(b) indirect and overhead costs of the Distributor
associated with performance of distribution
activities, including central office and
branch expenses;
(c) amounts paid to Prusec for performing services
under a selected dealer agreement between
Prusec and the Distributor for sale of Class 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
6
<PAGE>
personal service and/or the maintenance of
shareholder accounts; and
(f) advertising for the Fund in various forms
through any available medium, including the
cost of printing and mailing Fund
Prospectuses, and periodic financial reports
and sales literature to persons other than
current shareholders of the Fund.
Indirect and overhead costs referred to in clauses (b)
and (c) of the foregoing sentence include (i) lease expenses, (ii)
salaries and benefits of personnel including operations and sales
support personnel, (iii) utility expenses, (iv) communications
expenses, (v) sales promotion expenses, (vi) expenses of postage,
stationery and supplies and (vii) general overhead.
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.
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
7
<PAGE>
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
8
<PAGE>
make such information not misleading. The Distributor's agreement
to indemnify the Fund, its officers and Directors and any such
controlling person as aforesaid, is expressly conditioned upon the
Distributor's being promptly notified of any action brought against
the Fund, its officers and Directors or any such controlling
person, such notification to be given to the Distributor in writing
at its principal business office.
Section 11. Duration and Termination of this Agreement
11.1 This Agreement shall become effective as of the
date first above written and shall remain in force for two years
from the date hereof and thereafter, but only so long as such
continuance is specifically approved at least annually by (a) the
Board of Directors of the Fund, or by the vote of a majority of the
outstanding voting securities of the Class B shares of the Fund,
and (b) by the vote of a majority of those Directors who are not
parties to this Agreement or interested persons of any such parties
and who have no direct or indirect financial interest in this
Agreement or in the operation of the Fund's Plan or in any
agreement related thereto (Rule 12b-1 Directors), cast in person at
a meeting called for the purpose of voting upon such approval.
11.2 This Agreement may be terminated at any time,
without the payment of any penalty, by a majority of the Rule 12b-1
Directors or by vote of a majority of the outstanding voting
securities of the Class B shares of the Fund, or by the
Distributor, on sixty (60) days' written notice to the other party.
This Agreement shall automatically terminate in the event of its
assignment.
11.3 The terms "affiliated person," "assignment,"
"interested person" and "vote of a majority of the outstanding
voting securities," when used in this Agreement, shall have the
respective meanings specified in the Investment Company Act.
Section 12. Amendments to this Agreement
This Agreement may be amended by the parties only if such
amendment is specifically approved by (a) the Board of Directors of
the Fund, or by the vote of a majority of the outstanding voting
securities of the Class B shares of the Fund, and (b) by the vote
of a majority of the Rule 12b-1 Board of Directors cast in person
at a meeting called for the purpose of voting on such amendment.
Section 13. Governing Law
The provisions of this Agreement shall be construed and
interpreted in accordance with the laws of the State of New York as
at the time in effect and the applicable provisions of the
Investment Company Act. To the extent that the applicable law of
the State of New York, or any of the provisions herein, conflict
9
<PAGE>
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 Diversified Bond Fund, Inc.
By: /s/ Richard A. Redeker
Richard A. Redeker
President
10
<PAGE>
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
Distribution Agreement
(Class C Shares)
Agreement made as of January 3, 1995 and amended and
restated as of June 13, 1995, between Prudential Diversified Bond
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 C shares for sale
continuously;
WHEREAS, the Distributor is a broker-dealer registered
under the Securities Exchange Act of 1934, as amended, and is
engaged in the business of selling shares of registered investment
companies either directly or through other broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into
an agreement with each other, with respect to the continuous
offering of the Fund's Class C shares from and after the date
hereof in order to promote the growth of the Fund and facilitate
the distribution of its Class C shares; and
WHEREAS, the Fund has adopted a distribution and service
plan pursuant to Rule 12b-1 under the Investment Company Act (the
Plan) authorizing payments by the Fund to the Distributor with
respect to the distribution of Class C shares of the Fund and the
maintenance of Class C shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor
The Fund hereby appoints the Distributor as the principal
underwriter and distributor of the Class C shares of the Fund to
sell Class C shares to the public 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 C shares of the Fund through the
Distributor on the terms and conditions set forth below.
<PAGE>
Section 2. Exclusive Nature of Duties
The Distributor shall be the exclusive representative of
the Fund to act as principal underwriter and distributor of the
Fund's Class C shares, except that:
2.1 The exclusive rights granted to the Distributor to
sell Class C shares of the Fund shall not apply to Class C shares
of the Fund issued in connection with the merger or consolidation
of any other investment company or personal holding company with
the Fund or the acquisition by purchase or otherwise of all (or
substantially all) the assets or the outstanding shares of any such
company by the Fund.
2.2 Such exclusive rights shall not apply to Class C
shares issued by the Fund pursuant to reinvestment of dividends or
capital gains distributions.
2.3 Such exclusive rights shall not apply to Class C
shares issued by the Fund pursuant to the reinstatement privilege
afforded redeeming shareholders.
2.4 Such exclusive rights shall not apply to purchases
made through the Fund's transfer and dividend disbursing agent in
the manner set forth in the currently effective Prospectus of the
Fund. The term "Prospectus" shall mean the Prospectus and
Statement of Additional Information included as part of the Fund's
Registration Statement, as such Prospectus and Statement of
Additional Information may be amended or supplemented from time to
time, and the term "Registration Statement" shall mean the
Registration Statement filed by the Fund with the Securities and
Exchange Commission and effective under the Securities Act of 1933,
as amended (the Securities Act), and the Investment Company Act, as
such Registration Statement is amended from time to time.
Section 3. Purchase of Class C Shares from the Fund
3.1 The Distributor shall have the right to buy from the
Fund on behalf of investors the Class C shares needed, but not more
than the Class C shares needed (except for clerical errors in
transmission) to fill unconditional orders for Class C shares
placed with the Distributor by investors or registered and
qualified securities dealers and other financial institutions
(selected dealers).
3.2 The Class C 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.
2
<PAGE>
3.3 The Fund shall have the right to suspend the sale of
its Class C shares at times when redemption is suspended pursuant
to the conditions in Section 4.3 hereof or at such other times as
may be determined by the Board of Directors. The Fund shall also
have the right to suspend the sale of its Class C shares if a
banking moratorium shall have been declared by federal or New York
authorities.
3.4 The Fund, or any agent of the Fund designated in
writing by the Fund, shall be promptly advised of all purchase
orders for Class C shares received by the Distributor. Any order
may be rejected by the Fund; provided, however, that the Fund will
not arbitrarily or without reasonable cause refuse to accept or
confirm orders for the purchase of Class C shares. The Fund (or
its agent) will confirm orders upon their receipt, will make
appropriate book entries and upon receipt by the Fund (or its
agent) of payment therefor, will deliver deposit receipts for such
Class C shares pursuant to the instructions of the Distributor.
Payment shall be made to the Fund in New York Clearing House funds
or federal funds. The Distributor agrees to cause such payment and
such instructions to be delivered promptly to the Fund (or its
agent).
Section 4. Repurchase or Redemption of Class C Shares by the Fund
4.1 Any of the outstanding Class C shares may be
tendered for redemption at any time, and the Fund agrees to
repurchase or redeem the Class C shares so tendered in accordance
with its Articles of Incorporation as amended from time to time,
and in accordance with the applicable provisions of the Prospectus.
The price to be paid to redeem or repurchase the Class C shares
shall be equal to the net asset value determined as set forth in
the Prospectus. All payments by the Fund hereunder shall be made
in the manner set forth in Section 4.2 below.
4.2 The Fund shall pay the total amount of the
redemption price as defined in the above paragraph pursuant to the
instructions of the Distributor on or before the seventh day
subsequent to its having received the notice of redemption in
proper form. The proceeds of any redemption of Class C shares
shall be paid by the Fund as follows: (a) any applicable
contingent deferred sales charge shall be paid to the Distributor
and (b) the balance shall be paid to or for the account of the
redeeming shareholder, in each case in accordance with applicable
provisions of the Prospectus.
4.3 Redemption of Class C shares or payment may be
suspended at times when the New York Stock Exchange is closed for
other than customary weekends and holidays, when trading on said
Exchange is restricted, when an emergency exists as a result of
which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the
3
<PAGE>
Fund fairly to determine the value of its net assets, or during any
other period when the Securities and Exchange Commission, by order,
so permits.
Section 5. Duties of the Fund
5.1 Subject to the possible suspension of the sale of
Class C shares as provided herein, the Fund agrees to sell its
Class C shares so long as it has Class C shares available.
5.2 The Fund shall furnish the Distributor copies of all
information, financial statements and other papers which the
Distributor may reasonably request for use in connection with the
distribution of Class C shares, and this shall include one
certified copy, upon request by the Distributor, of all financial
statements prepared for the Fund by independent public accountants.
The Fund shall make available to the Distributor such number of
copies of its Prospectus and annual and interim reports as the
Distributor shall reasonably request.
5.3 The Fund shall take, from time to time, but subject
to the necessary approval of the Board of Directors and the
shareholders, all necessary action to fix the number of authorized
Class C shares and such steps as may be necessary to register the
same under the Securities Act, to the end that there will be
available for sale such number of Class C shares as the Distributor
reasonably may expect to sell. The Fund agrees to file from time
to time such amendments, reports and other documents as may be
necessary in order that there will be no untrue statement of a
material fact in the Registration Statement, or necessary in order
that there will be no omission to state a material fact in the
Registration Statement which omission would make the statements
therein misleading.
5.4 The Fund shall use its best efforts to qualify and
maintain the qualification of any appropriate number of its Class
C shares for sales under the securities laws of such states as the
Distributor and the Fund may approve; provided that the Fund shall
not be required to amend its Articles of Incorporation or By-Laws
to comply with the laws of any state, to maintain an office in any
state, to change the terms of the offering of its Class C shares in
any state from the terms set forth in its Registration Statement,
to qualify as a foreign corporation in any state or to consent to
service of process in any state other than with respect to claims
arising out of the offering of its Class C shares. Any such
qualification may be withheld, terminated or withdrawn by the Fund
at any time in its discretion. As provided in Section 9.1 hereof,
the expense of qualification and maintenance of qualification shall
be borne by the Fund. The Distributor shall furnish such
information and other material relating to its affairs and
activities as may be required by the Fund in connection with such
qualifications.
4
<PAGE>
Section 6. Duties of the Distributor
6.1 The Distributor shall devote reasonable time and
effort to effect sales of Class C shares of the Fund, but shall not
be obligated to sell any specific number of Class C shares. Sales
of the Class C shares shall be on the terms described in the
Prospectus. The Distributor may enter into like arrangements with
other investment companies. The Distributor shall compensate the
selected dealers as set forth in the Prospectus.
6.2 In selling the Class C shares, the Distributor shall
use its best efforts in all respects duly to conform with the
requirements of all federal and state laws relating to the sale of
such securities. Neither the Distributor nor any selected dealer
nor any other person is authorized by the Fund to give any
information or to make any representations, other than those
contained in the Registration Statement or Prospectus and any sales
literature approved by appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures
for the confirmation of sales to investors and selected dealers,
the collection of amounts payable by investors and selected dealers
on such sales and the cancellation of unsettled transactions, as
may be necessary to comply with the requirements of the National
Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into
selected dealer agreements with registered and qualified securities
dealers and other financial institutions of its choice for the sale
of Class C shares, provided that the Fund shall approve the forms
of such agreements. Within the United States, the Distributor
shall offer and sell Class C shares only to such selected dealers
as are members in good standing of the NASD. Class C shares sold
to selected dealers shall be for resale by such dealers only at the
offering price determined as set forth in the Prospectus.
Section 7. Payments to the Distributor
The Distributor shall receive and may retain any
contingent deferred sales charge which is imposed with respect to
repurchases and redemptions of Class C shares as set forth in the
Prospectus, subject to the limitations of Article III, Section 26
of the NASD Rules of Fair Practice. Payment of these amounts to the
Distributor is not contingent upon the adoption or continuation of
the Plan.
Section 8. Payment of the Distributor under the Plan
8.1 The Fund shall pay to the Distributor as
compensation for services under the Distribution and Service Plan
and this Agreement a fee of 1% (including an asset-based sales
charge of .75 of 1% and a service fee of .25 of 1%) per annum of
5
<PAGE>
the average daily net assets of the Class C shares of the Fund.
Amounts payable under the Plan shall be accrued daily and paid
monthly or at such other intervals as the Board of Directors may
determine. Amounts payable under the Plan shall be subject to the
limitations of Article III, Section 26 of the NASD Rules of Fair
Practice.
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 Expenses of distribution with respect to the Class
C shares of the Fund include, among others:
(a) sales commissions (including trailer
commissions) paid to, or on account of,
account executives of the Distributor;
(b) indirect and overhead costs of the Distributor
associated with performance of distribution
activities, including central office and
branch expenses;
(c) amounts paid to Prusec for performing services
under a selected dealer agreement between
Prusec and the Distributor for sale of Class C
shares of the Fund, including sales
commissions and trailer commissions paid to,
or on account of, agents and indirect and
overhead costs associated with distribution
activities;
(d) sales commissions (including trailer
commissions) paid to, or on account of,
broker-dealers and financial institutions
(other than Prusec) which have entered into
selected dealer agreements with the
Distributor with respect to Class C shares of
the Fund;
(e) amounts paid to, or an account of, account
executives of the Distributor or of other
broker-dealers or financial institutions for
6
<PAGE>
personal service and/or the maintenance of
shareholder accounts; and
(f) advertising for the Fund in various forms
through any available medium, including the
cost of printing and mailing Fund
Prospectuses, and periodic financial reports
and sales literature to persons other than
current shareholders of the Fund.
Indirect and overhead costs referred to in clauses (b)
and (c) of the foregoing sentence include (i) lease expenses, (ii)
salaries and benefits of personnel including operations and sales
support personnel, (iii) utility expenses, (iv) communications
expenses, (v) sales promotion expenses, (vi) expenses of postage,
stationery and supplies and (vii) general overhead.
Section 9. Allocation of Expenses
9.1 The Fund shall bear all costs and expenses of the
continuous offering of its Class C shares, including fees and
disbursements of its counsel and auditors, in connection with the
preparation and filing of any required Registration Statements
and/or Prospectuses under the Investment Company Act or the
Securities Act, and preparing and mailing annual and periodic
reports and proxy materials to shareholders (including but not
limited to the expense of setting in type any such Registration
Statements, Prospectuses, annual or periodic reports or proxy
materials). The Fund shall also bear the cost of expenses of
qualification of the Class C shares for sale, and, if necessary or
advisable in connection therewith, of qualifying the Fund as a
broker or dealer, in such states of the United States or other
jurisdictions as shall be selected by the Fund and the Distributor
pursuant to Section 5.4 hereof and the cost and expense payable to
each such state for continuing qualification therein until the Fund
decides to discontinue such qualification pursuant to Section 5.4
hereof. As set forth in Section 8 above, the Fund shall also bear
the expenses it assumes pursuant to the Plan with respect to Class
C shares, so long as the Plan is in effect.
Section 10. Indemnification
10.1 The Fund agrees to indemnify, defend and hold the
Distributor, its officers and 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
7
<PAGE>
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 C 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
8
<PAGE>
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 C 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 C shares of the Fund, or by the
Distributor, on sixty (60) days' written notice to the other party.
This Agreement shall automatically terminate in the event of its
assignment.
11.3 The terms "affiliated person," "assignment,"
"interested person" and "vote of a majority of the outstanding
voting securities," when used in this Agreement, shall have the
respective meanings specified in the Investment Company Act.
Section 12. Amendments to this Agreement
This Agreement may be amended by the parties only if such
amendment is specifically approved by (a) the Board of Directors of
the Fund, or by the vote of a majority of the outstanding voting
securities of the Class C shares of the Fund, and (b) by the vote
of a majority of the Rule 12b-1 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
9
<PAGE>
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 Diversified Bond Fund, Inc.
By: /s/ Richard A. Redeker
Richard A. Redeker
President
10
<PAGE>
PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC.
One Seaport Plaza
New York, New York 10292
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
Form of Selected Dealer Agreement
Date
(Name of Address of Outside Dealer)
As the principal distributor of the front end sales load
shares (to be known as Class A and hereinafter referred to as such)
of the Prudential Diversified Bond Fund, Inc. managed by Prudential
Mutual Fund Management, Inc., we invite you to participate as a
selected dealer in the distribution of Class A shares of the
Prudential Diversified Bond Fund, Inc. upon the following terms and
conditions:
1. You are to offer and sell such shares only at the public
offering prices which shall be currently in effect, in accordance
with the terms of the then current prospectus of the Fund. You
shall not have authority to act as agent for the Fund, for us, or
for any other dealer in any respect. All orders are subject to
acceptance by us and become effective only upon confirmation by us.
2. On each sale of shares by you, the total sales charges or
discounts, if any, to selected dealers shall be as stated in the
attached Schedule A, as may be amended from time to time.
Such sales charges or discounts to selected dealers are
subject to reductions under a variety of circumstances as described
in the Fund's then current prospectus. To obtain these reductions,
we must be notified when the sale takes place which would qualify
for the reduced charge.
There is no sales charge or discount to selected dealers on
the reinvestment of dividends.
3. As a selected dealer, you are hereby authorized (i) to
place purchase orders on behalf of investors or for your other
bonafide investment directly with the Fund for its Class A shares
subject to the applicable terms and conditions governing the
placement of orders by us set forth in the Distribution Agreement
between the Fund and us and subject to the applicable compensation
provisions set forth in the Fund's then current prospectus and (ii)
to tender shares directly to the Fund or its agent for redemption
subject to the applicable terms and conditions set forth in the
Distribution Agreement.
4. Redemptions of shares will be made at the net asset value
of such shares in accordance with the then current prospectus of
the Fund.
<PAGE>
5. You represent that you are a member of the National
Association of Securities Dealers, Inc. and that you agree to abide
by the Rules of Fair Practice of such Association.
6. This Agreement is in all respects subject to Section 26 of
the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. which shall control any provisions to the
contrary in this Agreement.
7. You agree:
(a) To purchase shares only from us or only from your
customers.
(b) To purchase shares from us only for the purpose of
covering purchase orders already received or for
your own bona fide investment.
(c) That you will not purchase any shares from your
customers at prices lower than the redemption
prices then quoted by the Fund. You shall,
however, be permitted to sell shares for the
account of their record owners to the Fund at the
redemption prices currently established for such
shares and may charge the owner a fair commission
for handling the transaction.
(d) That you will not delay placing customers' orders
for shares.
(e) That if any shares confirmed to you hereunder are
redeemed by the Fund within seven days after such
confirmation of your original order, you shall
forthwith refund to us the full sales charge on
discount, if any, allowed to you on such sales.
We shall forthwith pay to the Fund our share of the
sales charge, if any, on the original sale, and
shall also pay to the Fund the refund from you as
herein provided. Termination or cancellation of
this Agreement shall not relieve you or us from the
requirements of this subparagraph.
(f) At your own expense to defend any suit, claim,
action or other proceeding brought by any party
against the Funds, their transfer agent, or PMFD
and indemnify and hold harmless PMFD, the Funds and
their transfer agent, their officers, directors,
employees, agents and assigns, from and against any
and all direct or indirect losses, claims, demands,
damages (including consequential damages),
liabilities, attorneys' fees, interest and other
costs, all expenses of litigation or arbitration
and any amounts agreed upon in settlement, that may
be assessed against, suffered or incurred by any
one or more of the above parties (whether pursuant
to this Agreement or otherwise) as a result of or
arising out of, directly or indirectly, any sale of
2
<PAGE>
the Funds, breach of representations or warranties
herein; or as a result of or arising out of,
directly or indirectly, your failure to comply with
the terms of this Agreement; or as a result of or
arising out of, directly or indirectly, any error
or omission in any event whether such action,
failure, error, omission, misconduct or breach is
committed by you or by your employees or agents,
whether or not authorized or acting within the
scope of their employment, pursuant to this
Agreement, including that which may arise out of
the malfunction of equipment, systems and programs;
or as a result, directly or indirectly, of not
obtaining sufficient authorization of all
customers' communications and actions regarding
such customers' accounts, including all transfers;
or as a result, directly or indirectly, of any
refusal by us to accept a purchase form a customer.
Your obligations under this sub-section (g) shall
survive the termination of this Agreement.
8. We shall not accept from you any conditional orders for
shares. Delivery of certificates, if any, for shares purchased
shall be made by the Fund only against receipt of the purchase
price, subject to deduction for the sales charge or discount
reallowed to you and our portion of the sales charge on such sale,
if any. If payment for the shares purchased is not received within
the time customary for such payments, the sale may be cancelled
forthwith without any responsibility or liability on our part or on
the part of the Fund (in which case you will be responsible for any
loss, including loss of profit, suffered by the Fund resulting from
your failure to make payments as aforesaid), or, at our option, we
may sell on your behalf the shares ordered back to the Fund (in
which case we may hold you responsible for any loss, including loss
of profit suffered by us resulting from your failure to make
payment as aforesaid).
9. You will not offer or sell any of the shares except under
circumstances that will result in compliance with the applicable
Federal and state securities laws and in connection with sales and
offers to sell shares you will furnish to each person to whom any
such sale or offer is made a copy of the applicable then current
prospectus. We shall be under no liability to you except for lack
of good faith and for obligations expressly assumed by us herein.
Nothing herein contained, however, shall be deemed to be a
condition, stipulation or provision binding any persons acquiring
any security to waive compliance with any provision of the
Securities Act of 1933, or of the Rules and Regulations of the
Securities and Exchange Commission or to relieve the parties hereto
from any liability arising under the Securities Act of 1933.
10. From time to time during the term of this Agreement we may
(but are not hereby obliged to) make payments to you pursuant to
the distribution plan adopted by the Fund pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act"), in
consideration of your furnishing distribution services hereunder
with respect to the Fund. Any such payments made pursuant to this
Section 10 shall be subject to the following terms and conditions:
3
<PAGE>
(a) Any such payments shall be in such amounts as we
may from time to time advise you in writing but in
any event not in excess of the amounts permitted by
the plan in effect with respect to the Fund. Any
such payments shall be in addition to the selling
concession, if any, allowed to you pursuant to this
Agreement.
(b) The provisions of this Section 10 relate to the
plan adopted by the Fund pursuant to Rule 12b-1.
In accordance with Rule 12b-1, any person
authorized to direct the disposition of monies paid
or payable by a Fund pursuant to this Section 10
shall provide the Fund's Board of Directors or
Trustees, and the Directors or Trustees shall
review, at least quarterly, a written report of the
amounts so expended and the purposes for which such
expenditures were made.
(c) The provisions of this Section 10 applicable to the
Fund shall remain in effect for not more than a
year and thereafter for successive annual periods
only so long as such continuance is specifically
approved at least annually in conformity with Rule
12b-1 and the Act. The provisions of this Section
10 shall automatically terminate with respect to a
particular plan in the event of the assignment (as
defined by the Act) of this Agreement, in the event
such plan terminates or is not continued or in the
event this Agreement terminates or ceases to remain
in effect. In addition, the provisions of this
Section 10 may be terminated at any time, without
penalty, by either party with respect to any
particular plan on not more than 60 days' nor less
than 30 days' written notice delivered or mailed by
registered mail, postage prepaid, to the other
party.
11. No person is authorized to make any representations
concerning shares of the Fund except those contained in the current
prospectus and printed information issued by the Fund or by us as
information supplemental to each prospectus. We shall supply
prospectuses, reasonable quantities of supplemental sales
literature, sales bulletins, and additional information as issued.
You agree not to use other advertising or sales material relating
to the Fund, unless approved in writing by us in advance of such
use. Any printed information furnished by us other than the then
current prospectus and statement of additional information for the
Fund, periodic reports and proxy solicitation materials are our
sole responsibility and not the responsibility of the Fund, and you
agree that the Fund shall have no liability or responsibility to
you in these respects unless expressly assumed in connection
therewith.
12. Either party to this Agreement may cancel this Agreement
by giving written notice to the other. Such notice shall be deemed
to have been given on the date on which it was either delivered
personally to the other party or any officer or partner thereof, or
was mailed postpaid or delivered to a telegraph office for
4
<PAGE>
transmission to the other party at his or its address as shown
below. This Agreement may be amended by us at any time and your
placing of an order after the effective date of any such amendment
shall constitute your acceptance thereof.
13. This Agreement shall be construed in accordance with the
laws of the State of New York and shall be binding upon both
parties hereto when signed by us and accepted by you in the space
provided below.
Very truly yours,
PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC.
By: _______________________ DATE: _____________________
Firm Name _____________________________________
Address _____________________________________
City _________________ State ____________ Zip Code
ACCEPTED BY (signature)______________________________________________________
Name (print)________________________________________________________
Title ____________________________________________
Date _____________________________ 199 _____ Phone #_____________________
Please return two signed copies of this Agreement
(one of which will be signed above by us and
thereafter returned to you) in the accompanying
return envelope to:
Prudential Mutual Fund Distributors, Inc.
One Seaport Plaza, 25th Floor
New York, New York 10292
Attention: P.J. Berman
GL95
5
<PAGE>
<TABLE>
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
Schedule A
<CAPTION>
Amount of Sales Charge Sales Charge Dealer
Purchase as Percentage of as Percentage of Concession as
Offering Price Net Amount Percentage of
Invested Offering Price
<S> <C> <C> <C>
Less than
$50,000 4.00% 4.17% 3.75%
$50,000 to
$99,999 3.50% 3.63% 3.25%
$100,000 to
$249,999 2.75% 2.83% 2.50%
$250,000 to
$499,999 2.00% 2.04% 1.90%
$500,000 to
$999,999 1.50% 1.52% 1.40%
$1,000,000 and
above None None None
</TABLE>
GL95
6
<PAGE>
CUSTODIAN CONTRACT
Between
EACH OF THE PARTIES INDICATED ON APPENDIX A
and
STATE STREET BANK AND TRUST COMPANY
PAGE
<PAGE>
TABLE OF CONTENTS
Page
1. Employment of Custodian and Property to be Held by It . . . . . . .-1-
2. Duties to the Custodian with Respect to Property of The
Fund Held By the Custodian in the United States . . . . . . . . . .-2-
2.1 Holding Securities . . . . . . . . . . . . . . . . . . . . . .-2-
2.2 Delivery of Securities . . . . . . . . . . . . . . . . . . . .-2-
2.3 Registration of Securities . . . . . . . . . . . . . . . . . .-6-
2.4 Bank Accounts. . . . . . . . . . . . . . . . . . . . . . . . .-7-
2.5 Availability of Federal Funds. . . . . . . . . . . . . . . . .-7-
2.6 Collection of Income . . . . . . . . . . . . . . . . . . . . .-8-
2.7 Payment of Fund Monies . . . . . . . . . . . . . . . . . . . .-8-
2.8 Liability for Payment in Advance of Receipt of
Securities Purchased . . . . . . . . . . . . . . . . . . . . -11-
2.9 Appointment of Agents. . . . . . . . . . . . . . . . . . . . -11-
2.10 Deposit of Securities in Securities Systems. . . . . . . . . -11-
2.10A Fund Assets Held in the Custodian's Direct
Paper System . . . . . . . . . . . . . . . . . . . . . . . . -13-
2.11 Segregated Account . . . . . . . . . . . . . . . . . . . . . -14-
2.12 Ownership Certificates for Tax Purposes. . . . . . . . . . . -15-
2.13 Proxies. . . . . . . . . . . . . . . . . . . . . . . . . . . -16-
2.14 Communications Relating to Fund Portfolio
Securities . . . . . . . . . . . . . . . . . . . . . . . . . -16-
2.15 Reports to Fund by Independent Public Accountants. . . . . . -16-
3. Duties of the Custodian with Respect to Property of the
Fund Held Outside of the United States. . . . . . . . . . . . . . -17-
3.1 Appointment of Foreign Sub-Custodians. . . . . . . . . . . . -17-
3.2 Assets to be Held. . . . . . . . . . . . . . . . . . . . . . -17-
3.3 Foreign Securities Depositories. . . . . . . . . . . . . . . -18-
3.4 Segregation of Securities. . . . . . . . . . . . . . . . . . -18-
3.5 Agreements with Foreign Banking Institutions . . . . . . . . -18-
3.6 Access of Independent Accountants of the Fund. . . . . . . . -19-
3.7 Reports by Custodian . . . . . . . . . . . . . . . . . . . . -19-
3.9 Liability of Foreign Sub-Custodians. . . . . . . . . . . . . -20-
3.10 Liability of Custodian . . . . . . . . . . . . . . . . . . . -21-
3.11 Reimbursements for Advances. . . . . . . . . . . . . . . . . -21-
3.12 Monitoring Responsibilities. . . . . . . . . . . . . . . . . -22-
3.13 Branches of U.S. Banks . . . . . . . . . . . . . . . . . . . -22-
4. Payments for Repurchases or Redemptions and Sales of
Shares of the Fund. . . . . . . . . . . . . . . . . . . . . . . . -23-
-i-
<PAGE>
5. Proper Instructions . . . . . . . . . . . . . . . . . . . . . . . -24-
6. Actions Permitted without Express Authority . . . . . . . . . . . -24-
7. Evidence of Authority . . . . . . . . . . . . . . . . . . . . . . -25-
8. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income . . . . . . . . . . -26-
9. Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -26-
10. Opinion of Fund's Independent Accountant. . . . . . . . . . . . . -27-
11. Compensation of Custodian . . . . . . . . . . . . . . . . . . . . -27-
12. Responsibility of Custodian . . . . . . . . . . . . . . . . . . . -27-
13. Effective Period, Termination and Amendment . . . . . . . . . . . -29-
14. Successor Custodian . . . . . . . . . . . . . . . . . . . . . . . -30-
15. Interpretative and Additional Provisions. . . . . . . . . . . . . -32-
16. Massachusetts Law to Apply. . . . . . . . . . . . . . . . . . . . -32-
17. Prior Contracts . . . . . . . . . . . . . . . . . . . . . . . . . -32-
18. The Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . -32-
19. Limitation of Liability . . . . . . . . . . . . . . . . . . . . . -33-
-ii-
<PAGE>
<PAGE>
CUSTODIAN CONTRACT
This Contract between State Street Bank and Trust Company, a
Massachusetts trust company, having its principal place of business
at 225 Franklin Street, Boston, Massachusetts, 02110, hereinafter
called the "Custodian", and each Fund listed on Appendix A which
evidences its agreement to be bound hereby by executing a copy of
this Contract (each such Fund individually hereinafter referred to
as the "Fund").
WITNESSETH: That in consideration of the mutual
covenants and agreements hereinafter contained, the parties hereto
agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of its
assets, including securities it desires to be held in places within
the United States ("domestic securities") and securities it desires
to be held outside the United States ("foreign securities")
pursuant to the provisions of the Articles of Incorporation/
Declaration of Trust. The Fund agrees to deliver to the Custodian
all securities and cash owned by it, and all payments of income,
payments of principal or capital distributions received by it with
respect to all securities owned by the Fund from time to time, and
the cash consideration received by it for such new or treasury
shares of capital stock, ("Shares") of the Fund as may be issued or
sold from time to time. The Custodian shall not be responsible for
any property of the Fund held or received by the Fund and not
delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of
Article 5), the Custodian shall from time to time employ one or
more sub-custodians located in the United States, but only in
accordance with an applicable vote by the Board of Directors/
Trustees of the Fund, and provided that the Custodian shall have
-1-
<PAGE>
the same responsibility or liability to the Fund on account of any
actions or omissions of any sub-custodian so employed as any such
sub-custodian has to the Custodian, provided that the Custodian
agreement with any such domestic sub-custodian shall impose on such
sub-custodian responsibilities and liabilities similar in nature
and scope to those imposed by this Agreement with respect to the
functions to be performed by such sub-custodian. The Custodian may
employ as sub-custodians for the Fund's securities and other assets
the foreign banking institutions and foreign securities
depositories designated in Schedule "A" hereto but only in
accordance with the provisions of Article 3.
2. Duties of the Custodian with Respect to Property of The Fund
Held By the Custodian in the United States.
2.1 Holding Securities. The Custodian shall hold and
physically segregate for the account of the Fund all non-cash
property, to be held by it in the United States, including all
domestic securities owned by the Fund, other than (a) securities
which are maintained pursuant to Section 2.10 in a clearing agency
which acts as a securities depository or in a book-entry system
authorized by the U.S. Department of Treasury, collectively
referred to herein as "Securities System" and (b) commercial paper
of an issuer for which State Street Bank and Trust Company acts as
issuing and paying agent ("Direct Paper") which is deposited and/or
maintained in the Direct Paper System of the Custodian pursuant to
Section 2.10A.
2.2 Delivery of Securities. The Custodian shall release and
deliver domestic securities owned by the Fund held by the Custodian
or in a Securities System account of the Custodian or in the
Custodian's Direct Paper book-entry system account ("Direct Paper
System") only upon receipt of Proper Instructions, which may be
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<PAGE>
continuing instructions when deemed appropriate by the parties, and
only in the following cases:
(1) Upon sale of such securities for the account of the
Fund and receipt of payment therefor;
(2) Upon the receipt of payment in connection with any
repurchase agreement related to such securities
entered into by the Fund;
(3) In the case of a sale effected through a Securities
System, in accordance with the provisions of
Section 2.10 hereof;
(4) To the depository agent in connection with tender
or other similar offers for portfolio securities of
the Fund;
(5) To the issuer thereof or its agent when such
securities are called, redeemed, retired or
otherwise become payable; provided that, in any
such case, the cash or other consideration is to be
delivered to the Custodian;
(6) To the issuer thereof, or its agent, for transfer
into the name of the Fund or into the name of any
nominee or nominees of the Custodian or into the
name or nominee name of any agent appointed
pursuant to Section 2.9 or into the name or nominee
name of any sub-custodian appointed pursuant to
Article 1; or for exchange for a different number
of bonds, certificates or other evidence
representing the same aggregate face amount or
number of units; provided that, in any such case,
the new securities are to be delivered to the
Custodian;
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<PAGE>
(7) Upon the sale of such securities for the account of
the Fund, to the broker or its clearing agent,
against a receipt, for examination in accordance
with "street delivery" custom; provided that in any
such case, the Custodian shall have no
responsibility or liability for any loss arising
from the delivery of such securities prior to
receiving payment for such securities except as may
arise from the Custodian's own negligence or
willful misconduct;
(8) For exchange or conversation pursuant to any plan
of merger, consolidation, recapitalization,
reorganization or readjustment of the securities of
the issuer of such securities, or pursuant to
provisions for conversion contained in such
securities, or pursuant to any deposit agreement;
provided that, in any such case, the new securities
and cash, if any, are to be delivered to the
Custodian;
(9) In the case of warrants, rights or similar
securities, the surrender thereof in the exercise
of such warrants, rights or similar securities or
the surrender of interim receipts or temporary
securities for definitive securities; provided
that, in any such case, the new securities and
cash, if any, are to be delivered to the Custodian;
(10) For delivery in connection with any loans of
securities made by the Fund, but only against
receipt of adequate collateral as agreed upon from
time to time by the Custodian and the Fund, which
may be in the form of cash or obligations issued by
the United States government, its agencies or
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<PAGE>
instrumentalities, except that in connection with
any loans for which collateral is to be credited to
the Custodian's account in the book-entry system
authorized by the U.S. Department of the Treasury,
the Custodian will not be held liable or
responsible for the delivery of securities owned by
the Fund prior to the receipt of such collateral;
(11) For delivery as security in connection with any
borrowings by the Fund requiring a pledge of assets
by the Fund, but only against receipt of amounts
borrowed;
(12) For delivery in accordance with the provisions of
any agreement among the Fund, the Custodian and a
broker-dealer registered under the Securities
Exchange Act of 1934 (the "Exchange Act") and a
member of The National Association of Securities
Dealers, Inc. ("NASD"), relating to compliance with
the rules of The Options Clearing Corporation and
of any registered national securities exchange, or
of any similar organization or organizations,
regarding escrow or other arrangements in
connection with transactions by the Fund;
(13) For delivery in accordance with the provisions of
any agreement among the Fund, the Custodian, and a
Futures Commission Merchant registered under the
Commodity Exchange Act, relating to compliance with
the rules of the Commodity Futures Trading
Commission and/or any Contract Market, or any
similar organization or organizations, regarding
account deposits in connection with transactions by
the Fund;
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<PAGE>
(14) Upon receipt of instructions from the transfer
agent ("Transfer Agent") for the Fund, for delivery
to such Transfer Agent or to the holders of shares
in connection with distributions in kind, as may be
described from time to time in the Fund's currently
effective prospectus and statement of additional
information ("prospectus"), in satisfaction of
requests by holders of Shares for repurchase or
redemption; and
(15) For any other proper business purpose, but only
upon receipt of, in addition to Proper
Instructions, a certified copy of a resolution of
the Board of Directors/Trustees or of the Executive
Committee signed by an officer of the Fund and
certified by the Secretary or an Assistant
Secretary, specifying the securities to be
delivered, setting forth the purpose for which such
delivery is to be made, declaring such purpose to
be a proper business purpose, and naming the person
or persons to whom delivery of such securities
shall be made.
2.3 Registration of Securities. Domestic securities held by
the Custodian (other than bearer securities) shall be registered in
the name of the Fund or in the name of any nominees of the Fund or
of any nominee of the Custodian which nominee shall be assigned
exclusively to the Fund, unless the Fund has authorized in writing
the appointment of a nominee to be used in common with other
registered investment companies having the same investment adviser
as the Fund, or in the name or nominee name of any agent appointed
pursuant to Section 2.9 or in the name or nominee name of any sub-
custodian appointed pursuant to Article 1. All securities accepted
by the Custodian on behalf of the Fund under the terms of this
Contract shall be in "street name" or other good delivery form.
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<PAGE>
If, however, the Fund directs the Custodian to maintain securities
in "street name", the Custodian shall utilize its best efforts to
timely collect income due the Fund on such securities and to notify
the Fund on a best efforts basis of relevant corporate actions
including, without limitation, pendency of calls, maturities,
tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a
separate bank account or accounts in the United States in the name
of the Fund, subject only to draft or order by the Custodian acting
pursuant to the terms of this Contract, and shall hold in such
account or accounts, subject to the provisions hereof, all cash
received by it from or for the account of the Fund, other than cash
maintained by the Fund, other than cash maintained by the Fund in
a bank account established and used in accordance with Rule 17f-3
under the Investment Company Act of 1940. Funds held by the
Custodian for the Fund may be deposited by it to its credit as
Custodian in the Banking Department of the Custodian or in such
other banks or trust companies as it may in its discretion deem
necessary or desirable; provided, however, that every such bank or
trust company shall be qualified to act as a custodian under the
Investment Company Act of 1940 and that each such bank or trust
company and the funds to be approved by vote of a majority of the
Board of Directors/Trustees of the Fund. Such funds shall be
deposited by the Custodian in its capacity as Custodian and shall
be withdrawable by the Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement
between the Fund and the Custodian, the Custodian shall, upon the
receipt of Proper Instructions, make federal funds available to the
Fund as of specified times agreed upon from time to time by the
Fund and the Custodian in the amount of checks received in payment
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<PAGE>
for Shares of the Fund which are deposited into the Fund's account.
2.6 Collection of Income. Subject to the provisions of
Section 2.3, the Custodian shall collect on a timely basis all
income and other payments with respect to registered securities
held hereunder to which the Fund shall be entitled either by law or
pursuant to custom in the securities business, and shall collect on
a timely basis all income and other payments with respect to bearer
securities if, on the date of payment by the issuer, such
securities are held by the Custodian or its agent thereof and shall
credit such income, as collected, to the Fund's custodian account.
Without limiting the generality of the foregoing, the Custodian
shall detach and present for payment all coupons and other income
items requiring presentation as and when they become due and shall
collect interest when due on securities held hereunder. Income due
the Fund on securities loaned pursuant to the provisions of Section
2.2 (10) shall be the responsibility of the Fund. The Custodian
will have no duty or responsibility in connection therewith, other
than to provide the Fund with such information or data as may be
necessary to assist the Fund in arranging for the timely delivery
to the Custodian of the income to which the Fund is properly
entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper
Instructions, which may be continuing instructions when deemed
appropriate by the parties, the Custodian shall pay out monies of
the Fund in the following cases only:
(1) Upon the purchase of securities held domestically,
options, futures contracts or options on futures
contracts for the account of the Fund but only
(a) against the delivery of such securities, or
evidence of title to such options, futures
-8-
<PAGE>
contracts or options on futures contracts, to the
Custodian (or any bank, banking firm or trust
company doing business in the United States or
abroad which is qualified under the Investment
Company Act of 1940, as amended, to act as a
custodian and has been designated by the Custodian
as its agent for this purpose) registered in the
name of the Fund or in the name of a nominee of the
Custodian referred to in Section 2.3 hereof or in
proper form for transfer; (b) in the case of a
purchase effected through a Securities System, in
accordance with the conditions set forth in Section
2.10 hereof; (c) in the case of a purchase
involving the Direct Paper System, in accordance
with the conditions set forth in Section 2.10A; (d)
in the case of repurchase agreements entered into
between the Fund and the Custodian, or another
bank, or a broker-dealer which is a member of NASD,
(i) against delivery of the securities either in
certificate form or through an entry crediting the
Custodian's account at the Federal Reserve Bank
with such securities or (ii) against delivery of
the receipt evidencing purchase by the Fund of
securities owned by the Custodian along with
written evidence of the agreement by the Custodian
to repurchase such securities from the Fund or
(e) for transfer to a time deposit account of the
Fund in any bank, whether domestic or foreign; such
transfer may be effected prior to receipt of a
confirmation from a broker and/or the applicable
bank pursuant to Proper Instructions from the Fund
as defined in Article 5;
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<PAGE>
(2) In connection with conversion, exchange or
surrender of securities owned by the Fund as set
forth in Section 2.2 hereof;
(3) For the redemption or repurchase of Shares issued
by the Fund as set forth in Article 4 hereof;
(4) For the payment of any expense or liability
incurred by the Fund, including but not limited to
the following payments for the account of the Fund:
interest, taxes, management, accounting, transfer
agent and legal fees, and operating expenses of the
Fund whether or not such expenses are to be in
whole or part capitalized or treated as deferred
expenses;
(5) For the payment of any dividends declared pursuant
to the governing documents of the Fund;
(6) For payment of the amount of dividends received in
respect of securities sold short;
(7) For any other proper purpose, but only upon receipt
of, in addition to Proper Instructions, a certified
copy of a resolution of Board of Directors/Trustees
or of the Executive Committee of the Fund signed by
an officer of the Fund and certified by its
Secretary or an Assistant Secretary, specifying the
amount of such payment, setting forth the purpose
for which such payment is to be made, declaring
such purpose to be a proper purpose, and naming the
person or persons to whom such payment is to be
made.
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<PAGE>
2.8 Liability for Payment in Advance of Receipt of Securities
Purchased. Except as specifically stated otherwise in this
Contract, in any and every case where payment for purchase of
securities for the account of the Fund is made by the Custodian in
advance of receipt of the securities purchased in the absence of
specific written instructions from the Fund to so pay in advance,
the Custodian shall be absolutely liable to the Fund for such
securities to the same extent as if the securities had been
received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or
times in its discretion appoint (and may at any time remove) any
other bank or trust company which is itself qualified under the
Investment Company Act of 1940, as amended, to act as a custodian,
as its agent to carry out such of the provisions of this Article 2
as the Custodian may from time to time direct; provided, however,
that the appointment of any agent shall not relieve the Custodian
of its responsibilities or liabilities hereunder.
2.10 Deposit of Securities in Securities Systems. The
Custodian may deposit and/or maintain domestic securities owned by
the Fund in a clearing agency registered with the Securities and
Exchange Commission under Section 17A of the Securities Exchange
Act of 1934, which acts as a securities depository, or in the book-
entry system authorized by the U.S. Department of the Treasury and
certain federal agencies, collectively referred to herein as
"Securities System" in accordance with applicable Federal Reserve
Board and Securities and Exchange Commission rules and regulations,
if any, and subject to the following provisions:
(1) The Custodian may keep domestic securities of the
Fund in a Securities System provided that such
securities are represented in an account
("Account") of the Custodian in the Securities
System which shall not include any assets of the
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<PAGE>
Custodian other than assets held as a fiduciary,
custodian or otherwise for customers;
(2) The records of the Custodian with respect to
domestic securities of the Fund which are
maintained in a Securities System shall identify by
book-entry those securities belonging to the Fund;
(3) The Custodian shall pay for domestic securities
purchased for the account of the Fund upon (i)
receipt of advice from the Securities System that
such securities have been transferred to the
Account, and (i.) the making of an entry on the
records of the Custodian to reflect such payment
and transfer for the account of the Fund. The
Custodian shall transfer domestic securities sold
for the account of the Fund upon (i) receipt of
advice from the Securities System that payment for
such securities has been transferred to the
Account, and (ii) the making of an entry on the
records of the Custodian to reflect such transfer
and payment for the account of the Fund. Copies of
all advices from the Securities System of transfers
of domestic securities for the account of the Fund
shall identify the Fund, be maintained for the Fund
by the Custodian and be provided to the Fund at its
request. Upon request, the Custodian shall furnish
the Fund confirmation of each transfer to or from
the account of the Fund in the form of a written
advice or notice and shall furnish promptly to the
Fund copies of daily transaction sheets reflecting
each day's transactions in the Securities System
for the account of the Fund.
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<PAGE>
(4) The Custodian shall provide the Fund with any
report obtained by the Custodian on the Securities
System's accounting system, internal accounting
control and procedures for safeguarding securities
deposited in the Securities System;
(5) The Custodian shall have received the initial or
annual certificate, as the case may be, required by
Article 13 hereof;
(6) Anything to the contrary in this Contract
notwithstanding, the Custodian shall be liable to
the Fund for any loss or damage to the Fund
resulting from use of the Securities System by
reason of any negligence, misfeasance or misconduct
of the Custodian or any of its agents or of any of
its or their employees or from failure of the
Custodian or any such agent to enforce effectively
such rights as it may have against the Securities
System; at the election of the Fund, it shall be
entitled to be subrogated to the rights of the
Custodian with respect to any claim against the
Securities System or any other person which the
Custodian may have as a consequence of any such
loss or damage if and to the extent that the Fund
has not been made whole for any such loss or
damage.
2.10A Fund Assets Held in the Custodian's Direct Paper System.
The Custodian may deposit and/or maintain securities owned by
the Fund in the Direct Paper System of the Custodian subject to the
following provisions:
(1) No transaction relating to securities in the Direct
Paper System will be effected in the absence of
Proper Instructions;
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<PAGE>
(2) The Custodian may keep securities of the Fund in
the Direct Paper System only if such securities are
represented in an account ("Account") of the
Custodian in the Direct Paper System which shall
not include any assets of the Custodian other than
assets held as a fiduciary, custodian or otherwise
for customers;
(3) The records of the Custodian with respect to
securities of the Fund which are maintained in the
Direct Paper System shall identify by book-entry
those securities belonging to the Fund;
(4) The Custodian shall pay for securities purchased
for the account of the Fund upon the making of an
entry on the records of the Custodian to reflect
such payment and transfer of securities to the
account of the Fund. The Custodian shall transfer
securities sold for the account of the Fund upon
the making of an entry on the records of the
Custodian to reflect such transfer and receipt of
payment for the account of the Fund;
(5) The Custodian shall furnish the Fund confirmation
of each transfer to or from the account of the
Fund, in the form of a written advice or notice, of
Direct Paper on the next business day following
such transfer and shall furnish to the Fund copies
of daily transaction sheets reflecting each day's
transaction in the Direct Paper System for the
account of the Fund;
(6) The Custodian shall provide the Fund with any
report on its system of internal accounting control
as the Fund may reasonably request from time to
time;
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<PAGE>
2.11 Segregated Account. The Custodian shall upon receipt of
Proper Instructions establish and maintain a segregated account or
accounts for and on behalf of the Fund, into which account or
accounts may be transferred cash and/or securities, including
securities maintained in an account by the Custodian pursuant to
Section 2.10 hereof, (i) in accordance with the provisions of any
agreement among the Fund, the Custodian and a broker-dealer
registered under the Exchange Act and a member of the NASD (or any
futures commission merchant registered under the Commodity Exchange
Act), relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange (or
the Commodity Futures Trading Commission or any registered contract
market), or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions by the
Fund, (ii) for purposes of segregating cash, government securities
or liquid, high-grade debt obligations in connection with options
purchased, sold or written by the Fund or commodity futures
contracts or options thereon purchased or sold by the Fund, (iii)
for the purposes of compliance by the Fund with the procedures
required by Investment Company Act Release No. 10666, or any
subsequent release or releases of the Securities and Exchange
Commission relating to the maintenance of segregated accounts by
registered investment companies and (iv) for other proper corporate
purposes, but only, in the case of clause (iv), upon receipt of, in
addition to Proper Instructions, a certified copy of a resolution
of the Board of Directors/Trustees or of the Executive Committee
signed by an officer of the Fund and certified by the Secretary or
an Assistant Secretary, setting forth the purpose or purposes of
such segregated account and declaring such purposes to be proper
corporate purposes.
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<PAGE>
2.12 Ownership Certificates for Tax Purposes. The Custodian
shall execute ownership and other certificates and affidavits for
all federal and state tax purposes in connection with receipt of
income or other payments with respect to domestic securities of the
Fund held by it and in connection with transfers of such
securities.
2.13 Proxies. The Custodian shall, with respect to the
domestic securities held hereunder, cause to be promptly executed
by the registered holder of such securities, if the securities are
registered otherwise than in the name of the Fund or a nominee of
the Fund, all proxies, without indication of the manner in which
such proxies are to be voted, and shall promptly deliver to the
Fund such proxies, all proxy soliciting materials and all notices
relating to such securities.
2.14 Communications Relating to Fund Portfolio Securities.
Subject to the provisions of Section 2.3, the Custodian shall
transmit promptly to the Fund all written information (including,
without limitation, pendency of calls and maturities of securities
held domestically and expirations of rights in connection therewith
and notices of exercise of call and put options written by the Fund
and the maturity of futures contracts purchased or sold by the
Fund) received by the Custodian from issuers of the securities
being held for the Fund. With respect to tender or exchange
offers, the Custodian shall transmit promptly to the Fund all
written information received by the Custodian from issuers of the
securities whose tender or exchange is sought and from the party
(or his agents) making the tender or exchange offer. If the Fund
desires to take action with respect to any tender offer, exchange
offer or any other similar transaction, the Fund shall notify the
Custodian at least three business days prior to the date of which
the Custodian is to take such action.
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<PAGE>
2.15 Reports to Fund by Independent Public Accountants. The
Custodian shall provide the Fund, at such times as the Fund may
reasonably require, with reports by independent public accountants
on the accounting system, internal accounting control and
procedures for safeguarding securities, futures contracts and
options on futures contracts, including securities deposited and/or
maintained in a Securities System, relating to the services
provided by the Custodian under this Contract; such reports shall
be of sufficient scope and in sufficient detail, as may reasonably
be required by the Fund to provide reasonable assurance that any
material inadequacies would be disclosed by such examination, and,
if there are no such inadequacies, the reports shall so state.
3. Duties of the Custodian with Respect to Property of the Fund
Held Outside of the United States
3.1 Appointment of Foreign Sub-Custodians. The Fund hereby
authorizes and instructs the Custodian to employ as sub-custodians
for the Fund's securities and other assets maintained outside the
United States the foreign banking institutions and foreign
securities depositories designated on Schedule A hereto ("foreign
sub-custodians"). Upon receipt of "Proper Instructions", as
defined in Section 5 of this Contract, together with a certified
resolution of the Fund's Board of Directors/Trustees, the Custodian
and the Fund may agree to amend Schedule A hereto from time to time
to designate additional foreign banking institutions and foreign
securities depositories to act as sub-custodian. Upon receipt of
Proper Instructions, the Fund may instruct the Custodian to cease
the employment of any one or more such sub-custodians for
maintaining custody of the Fund's assets.
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<PAGE>
3.2 Assets to be Held. The Custodian shall limit the
securities and other assets maintained in the custody of the
foreign sub-custodians to: (a) "foreign securities", as defined in
paragraph (c)(1) of Rule 17f-5 under the Investment Company Act of
1940, and (b) cash and cash equivalents in such amounts as the
Custodian or the Fund may determine to be reasonably necessary to
effect the Fund's foreign securities transactions.
3.3 Foreign Securities Depositories. Except as may otherwise
be agreed upon in writing by the Custodian and the Fund, assets of
the Fund shall be maintained in foreign securities depositories
only through arrangements implemented by the foreign banking
institutions serving as sub-custodians pursuant to the terms
hereof. Where possible, such arrangements shall include entry into
agreements containing the provisions set forth in Section 3.5
hereof.
3.4 Segregation of Securities. The Custodian shall identify
on its books as belonging to the Fund, the foreign securities of
the Fund held by each foreign sub-custodian. Each agreement
pursuant to which the Custodian employs a foreign banking
institution shall require that such institution establish a custody
account for the Custodian on behalf of the Fund and physically
segregate in that account, securities and other assets of the Fund,
and, in the event that such institution deposits the Fund's
securities in a foreign securities depository, that it shall
identify on its books as belonging to the Custodian, as agent for
the Fund, the securities so deposited.
3.5 Agreements with Foreign Banking Institutions. Each
agreement with a foreign banking institution shall be substantially
in the form set forth in Exhibit I hereto and shall provide that
(a) the Fund's assets will not be subject to any right, charge,
security interest, lien or claim of any kind in favor of the
foreign banking institution or its creditors or agent, except a
claim of payment for their safe custody or administration; (b)
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<PAGE>
beneficial ownership of the Fund's assets will be freely
transferable without the payment of money or value other than for
custody or administration; (c) adequate records will be maintained
identifying the assets as belonging to the Fund; (d) officers of or
auditors employed by, or other representatives of the Custodian,
including to the extent permitted under applicable law the
independent public accountants for the Fund, will be given access
to the books and records of the foreign banking institution
relating to its actions under its agreement with the Custodian; and
(e) assets of the Fund held by the foreign sub-custodian will be
subject only to the instructions of the Custodian or its agents.
3.6 Access of Independent Accountants of the Fund. Upon
request of the Fund, the Custodian will use its best efforts to
arrange for the independent accountants of the Fund to be afforded
access to the books and records of any foreign banking institution
employed as a foreign sub-custodian insofar as such books and
records relate to the performance of such foreign banking
institution under its agreement with the Custodian.
3.7 Reports by Custodian. The Custodian will supply to the
Fund from time to time, as mutually agreed upon, statements in
respect of the securities and other assets of the Fund held by
foreign sub-custodians, including but not limited to an
identification of entities having possession of the Fund's
securities and other assets and advices or notifications of any
transfers of securities to or from each custodial account
maintained by a foreign banking institution for the Custodian on
behalf of the Fund indicating, as to securities acquired for the
Fund, the identity of the entity having physical possession of such
securities.
3.8 Transactions in Foreign Custody Account
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<PAGE>
(a) Except as otherwise provided in paragraph (b) of
this Section 3.8, the provision of Sections 2.2 and 2.7 of this
Contract shall apply, in their entirety to the foreign securities
of the Fund held outside the United States by foreign sub-
custodians.
(b) Notwithstanding any provision of this Contract to
the contrary, settlement and payment for securities received for
the account of the Fund and delivery of securities maintained for
the account of the Fund may be effected in accordance with the
customary established securities trading or securities processing
practices and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivering
securities to the purchaser thereof or to a dealer therefore (or an
agent for such purchaser or dealer) against a receipt with the
expectation of receiving later payment for such securities from
such purchaser or dealer.
(c) Securities maintained in the custody of a foreign
sub-custodian may be maintained in the name of such entity's
nominee to the same extent as set forth in Section 2.3 of this
Contract, and the Fund agrees to hold any such nominee harmless
from any liability as a holder of record of such securities.
3.9 Liability of Foreign Sub-Custodians. Each agreement
pursuant to which the Custodian employs a foreign banking
institution as a foreign sub-custodian shall require the
institution to exercise reasonable care in the performance of its
duties and to indemnify, and hold harmless, the Custodian and each
Fund from and against any loss, damage, cost, expense, liability or
claim arising out of or in connection with the institution's
performance of such obligations. At the election of the Fund, it
shall be entitled to be subrogated to the rights of the Custodian
with respect to any claims against a foreign banking institution as
a consequence of any such loss, damage, cost, expense, liability or
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<PAGE>
claim if and to the extent that the Fund has not been made whole
for any such loss, damage, cost, expense, liability or claim.
3.10 Liability of Custodian. The Custodian shall be liable
for the acts or omissions of a foreign banking institution to the
same extent as set forth with respect to sub-custodians generally
in this Contract and, regardless of whether assets are maintained
in the custody of a foreign banking institution, a foreign
securities depository or a branch of a U.S. bank as contemplated by
paragraph 3.13 hereof, the Custodian shall not be liable for any
loss, damage, cost, expense, liability or claim resulting from
nationalization, expropriation, currency restrictions, or acts of
war or terrorism or any loss where the sub-custodian has otherwise
exercised reasonable care. Notwithstanding the foregoing
provisions of this paragraph 3.10, in delegating custody duties to
State Street London Ltd., the Custodian shall not be relieved of
any responsibility to the Fund for any loss due to such delegation,
except such loss as may result from (a) political risk (including,
but not limited to, exchange control restrictions, confiscation,
expropriation, nationalization, insurrection, civil strife or armed
hostilities) or (b) other losses (excluding a bankruptcy or
insolvency of State Street London Ltd. not caused by political
risk) due to Acts of God, nuclear incident or other losses under
circumstances where the Custodian and State Street London Ltd. have
exercised reasonable care.
3.11 Reimbursement for Advances. If the Fund requires the
Custodian to advance cash or securities for any purpose including
the purchase or sale of foreign exchange or of contracts for
foreign exchange, or in the event that the Custodian or its
nominees shall incur or be assessed any taxes, charges, expenses,
assessments, claims or liabilities in connection with the
performance of this Contract, except such as amy arise from its or
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<PAGE>
its nominee's own negligent action, negligent failure to act or
wilful misconduct, any property at any time held for the account of
the Fund shall be security therefor and should the Fund fail to
repay the Custodian promptly, the Custodian shall be entitled to
utilize available cash and to dispose of the Fund assets to the
extent necessary to obtain reimbursement.
3.12 Monitoring Responsibilities. The Custodian shall
furnish annually to the Fund, during the month of June, information
concerning the foreign sub-custodians employed by the Custodian.
Such information shall be similar in kind and scope to that
furnished to the Fund in connection with the initial approval of
this Contract. In addition, the Custodian will promptly inform the
Fund in the event that the Custodian learns of a material adverse
change in the financial condition of a foreign sub-custodian or any
material loss of the assets of the Fund or in the case of any
foreign sub-custodian not the subject of an exemptive order from
the Securities and Exchange Commission is notified by such foreign
sub-custodian that there appears to be a substantial likelihood
that its shareholders equity will decline below $200 million (U.S.
dollars or the equivalent thereof) or that its shareholders equity
has declined below $200 million (in each case computed in
accordance with generally accepted U.S. accounting principles).
3.13 Branches of U.S. Banks
(a) Except as otherwise set forth in this Contract, the
provisions of Article 3 shall not apply where the custody of the
Fund assets are maintained in a foreign branch of a banking
institution which is a "bank" as defined by Section 2(a)(5) of the
Investment Company Act of 1940 meeting the qualification set forth
in Section 26(a) of said Act. The appointment of any such branch
as a sub-custodian shall be governed by paragraph 1 of this
Contract.
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<PAGE>
(b) Cash held for the Fund in the United Kingdom shall
be maintained in an interest bearing account established for the
Fund with the Custodian's London branch, which account shall be
subject to the direction of the Custodian, State Street London Ltd.
or both.
4. Payments for Repurchases or Redemptions and Sales of Shares of
the Fund.
From such funds as may be available for the purpose but
subject to the limitations of the Articles of
Incorporation/Declaration of Trust and any applicable votes of the
Board of Directors/Trustees of the Fund pursuant thereto, the
Custodian shall, upon receipt of instructions from the Transfer
Agent, make funds available for payment to holders of Shares who
have delivered to the Transfer Agent a request for redemption or
repurchase of their Shares. In connection with the redemption or
repurchase of Shares of the Fund, the Custodian is authorized upon
receipt of instructions from the Transfer Agent to wire funds to or
through a commercial bank designated by the redeeming shareholders.
In connection with the redemption or repurchase of Shares of the
Fund, the Custodian shall honor checks drawn on the Custodian by a
holder of Shares, which checks have been furnished by the Fund to
the holder of Shares, when presented to the Custodian in accordance
with such procedures and controls as are mutually agreed upon from
time to time between the Fund and the Custodian.
The Custodian shall receive from the distributor for the
Fund's Shares or from the Transfer Agent of the Fund and deposit
into the Fund's account such payments as are received for Shares of
the Fund issued or sold from time to time by the Fund. The
Custodian will provide timely notification to the Fund and the
Transfer Agent of any receipt by it of payments for Shares of the
Fund.
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<PAGE>
5. Proper Instructions.
Proper Instructions as used herein means a writing signed or
initialled by one or more person or persons as the officers of the
Fund shall have from time to time authorized. Each such writing
shall set forth the specific transaction or type of transaction
involved, including a specific statement of the purpose for which
such action is requested. Oral instructions will be considered
Proper Instructions if the Custodian reasonably believes them to
have been given by a person authorized to give such instructions
with respect to the transaction involved. The Fund shall cause all
oral instructions to be confirmed in writing. It is understood and
agreed that the Board of Directors/Directors/Trustees has
authorized (i) Prudential Mutual Fund Management, Inc., as Manager
of the Fund, and (ii) The Prudential Investment Corporation (or
Prudential-Bache Securities Inc.), as Subadviser to the Fund, to
deliver proper instructions with respect to all matters for which
proper instructions are required by this Article 5. The Custodian
may rely upon the certificate of an officer of the Manager or
Subadviser, as the case may be, with respect to the person or
persons authorized on behalf of the Manager and Subadviser,
respectively, to sign, initial or give proper instructions for the
purpose of this Article 5. Proper Instructions may include
communications effected directly between electro-mechanical or
electronic devices provided that the Fund and the Custodian are
satisfied that such procedures afford adequate safeguards for the
Fund's assets. For purposes of this Section, Proper Instructions
shall include instructions received by the Custodian pursuant to
any three-party agreement which requires a segregated asset account
in accordance with Section 2.11.
6. Actions Permitted without Express Authority.
The Custodian may in its discretion, without express authority
from the Fund:
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<PAGE>
(1) make payments to itself or others for minor expenses
of handling securities or other similar items relating to its
duties under this Contract, provided that all such payments shall
be accounted for to the Fund;
(2) surrender securities in temporary form for
securities in definitive form;
(3) endorse for collection, in the name of the Fund,
checks, drafts and other negotiable instruments; and
(4) in general, attend to all non-discretionary details
in connection with the sale, exchange, substitution, purchase,
transfer and other dealings with the securities and property of the
Fund except as otherwise directed by the Board of
Directors/Trustees of the Fund.
7. Evidence of Authority
The Custodian shall be protected in acting upon any
instructions, notice, request, consent, certificate or other
instrument or paper believed by it to be genuine and to have been
properly executed by or on behalf of the Fund. The Custodian may
receive and accept a certified copy of a vote of the Board of
Directors/Trustees of the Fund as conclusive evidence (a) of the
authority of any person to act in accordance with such vote or (b)
of any determination or of any action by the Board of Directors/
Trustees pursuant to the Articles of Incorporation/Declaration of
Trust as described in such vote, and such vote may be considered as
in full force and effect until receipt by the Custodian of written
notice to the contrary.
8. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income.
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<PAGE>
The Custodian shall cooperate with and supply necessary
information to the entity or entities appointed by the Board of
Directors/Trustees of the Fund to keep the books of account of the
Fund and/or compute the net asset value per share of the
outstanding shares of the Fund or, if directed in writing to do so
by the Fund, shall itself keep such books of account and/or compute
such net asset value per share. If so directed, the Custodian
shall also calculate daily the net income of the Fund as described
in the Fund's currently effective prospectus and shall advise the
Fund and the Transfer Agent daily of the total amounts of such net
income and, if instructed in writing by an office of the Fund to do
so, shall advise the Transfer Agent periodically of the division of
such net income among its various components. The calculations of
the net asset value per share and the daily income of the Fund
shall be made at the time or times described from time to time in
the Fund's currently effective prospectus.
9. Records
The Custodian shall create and maintain all records relating
to its activities and obligations under this Contract in such
manner as will meet the obligations of the Fund under the
Investment Company Act of 1940, with particular attention to
Section 31 thereof and Rules 31a-1 and 31a-2 thereunder. All such
records shall be the property of the Fund and shall at all times
during the regular business hours of the Custodian be open for
inspection by duly authorized officers, employees or agents of the
Fund and employees and agents of the Securities and Exchange
Commission. The Custodian shall, at the Fund's request, supply the
Fund with a tabulation of securities owned by the Fund and held by
the Custodian and shall, when requested to do so by the Fund and
for such compensation as shall be agreed upon between the Fund and
the Custodian, include certificate numbers in such tabulations.
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<PAGE>
10. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the
Fund may from time to time request, to obtain from year to year
favorable opinions from the Fund's independent accountants with
respect to its activities hereunder in connection with the
preparation of the Fund's Form N-1A, Form N-2 (in the case of a
closed end Fund) and Form N-SAR or other periodic reports to the
Securities and Exchange Commission and with respect to any other
requirements of such Commission.
11. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for
its services and expenses as Custodian, as agreed upon from time to
time between the Fund and the Custodian.
12. Responsibility of Custodian
So long as and to the extent that it is in the exercise of
reasonable care, the Custodian shall not be responsible for the
title, validity or genuineness of any property or evidence of title
thereto received by it or delivered by it pursuant to this Contract
and shall be held harmless in acting upon any notice, request,
consent, certificate or other instrument reasonably believed by it
to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the
terms of a three-party futures or options agreement. The Custodian
shall be held to the exercise of reasonable care in carrying out
the provisions of this Contract but shall be kept indemnified by
and shall be without liability to the Fund for any action taken or
omitted by it in good faith without negligence. It shall be
entitled to rely on and may act upon advice of counsel (who may be
counsel for the Fund) on all matters, and shall be without
liability for any action reasonably taken or omitted pursuant to
such advice. Notwithstanding the foregoing, the responsibility of
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<PAGE>
the Custodian with respect to redemptions effected by check shall
be in accordance with a separate Agreement entered into between the
Custodian and the Fund.
The Custodian shall be liable for the acts or omissions of a
foreign banking institution appointed pursuant to the provisions of
Article 3 to the same extent as set forth in Article 1 hereof with
respect to sub-custodians located in the United States and,
regardless of whether assets are maintained in the custody of a
foreign banking institution, a foreign securities depository or a
branch of a U.S. bank as contemplated by paragraph 3.11 hereof, the
Custodian shall not be liable for any loss, damage, cost, expense,
liability or claim resulting from, or caused by, the direction of
or authorization by the Fund to maintain custody or any securities
or cash of the Fund in a foreign country including, but not limited
to, losses resulting from nationalization, expropriation, currency
restrictions, or acts of war or terrorism.
If the Fund requires the Custodian to take any action with
respect to securities, which action involves the payment of money
or which action may, in the opinion of the Custodian, result in the
Custodian or its nominee assigned to the Fund being liable for the
payment of money or incurring liability of some other form, the
Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and
form satisfactory to it.
If the Fund requires the Custodian to advance cash or
securities for any purpose or in the event that the Custodian or
its nominee shall incur or be assessed any taxes, charges,
expenses, assessments, claims or liabilities in connection with the
performance of this Contract, except such as may arise from its or
its nominee's own negligent action, negligent failure to act or
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<PAGE>
wilful misconduct, any property at any time held for the account of
the Fund shall be security therefor and should the Fund fail to
repay the Custodian promptly, the Custodian shall be entitled to
utilize available cash and to dispose of the Fund assets to the
extent necessary to obtain reimbursement provided, however that,
prior to disposing of Fund assets hereunder, the Custodian shall
give the Fund notice of its intention to dispose of assets
identifying such assets and the Fund shall have one business day
from receipt of such notice to notify the Custodian if the Fund
wishes the Custodian to dispose of Fund assets of equal value other
than those identified in such notice.
13. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution,
shall continue in full force and effect until terminated as
hereinafter provided, may be amended at any time by mutual
agreement of the parties hereto and may be terminated by either
party by an instrument in writing delivered or mailed, postage
prepaid to the other party, such termination to take effect not
sooner than sixty (60) days after the date of such delivery or
mailing; provided, however that the Custodian shall not act under
Section 2.10 hereof in the absence of receipt of an initial
certificate of the Secretary or an Assistant Secretary that the
Board of Directors/Trustees of the Fund has approved the initial
use of a particular Securities System and the receipt of an annual
certificate of the Secretary or an Assistant Secretary that the
Board of Directors/Trustees has reviewed the use by the Fund of
such Securities System, as required in each case by Rule 17f-4
under the Investment Company Act of 1940, as amended and that the
Custodian shall not act under Section 2.10A hereof in the absence
of receipt of an initial certificate of the Secretary or an
Assistant Secretary that the Board of Directors/Trustees has
approved the initial use of the Direct Paper System and the receipt
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<PAGE>
of an annual certificate of the Secretary or an Assistant Secretary
that the Board of Directors/Trustees has reviewed the use by the
Fund of the Direct Paper System; provided further, however, that
the Fund shall not amend or terminate this Contract in
contravention of any applicable federal or state regulations, or
any provision of the Articles of Incorporation/Declaration of
Trust, and further, provided, that the Fund may at any time by
action of its Board of Directors/Trustees (i) substitute another
bank or trust company for the Custodian by giving notice as
described above to the Custodian, or (ii) immediately terminate
this Contract in the event of the appointment of a conservator or
receiver for the Custodian by the Comptroller of the Currency or
upon the happening of a like event at the direction of an
appropriate regulatory agency or court of competent jurisdiction.
Upon termination of the Contract, the Fund shall pay to the
Custodian such compensation as may be due as of the date of such
termination and shall likewise reimburse the Custodian for its
costs, expenses and disbursements.
14. Successor Custodian
If a successor custodian shall be appointed by the Board of
Directors/Trustees of the Fund, the Custodian shall, upon
termination, deliver to such successor custodian at the office of
the Custodian, duly endorsed and in the form for transfer, all
securities then held by it hereunder and shall transfer to an
account of the successor custodian all of the Fund's securities
held in a Securities System.
If no such successor custodian shall be appointed, the
Custodian shall, in like manner, upon receipt of a certified copy
of a vote of the Board of Directors/Trustees of the Fund, deliver
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<PAGE>
at the office of the Custodian and transfer such securities, funds
and other properties in accordance with such vote.
In the event that no written order designating a successor
custodian or certified copy of a vote of the Board of
Directors/Trustees shall have been delivered to the Custodian on or
before the date when such termination shall become effective, then
the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the Investment Company Act
of 1940, doing business in Boston, Massachusetts, of its own
selection, having an aggregate capital, surplus, and undivided
profits, as shown by its last published report, of not less than
$25,000,000, all securities, funds and other properties held by the
Custodian and all instruments held by the Custodian relative
thereto and all other property held by it under this Contract and
to transfer to an account of such successor custodian all of the
Fund's securities held in any Securities System. Thereafter, such
bank or trust company shall be the successor of the Custodian under
this Contract.
In the event that securities, funds and other properties
remain in the possession of the Custodian after the date of
termination hereof owing to failure of the Fund to procure the
certified copy of the vote referred to or of the Board of
Directors/Trustees to appoint a successor custodian, the Custodian
shall be entitled to fair compensation for its services during such
period as the Custodian retains possession of such securities,
funds and other properties and the provisions of this Contract
relating to the duties and obligations of the Custodian shall
remain in full force and effect.
15. Interpretative and Additional Provisions
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<PAGE>
In connection with the operation of this Contract, the
Custodian and the Fund may from time to time agree on such
provisions interpretive of or in addition to the provisions of this
Contract as may in their joint opinion be consistent with the
general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties
and shall be annexed hereto, provided that no such interpretative
or additional provisions shall contravene any applicable federal or
state regulations or any provision of the Articles of
Incorporation/ Declaration of Trust of the Fund. No interpretative
or additional provisions made as provided in the preceding sentence
shall be deemed to be an amendment of this Contract.
16. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof
interpreted under and in accordance with laws of the Commonwealth
of Massachusetts.
17. Prior Contracts
This Contract supersedes and terminates, as of the date
hereof, all prior contracts between the Fund and the Custodian
relating to the custody of the Fund's assets.
18. The Parties
All references herein to the "Fund" are to each of the Funds
listed on Appendix A individually, as if this Contract were between
such individual Fund and the Custodian. With respect to any Fund
listed on Appendix A which is organized as a Massachusetts Business
Trust, references to Board of Directors and Articles of
Incorporation shall be deemed a reference to Board of
Directors/Trustees and Articles of Incorporation/Declaration of
Trust respectively and reference to shares of capital stock shall
be deemed a reference to shares of beneficial interest.
19. Limitation of Liability
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<PAGE>
Each Fund listed on Appendix A that is referenced as a
Massachusetts Business Trust is the designation of the
Directors/Trustees under a Articles of Incorporation/Declaration of
Trust, dated (see Appendix A) and all persons dealing with the Fund
must look solely to the property of the Fund for the enforcement of
any claims against the Fund as neither the Directors/Trustees,
officers, agents or shareholders assume any personal liability for
obligations entered into on behalf of the Fund.
IN WITNESS WHEREOF, each of the parties has caused this
instrument to be executed in its name and behalf by its duly
authorized representative and its seal to be hereunder affixed as
of the dates set forth on Appendix A.
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/ By /s/ Al O'Neal
- ------------------------- --------------------------------------
Assistant Secretary
ATTEST EACH OF THE FUNDS LISTED ON APPENDIX A
/s/ S. Jane Rose By /s/ Robert F. Gunia
- ------------------------- --------------------------------------
Secretary Vice President<PAGE>
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<PAGE>
Appendix A
Fund Name Execution Date of
Date Declaration of Trust
(if applicable)
Command Government Fund July 1, 1990 August 19, 1981
Command Money Fund July 1, 1990 June 5, 1981
Command Tax-Free Fund July 1, 1990 June 5, 1981
The BlackRock Government
Income Trust August 30, 1991 June 13, 1991
The Global Total Return Fund, Inc. September 5, 1990
(formerly The Global Yield
Fund, Inc.)
Prudential Adjustable Rate
Securities Fund, Inc. June 1, 1992
Prudential California
Municipal Fund August 1, 1990 May 18, 1984
Prudential Diversified
Bond Fund, Inc. January 3, 1995
Prudential Equity Fund, Inc. August 1, 1990
Prudential Global Fund, Inc. June 7, 1990
Prudential GNMA Fund, Inc. August 1, 1990
Prudential Government
Income Fund, Inc. July 31, 1990
(formerly Prudential Government
Plus Fund)
Prudential Government
Securities Trust July 26, 1990 September 22, 1981
Prudential Growth Opportunity
Fund, Inc. July 26, 1990
Prudential High Yield Fund, Inc. July 26, 1990
Prudential IncomeVertibleR
Fund, Inc. June 6, 1990
Prudential MoneyMart Assets July 25, 1990
Prudential Multi-Sector Fund, Inc. June 1, 1990
Prudential Municipal Series Fund August 1, 1990 May 18, 1984
Prudential National
Municipals Fund, Inc. July 26, 1990
Prudential Pacific Growth
Fund, Inc. July 16, 1992
Prudential Strategist Fund, Inc. July 25, 1990
(formerly Prudential Research
Fund and Prudential Growth
Fund, Inc.)
Prudential Short-Term Global
Income Fund, Inc. October 25, 1990
Prudential Special Money
Market Fund January 12, 1990
Prudential Structured Maturity
Fund, Inc. July 25, 1989
<PAGE>
Fund Name Execution Date of
Date Declaration of Trust
(if applicable)
Prudential Tax-Free Money Fund July 26, 1990
Prudential U. S. Government Fund June 7, 1990 September 22, 1986
Prudential Utility Fund, Inc. June 6, 1990
The Target Portfolio Trust November 9, 1992 July 29, 1992
<PAGE>
Schedule A
Prudential Mutual Fund Services, Inc.
Fee Schedule
Fee Information for Services as
Transfer Agent, Dividend Disbursing Agent
and Shareholder Servicing Agent
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
General - Fees are based on an annual per shareholder account
charge for account maintenance plus out-of-pocket expenses. In
addition, there is a one time set-up charge per account for
manually established accounts and a monthly charge for inactive
zero balance accounts. The effective period of this fee schedule
is January 3, 1995 through December 31, 1995 and shall continue
thereafter from year to year, unless otherwise amended.
Annual Maintenance Charges - The annual maintenance charge includes
the processing of all transactions and correspondence. The fee is
billable on a monthly basis at the rate of 1/12 of the annual fee.
A charge is made for an account in the month that an account opens
or closes.
Annual Maintenance Per Account Fee $ 13.00
Other Charges
New Account Set-up Fee for Manually $ 2.00
Established Accounts
Monthly Inactive Zero Balance Account Fee $ .20
Out-of-Pocket Expenses - Out-of-pocket expenses include but are not
limited to: postage, stationery and printing, allocable
communication costs, microfilm, microfiche, and expenses incurred
at the specific direction of the Fund.
Payment - An invoice will be presented to the Fund on a monthly
basis assessing the Fund the appropriate fee and out-of-pocket
expenses.
PRUDENTIAL DIVERSIFIED PRUDENTIAL MUTUAL FUND
BOND FUND, INC. SERVICES, INC.
NAME: /s/ Robert F. Gunia NAME: /s/ Vincent Marra
TITLE: Vice President TITLE: Executive Vice President
-------------- ------------------------
DATE: January 3, 1995 DATE: January 3, 1995
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
between
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
and
PRUDENTIAL MUTUAL FUND SERVICES, INC.
TABLE OF CONTENTS
Article 1 Terms of Appointment; Duties of the Agent ......... 1
Article 2 Fees and Expenses.................................. 5
Article 3 Representations and Warranties of the Agent........ 5
Article 4 Representations of Warranties of the Fund.......... 6
Article 5 Duty of Care and Indemnification................... 7
Article 6 Documents and Covenants of the Fund and the Agent.. 10
Article 7 Termination of Agreement........................... 12
Article 8 Assignment......................................... 12
Article 9 Affiliations....................................... 13
Article 10 Amendment.......................................... 14
Article 11 Applicable Law..................................... 14
Article 12 Miscellaneous...................................... 14
Article 13 Merger of Agreement................................ 15
<PAGE> TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the 3rd day of January, 1995 by and
between PRUDENTIAL DIVERSIFIED BOND FUND, INC., a Maryland
corporation, having its principal office and place of business at
One Seaport Plaza, New York, New York 10292 (the Fund), and
PRUDENTIAL MUTUAL FUND SERVICES, INC., a New Jersey corporation,
having its principal office and place of business at Raritan Plaza
One, Edison, New Jersey 08837 (the Agent or PMFS).
WHEREAS, the Fund desires to appoint PMFS as its transfer
agent, dividend disbursing agent and shareholder servicing agent in
connection with certain other activities, and PMFS desires to
accept such appointment;
NOW THEREFORE, in consideration of the mutual covenants
herein contained, the parties hereto agree as follows:
Article 1 Terms of Appointment; Duties of PMFS
1.01 Subject to the terms and conditions set forth
in this Agreement, the Fund hereby employs and appoints PMFS to act
as, and PMFS agrees to act as, the transfer agent for the
authorized and issued shares of the common stock of each series of
the Fund, $.001 par value (Shares), dividend disbursing agent and
shareholder servicing agent in connection with any accumulation,
open-account or similar plans provided to the shareholders of the
Fund or any series thereof (Shareholders) and set out in the
currently effective prospectus and statement of additional
<PAGE>
information (prospectus) of the Fund, including without limitation
any periodic investment plan or periodic withdrawal program.
1.02 PMFS agrees that it will perform the following
services:
(a) In accordance with procedures established from time to
time by agreement between the Fund and PMFS, PMFS shall:
(i) Receive for acceptance, orders for the purchase of
Shares, and promptly deliver payment and appropriate documentation
therefor to the Custodian of the Fund authorized pursuant to the
Articles of Incorporation of the Fund (the Custodian);
(ii) Pursuant to purchase orders, issue the appropriate
number of Shares and hold such Shares in the appropriate
Shareholder account;
(iii) Receive for acceptance redemption requests and
redemption directions and deliver the appropriate documentation
therefor to the Custodian;
(iv) At the appropriate time as and when it receives monies
paid to it by the Custodian with respect to any redemption, pay
over or cause to be paid over in the appropriate manner such monies
as instructed by the redeeming Shareholders;
(v) Effect transfers of Shares by the registered owners
thereof upon receipt of appropriate instructions;
(vi) Prepare and transmit payments for dividends and
distributions declared by the Fund;
(vii) Calculate any sales charges payable by a Shareholder on
purchases and/or redemptions of Shares of the Fund as such charges
2
<PAGE>
may be reflected in the prospectus;
(viii) Maintain records of account for and advise the Fund and
its Shareholders as to the foregoing; and
(ix) Record the issuance of Shares of the Fund and maintain
pursuant to Rule 17Ad-10(e) under the Securities Exchange Act of
1934 (1934 Act) a record of the total number of Shares of the Fund
which are authorized, based upon data provided to it by the Fund,
and issued and outstanding. PMFS shall also provide to the Fund on
a regular basis the total number of Shares which are authorized,
issued and outstanding and shall notify the Fund in case any
proposed issue of Shares by the Fund would result in an overissue.
In case any issue of Shares would result in an overissue, PMFS
shall refuse to issue such Shares and shall not countersign and
issue any certificates requested for such Shares. When recording
the issuance of Shares, PMFS shall have no obligation to take
cognizance of any Blue Sky laws relating to the issue or sale of
such Shares, which functions shall be the sole responsibility of
the Fund.
(b) In addition to and not in lieu of the services set forth
in the above paragraph (a), PMFS shall: (i) perform all of the
customary services of a transfer agent, dividend disbursing agent
and, as relevant, shareholder servicing agent in connection with
accumulation, open-account or similar plans (including without
limitation any periodic investment plan or periodic withdrawal
program), including but not limited to, maintaining all
Shareholder accounts, preparing Shareholder meeting lists, mailing
3
<PAGE>
proxies, receiving and tabulating proxies, mailing Shareholder
reports and prospectuses to current Shareholders, withholding taxes
on non-resident alien accounts, preparing and filing appropriate
forms required with respect to dividends and distributions by
federal tax authorities for all Shareholders, preparing and mailing
confirmation forms and statements of account to Shareholders for
all purchases and redemptions of Shares and other confirmable
transactions in Shareholder accounts, preparing and mailing
activity statements for Shareholders and providing Shareholder
account information and (ii) provide a system which will enable
the Fund to monitor the total number of Shares sold in each State
or other jurisdiction.
(c) In addition, the Fund shall (i) identify to PMFS in
writing those transactions and assets to be treated as exempt from
Blue Sky reporting for each State and (ii) verify the establishment
of transactions for each State on the system prior to activation
and thereafter monitor the daily activity for each State. The
responsibility of PMFS for the Fund's registration status under the
Blue Sky or securities laws of any State or other jurisdiction is
solely limited to the initial establishment of transactions subject
to Blue Sky compliance by the Fund and the reporting of such
transactions to the Fund as provided above and as agreed from time
to time by the Fund and PMFS.
PMFS may also provide such additional services and functions
not specifically described herein as may be mutually agreed between
PMFS and the Fund and set forth in Schedule B hereto.
4
<PAGE>
Procedures applicable to certain of these services may be
established from time to time by agreement between the Fund and
PMFS.
Article 2 Fees and Expenses
2.01 For performance by PMFS pursuant to this Agreement,
the Fund agrees to pay PMFS an annual maintenance fee for each
Shareholder account and certain transactional fees as set out in
the fee schedule attached hereto as Schedule A. Such fees and
out-of-pocket expenses and advances identified under Section 2.02
below may be changed from time to time subject to mutual written
agreement between the Fund and PMFS.
2.02 In addition to the fees paid under Section 2.01
above, the Fund agrees to reimburse PMFS for out-of-pocket expenses
or advances incurred by PMFS for the items set out in Schedule A
attached hereto. In addition, any other expenses incurred by PMFS
at the request or with the consent of the Fund will be reimbursed
by the Fund.
2.03 The Fund agrees to pay all fees and reimbursable
expenses within a reasonable period of time following the mailing
of the respective billing notice. Postage for mailing of
dividends, proxies, Fund reports and other mailings to all
Shareholder accounts shall be advanced to PMFS by the Fund upon
request prior to the mailing date of such materials.
Article 3 Representations and Warranties of PMFS
PMFS represents and warrants to the Fund that:
3.01 It is a corporation duly organized and existing
5
<PAGE>
and in good standing under the laws of New Jersey and it is duly
qualified to carry on its business in New Jersey.
3.02 It is and will remain registered with the U.S.
Securities and Exchange Commission (SEC) as a Transfer Agent
pursuant to the requirements of Section 17A of the 1934 Act.
3.03 It is empowered under applicable laws and by its
charter and By-Laws to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken
to authorize it to enter into and perform this Agreement.
3.05 It has and will continue to have access to the
necessary facilities, equipment and personnel to perform its duties
and obligations under this Agreement.
Article 4 Representations and Warranties of the Fund
The Fund represents and warrants to PMFS that:
4.01 It is a corporation duly organized and existing and
in good standing under the laws of Maryland.
4.02 It is empowered under applicable laws and by its
Articles of Incorporation and By-Laws to enter into and perform
this Agreement.
4.03 All corporate proceedings required by said
Articles of Incorporation and By-Laws have been taken to authorize
it to enter into and perform this Agreement.
4.04 It is an investment company registered with the
SEC under the Investment Company Act of 1940, as amended (the 1940
Act).
4.05 A registration statement under the Securities Act
6
<PAGE>
of 1933 (the 1933 Act) is currently effective and will remain
effective, and appropriate state securities law filings have been
made and will continue to be made, with respect to all Shares of
the Fund being offered for sale.
Article 5 Duty of Care and Indemnification
5.01 PMFS shall not be responsible for, and the Fund
shall indemnify and hold PMFS harmless from and against, any and
all losses, damages, costs, charges, counsel fees, payments,
expenses and liability arising out of or attributable to:
(a) All actions of PMFS or its agents or subcontractors
required to be taken pursuant to this Agreement, provided that such
actions are taken in good faith and without negligence or willful
misconduct.
(b) The Fund's refusal or failure to comply with the terms
of this Agreement, or which arise out of the Fund's lack of good
faith, negligence or willful misconduct or which arise out of the
breach of any representation or warranty of the Fund hereunder.
(c) The reliance on or use by PMFS or its agents or
subcontractors of information, records and documents which (i) are
received by PMFS or its agents or subcontractors and furnished to
it by or on behalf of the Fund, and (ii) have been prepared and/or
maintained by the Fund or any other person or firm on behalf of the
Fund.
(d) The reliance on, or the carrying out by PMFS or its
agents or subcontractors of, any instructions or requests of the
Fund.
7
<PAGE>
(e) The offer or sale of Shares in violation of any
requirement under the federal securities laws or regulations or the
securities or Blue Sky laws of any State or other jurisdiction that
such Shares be registered in such State or other jurisdiction or in
violation of any stop order or other determination or ruling by any
federal agency or any State or other jurisdiction with respect to
the offer or sale of such Shares in such State or other
jurisdiction.
5.02 PMFS shall indemnify and hold the Fund harmless from
and against any and all losses, damages, costs, charges, counsel
fees, payments, expenses and liability arising out of or
attributable to any action or failure or omission to act by PMFS as
a result of PMFS' lack of good faith, negligence or willful
misconduct.
5.03 At any time PMFS may apply to any officer of the Fund
for instructions, and may consult with legal counsel, with respect
to any matter arising in connection with the services to be
performed by PMFS under this Agreement, and PMFS and its agents or
subcontractors shall not be liable and shall be indemnified by the
Fund for any action taken or omitted by it in reliance upon such
instructions or upon the opinion of such counsel. PMFS, its agents
and subcontractors shall be protected and indemnified in acting
upon any paper or document furnished by or on behalf of the Fund,
reasonably believed to be genuine and to have been signed by the
proper person or persons, or upon any instruction, information,
data, records or documents provided to PMFS or its agents or
8
<PAGE>
subcontractors by machine readable input, telex, CRT data entry or
other similar means authorized by the Fund, and shall not be held
to have notice of any change of authority of any person, until
receipt of written notice thereof from the Fund. PMFS, its agents
and subcontractors shall also be protected and indemnified in
recognizing stock certificates which are reasonably believed to
bear the proper manual or facsimile signature of the officers of
the Fund, and the proper countersignature of any former transfer
agent or registrar, or of a co-transfer agent or co-registrar.
5.04 In the event either party is unable to perform its
obligations under the terms of this Agreement because of acts of
God, strikes, equipment or transmission failure or damage
reasonably beyond its control, or other causes reasonably beyond
its control, such party shall not be liable for damages to the
other for any damages resulting from such failure to perform or
otherwise from such causes.
5.05 Neither party to this Agreement shall be liable to the
other party for consequential damages under any provision of this
Agreement or for any act or failure to act hereunder.
5.06 In order that the indemnification provisions contained
in this Article 5 shall apply, upon the assertion of a claim for
which either party may be required to indemnify the other, the
party seeking indemnification shall promptly notify the other party
of such assertion, and shall keep the other party advised with
respect to all developments concerning such claim. The party who
may be required to indemnify shall have the option to participate
9
<PAGE>
with the party seeking indemnification in the defense of such
claim. The party seeking indemnification shall in no case confess
any claim or make any compromise in any case in which the other
party may be required to indemnify it except with the other party's
prior written consent.
Article 6 Documents and Covenants of the Fund and PMFS
6.01 The Fund shall promptly furnish to PMFS the following:
(a) A certified copy of the resolution of the Board of
Directors of the Fund authorizing the appointment of PMFS and the
execution and delivery of this Agreement;
(b) A certified copy of the Articles of Incorporation and
By-Laws of the Fund and all amendments thereto;
(c) The current registration statements and any amendments
and supplements thereto filed with the SEC pursuant to the
requirements of the 1933 Act and the 1940 Act;
(d) A specimen of the certificate for Shares of the Fund
in the form approved by the Board of Directors, with a certificate
of the Secretary of the Fund as to such approval;
(e) All account application forms or other documents
relating to Shareholder accounts and/or relating to any plan
program or service offered or to be offered by the Fund; and
(f) Such other certificates, documents or opinions as the
Agent deems to be appropriate or necessary for the proper
performance of its duties.
6.02 PMFS hereby agrees to establish and maintain
facilities and procedures reasonably acceptable to the Fund for
10
<PAGE>
safekeeping of stock certificates, check forms and facsimile
signature imprinting devices, if any; and for the preparation or
use, and for keeping account of, such certificates, forms and
devices.
6.03 PMFS shall prepare and keep records relating to the
services to be performed hereunder, in the form and manner as it
may deem advisable. To the extent required by Section 31 of the
1940 Act, and the Rules and Regulations thereunder, PMFS agrees
that all such records prepared or maintained by PMFS relating to
the services to be performed by PMFS hereunder are the property of
the Fund and will be preserved, maintained and made available in
accordance with such Section 31 of the 1940 Act, and the Rules and
Regulations thereunder, and will be surrendered promptly to the
Fund on and in accordance with its request.
6.04 PMFS and the Fund agree that all books, records,
information and data pertaining to the business of the other party
which are exchanged or received pursuant to the negotiation or the
carrying out of this Agreement shall remain confidential and shall
not be voluntarily disclosed to any other person except as may be
required by law or with the prior consent of PMFS and the Fund.
6.05 In case of any requests or demands for the inspection
of the Shareholder records of the Fund, PMFS will endeavor to
notify the Fund and to secure instructions from an authorized
officer of the Fund as to such inspection. PMFS reserves the
right, however, to exhibit the Shareholder records to any person
whenever it is advised by its counsel that it may be held liable
11
<PAGE>
for the failure to exhibit the Shareholder records to such person.
Article 7 Termination of Agreement
7.01 This Agreement may be terminated by either party upon
one hundred twenty (120) days written notice to the other.
7.02 Should the Fund exercise its right to terminate, all
out-of-pocket expenses associated with the movement of records and
other materials will be borne by the Fund. Additionally, PMFS
reserves the right to charge for any other reasonable fees and
expenses associated with such termination.
Article 8 Assignment
8.01 Except as provided in Section 8.03 below, neither
this Agreement nor any rights or obligations hereunder may be
assigned by either party without the written consent of the other
party.
8.02 This Agreement shall inure to the benefit of and
be binding upon the parties and their respective permitted
successors and assigns.
8.03 PMFS may, in its sole discretion and without
further consent by the Fund, subcontract, in whole or in part, for
the performance of its obligations and duties hereunder with any
person or entity including but not limited to: (i) Prudential
Securities Incorporated (Prudential Securities), a registered
broker-dealer, (ii) The Prudential Insurance Company of America
(Prudential), (iii) Pruco Securities Corporation, a registered
broker-dealer, (iv) any Prudential Securities or Prudential
subsidiary or affiliate duly registered as a broker-dealer and/or
12
<PAGE>
a transfer agent pursuant to the 1934 Act or (vi) any other
Prudential Securities or Prudential affiliate or subsidiary;
provided, however, that PMFS shall be as fully responsible to the
Fund for the acts and omissions of any agent or subcontractor as it
is for its own acts and omissions.
Article 9 Affiliations
9.01 PMFS may now or hereafter, without the consent of
or notice to the Fund, function as Transfer Agent and/or
Shareholder Servicing Agent for any other investment company
registered with the SEC under the 1940 Act, including without
limitation any investment company whose adviser, administrator,
sponsor or principal underwriter is or may become affiliated with
Prudential Securities and/or Prudential or any of its or their
direct or indirect subsidiaries or affiliates.
9.02 It is understood and agreed that the directors,
officers, employees, agents and Shareholders of the Fund, and the
directors, officers, employees, agents and shareholders of the
Fund's investment adviser and/or distributor, are or may be
interested in the Agent as directors, officers, employees, agents,
shareholders or otherwise, and that the directors, officers,
employees, agents or shareholders of the Agent may be interested in
the Fund as directors, officers, employees, agents, Shareholders or
otherwise, or in the investment adviser and/or distributor as
officers, directors, employees, agents, shareholders or otherwise.
13
<PAGE>
Article 10 Amendment
10.01 This Agreement may be amended or modified by a
written agreement executed by both parties and authorized or
approved by a resolution of the Board of Directors of the Fund.
Article 11 Applicable Law
11.01 This Agreement shall be construed and the
provisions thereof interpreted under and in accordance with the
laws of the State of New Jersey.
Article 12 Miscellaneous
12.01 In the event of an alleged loss or destruction
of any Share certificate, no new certificate shall be issued in
lieu thereof, unless there shall first be furnished to PMFS an
affidavit of loss or non-receipt by the holder of Shares with
respect to which a certificate has been lost or destroyed,
supported by an appropriate bond satisfactory to PMFS and the Fund
issued by a surety company satisfactory to PMFS, except that PMFS
may accept an affidavit of loss and indemnity agreement executed by
the registered holder (or legal representative) without surety in
such form as PMFS deems appropriate indemnifying PMFS and the Fund
for the issuance of a replacement certificate, in cases where the
alleged loss is in the amount of $1000 or less.
12.02 In the event that any check or other order for
payment of money on the account of any Shareholder or new investor
is returned unpaid for any reason, PMFS will (a) give prompt
notification to the Fund's distributor (Distributor) of such
non-payment; and (b) take such other action, including imposition
14
<PAGE>
of a reasonable processing or handling fee, as PMFS may, in its
sole discretion, deem appropriate or as the Fund and the
Distributor may instruct PMFS.
12.03 Any notice or other instrument authorized or
required by this Agreement to be given in writing to the Fund or to
PMFS shall be sufficiently given if addressed to that party and
received by it at its office set forth below or at such other place
as it may from time to time designate in writing.
To the Fund:
Prudential Diversified Bond Fund, Inc.
One Seaport Plaza
New York, NY 10292
Attention: President
To PMFS:
Prudential Mutual Fund Services, Inc.
Raritan Plaza One
Edison, NJ 08837
Attention: President
Article 13 Merger of Agreement
13.01 This Agreement constitutes the entire agreement
between the parties hereto and supersedes any prior agreement with
respect to the subject matter hereof whether oral or written.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed in their names and on their behalf under
their seals by and through their duly authorized officers, as of
the day and year first above written.
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
BY: /s/ Robert F. Gunia
Robert F. Gunia
Vice President
ATTEST:
/s/ E.S. Stark
- --------------------------
PRUDENTIAL MUTUAL FUND
SERVICES, INC.
BY: /s/ Vincent Marra
Vincent Marra
Executive Vice President
ATTEST:
/s/ S. Jane Rose
- --------------------------
16
<PAGE>
Schedule A
Prudential Mutual Fund Services, Inc.
Fee Schedule
Fee Information for Services as
Transfer Agent, Dividend Disbursing Agent
and Shareholder Servicing Agent
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
General - Fees are based on an annual per shareholder account
charge for account maintenance plus out-of-pocket expenses. In
addition, there is a one time set-up charge per account for
manually established accounts and a monthly charge for inactive
zero balance accounts. The effective period of this fee schedule
is January 3, 1995 through December 31, 1995 and shall continue
thereafter from year to year, unless otherwise amended.
Annual Maintenance Charges - The annual maintenance charge includes
the processing of all transactions and correspondence. The fee is
billable on a monthly basis at the rate of 1/12 of the annual fee.
A charge is made for an account in the month that an account opens
or closes.
Annual Maintenance Per Account Fee $ 13.00
Other Charges
New Account Set-up Fee for Manually $ 2.00
Established Accounts
Monthly Inactive Zero Balance Account Fee $ .20
Out-of-Pocket Expenses - Out-of-pocket expenses include but are not
limited to: postage, stationery and printing, allocable
communication costs, microfilm, microfiche, and expenses incurred
at the specific direction of the Fund.
Payment - An invoice will be presented to the Fund on a monthly
basis assessing the Fund the appropriate fee and out-of-pocket
expenses.
PRUDENTIAL DIVERSIFIED PRUDENTIAL MUTUAL FUND
BOND FUND, INC. SERVICES, INC.
NAME: /s/ Robert F. Gunia NAME: /s/ Vincent Marra
TITLE: Vice President TITLE: Executive Vice President
DATE: January 3, 1995 DATE: January 3, 1995
<PAGE>
SCHEDULE B
<PAGE>
Exhibit 11
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Post-Effective Amendment No. 1 to Registration
Statement No. 33-55441 of Prudential Diversified Bond Fund, Inc. of our report
dated October 5, 1994, appearing in the Statement of Additional Information,
which is a part of such Registration Statement, and to the reference to us under
the heading ``Custodian, Transfer and Dividend Disbursing Agent and Independent
Accountants'' in the Statement of Additional Information.
Deloitte & Touche LLP
New York, New York
June 19, 1995
<PAGE>
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
Distribution and Service Plan
(Class A Shares)
Introduction
The Distribution and Service Plan (the Plan) set forth below
which is designed to conform to the requirements of Rule 12b-1
under the Investment Company Act of 1940 (the Investment Company
Act) and Article III, Section 26 of the Rules of Fair Practice of
the National Association of Securities Dealers, Inc. (NASD) has
been adopted by Prudential Diversified Bond Fund, Inc. (the Fund)
and by Prudential Mutual Fund Distributors, Inc., the Fund's
distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant
to which the Fund will employ the Distributor to distribute Class
A shares issued by the Fund (Class A shares). Under the Plan,
the Fund intends to pay to the Distributor, as compensation for
its services, a distribution and service fee with respect to
Class A shares.
A majority of the Board of Directors of the Fund, including
a majority of those 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 this
Plan or any agreements related to it (the Rule 12b-1 Directors),
have determined by votes cast in person at a meeting called for
the purpose of voting on this Plan that there is a reasonable
likelihood that adoption of this Plan will benefit the Fund and
<PAGE>
its shareholders. Expenditures under this Plan by the Fund for
Distribution Activities (defined below) are primarily intended to
result in the sale of Class A shares of the Fund within the
meaning of paragraph (a)(2) of Rule 12b-1 promulgated under the
Investment Company Act.
The purpose of the Plan is to create incentives to the
Distributor and/or other qualified broker-dealers and their
account executives to provide distribution assistance to their
customers who are investors in the Fund, to defray the costs and
expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other
promotional and distribution activities and to provide for the
servicing and maintenance of shareholder accounts.
The Plan
The material aspects of the Plan are as follows:
1. Distribution Activities
The Fund shall engage the Distributor to distribute Class A
shares of the Fund and to service shareholder accounts using all
of the facilities of the distribution networks of Prudential
Securities Incorporated (Prudential Securities) and Pruco
Securities Corporation (Prusec), including sales personnel and
branch office and central support systems, and also using such
other qualified broker-dealers and financial institutions as the
Distributor may select. Services provided and activities
undertaken to distribute Class A shares of the Fund are referred
to herein as "Distribution Activities."
2
<PAGE>
2. Payment of Service Fee
The Fund shall pay to the Distributor as compensation for
providing personal service and/or maintaining shareholder
accounts a service fee of .25 of 1% per annum of the average
daily net assets of the Class A shares (service fee). The Fund
shall calculate and accrue daily amounts payable by the Class A
shares of the Fund hereunder and shall pay such amounts monthly
or at such other intervals as the Board of Directors may
determine.
3. Payment for Distribution Activities
The Fund shall pay to the Distributor as compensation for
its services a distribution fee, together with the service fee
(described in Section 2 hereof), of .30 of 1% per annum of the
average daily net assets of the Class A shares of the Fund for
the performance of Distribution Activities. The Fund shall
calculate and accrue daily amounts payable by the Class A shares
of the Fund hereunder and shall pay such amounts monthly or at
such other intervals as the Board of Directors may determine.
Amounts payable under the Plan shall be subject to the
limitations of Article III, Section 26 of the NASD Rules of Fair
Practice.
Amounts paid to the Distributor by the Class A shares of the
Fund will not be used to pay the distribution expenses incurred
with respect to any other class of shares of the Fund except that
distribution expenses attributable to the Fund as a whole will be
allocated to the Class A shares according to the ratio of the
sales of Class A shares to the total sales of the Fund's shares
3
<PAGE>
over the Fund's fiscal year or such other allocation method
approved by the Board of Directors. The allocation of
distribution expenses among classes will be subject to the review
of the Board of Directors.
The Distributor shall spend such amounts as it deems
appropriate on Distribution Activities which include, among
others:
(a) amounts paid to Prudential Securities for
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 for performing
services under a selected dealer agreement
between Prusec and the Distributor for sale
of Class A shares of the Fund, including
sales commissions, trailer commissions paid
to, or on account of, agents and indirect and
overhead costs associated with Distribution
Activities;
(c) advertising for the Fund in various forms
through any available medium, including the
cost of printing and mailing Fund
prospectuses, statements of additional
information and periodic financial reports
and sales literature to persons other than
current shareholders of the Fund; and
(d) sales commissions (including trailer
commissions) paid to, or on account of,
broker-dealers and financial institutions
(other than Prudential Securities and Prusec)
which have entered into selected dealer
agreements with the Distributor with respect
to Class A shares of the Fund.
4. Quarterly Reports; Additional Information
An appropriate officer of the Fund will provide to the Board
4
<PAGE>
of Directors of the Fund for review, at least quarterly, a
written report specifying in reasonable detail the amounts
expended for Distribution Activities (including payment of the
service fee) and the purposes for which such expenditures were
made in compliance with the requirements of Rule 12b-1. The
Distributor will provide to the Board of Directors of the Fund
such additional information as the Board shall from time to time
reasonably request, including information about Distribution
Activities undertaken or to be undertaken by the Distributor.
The Distributor will inform the Board of Directors of the
Fund of the commissions and account servicing fees to be paid by
the Distributor to account executives of the Distributor and to
broker-dealers and financial institutions which have selected
dealer agreements with the Distributor.
5. Effectiveness; Continuation
The Plan shall not take effect until it has been approved by
a vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class A shares of
the Fund.
If approved by a vote of a majority of the outstanding
voting securities of the Class A shares of the Fund, the Plan
shall, unless earlier terminated in accordance with its terms,
continue in full force and effect thereafter for so long as such
continuance is specifically approved at least annually by a
majority of the Board of Directors of the Fund and a majority of
the Rule 12b-1 Directors by votes cast in person at a meeting
called for the purpose of voting on the continuation of the Plan.
5
<PAGE>
6. Termination
This Plan may be terminated at any time by vote of a
majority of the Rule 12b-1 Directors, or by vote of a majority of
the outstanding voting securities (as defined in the Investment
Company Act) of the Class A shares of the Fund.
7. Amendments
The Plan may not be amended to change the combined service
and distribution fees to be paid as provided for in Sections 2
and 3 hereof so as to increase materially the amounts payable
under this Plan unless such amendment shall be approved by the
vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class A shares of
the Fund. All material amendments of the Plan shall be approved
by a majority of the Board of Directors of the Fund and a
majority of the Rule 12b-1 Directors by votes cast in person at a
meeting called for the purpose of voting on the Plan.
8. Rule 12b-1 Directors
While the Plan is in effect, the selection and nomination of
the Directors shall be committed to the discretion of the
Rule 12b-1 Directors.
9. Records
The Fund shall preserve copies of the Plan and any related
agreements and all reports made pursuant to Section 4 hereof, for
a period of not less than six years from the date of
effectiveness of the Plan, such agreements or reports, and for at
least the first two years in an easily accessible place.
Dated: January 3, 1995
6
<PAGE>
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
Distribution and Service Plan
(Class B Shares)
Introduction
The Distribution and Service Plan (the Plan) set forth
below which is designed to conform to the requirements of Rule 12b-
1 under the Investment Company Act of 1940 (the Investment Company
Act) and Article III, Section 26 of the Rules of Fair Practice of
the National Association of Securities Dealers, Inc. (NASD) has
been adopted by Prudential Diversified Bond Fund, Inc. (the Fund)
and by Prudential Securities Incorporated (Prudential Securities),
the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement
pursuant to which the Fund will employ the Distributor to
distribute Class B shares issued by the Fund (Class B shares).
Under the Plan, the Fund wishes to pay to the Distributor, as
compensation for its services, a distribution and service fee with
respect to Class B shares.
A majority of the Board of Directors of the Fund including a
majority who are not "interested persons" of the Fund (as defined
in the Investment Company Act) and who have no direct or indirect
financial interest in the operation of this Plan or any agreements
related to it (the Rule 12b-1 Directors), have determined by votes
cast in person at a meeting called for the purpose of voting on
this Plan that there is a reasonable likelihood that adoption of
this Plan will benefit the Fund and its shareholders. Expenditures
<PAGE>
under this Plan by the Fund for Distribution Activities (defined
below) are primarily intended to result in the sale of Class B
shares of the Fund within the meaning of paragraph (a)(2) of Rule
12b-1 promulgated under the Investment Company Act.
The purpose of the Plan is to create incentives to the
Distributor and/or other qualified broker-dealers and their account
executives to provide distribution assistance to their customers
who are investors in the Fund, to defray the costs and expenses
associated with the preparation, printing and distribution of
prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and
maintenance of shareholder accounts.
The Plan
The material aspects of the Plan are as follows:
1. Distribution Activities
The Fund shall engage the Distributor to distribute Class B
shares of the Fund and to service shareholder accounts using all of
the facilities of the Prudential Securities distribution network
including sales personnel and branch office and central support
systems, and also using such other qualified broker-dealers and
financial institutions as the Distributor may select, including
Pruco Securities Corporation (Prusec). Services provided and
activities undertaken to distribute Class B shares of the Fund are
referred to herein as "Distribution Activities."
2
<PAGE>
2. Payment of Service Fee
The Fund shall pay to the Distributor as compensation for
providing personal service and/or maintaining shareholder accounts
a service fee of .25 of 1% per annum of the average daily net
assets of the Class B shares (service fee). The Fund shall
calculate and accrue daily amounts payable by the Class B shares of
the Fund hereunder and shall pay such amounts monthly or at such
other intervals as the Board of Directors may determine.
3. Payment for Distribution Activities
The Fund shall pay to the Distributor as compensation for its
services a distribution fee of .75 of 1% per annum of the average
daily net assets of the Class B shares of the Fund for the
performance of Distribution Activities. The Fund shall calculate
and accrue daily amounts payable by the Class B shares of the Fund
hereunder and shall pay such amounts monthly or at such other
intervals as the Board of Directors may determine. Amounts payable
under the Plan shall be subject to the limitations of Article III,
Section 26 of the NASD Rules of Fair Practice.
Amounts paid to the Distributor by the Class B shares of the
Fund will not be used to pay the distribution expenses incurred
with respect to any other class of shares of the Fund except that
distribution expenses attributable to the Fund as a whole will be
allocated to the Class B shares according to the ratio of the sale
of Class B shares to the total sales of the Fund's shares over the
Fund's fiscal year or such other allocation method approved by the
3
<PAGE>
Board of Directors. The allocation of distribution expenses among
classes will be subject to the review of the Board of Directors.
The Distributor shall spend such amounts as it deems
appropriate on Distribution Activities which include, among others:
(a) sales commissions (including trailer commissions)
paid to, or on account of, account executives of the
Distributor;
(b) indirect and overhead costs of the Distributor
associated with performance of Distribution Activities
including central office and branch expenses;
(c) amounts paid to Prusec for performing services under
a selected dealer agreement between Prusec and the
Distributor for sale of Class B shares of the Fund,
including sales commissions and trailer commissions paid
to, or on account of, agents and indirect and overhead
costs associated with Distribution Activities;
(d) advertising for the Fund in various forms through
any available medium, including the cost of printing and
mailing Fund prospectuses, statements of additional
information and periodic financial reports and sales
literature to persons other than current shareholders of
the Fund; and
(e) sales commissions (including trailer commissions)
paid to, or on account of, broker-dealers and other
financial institutions (other than Prusec) which have
entered into selected dealer agreements with the
Distributor with respect to Class B shares of the Fund.
4. Quarterly Reports; Additional Information
An appropriate officer of the Fund will provide to the Board
of Directors of the Fund for review, at least quarterly, a written
report specifying in reasonable detail the amounts expended for
Distribution Activities (including payment of the service fee) and
the purposes for which such expenditures were made in compliance
with the requirements of Rule 12b-1. The Distributor will provide
to the Board of Directors of the Fund such additional information
4
<PAGE>
as they shall from time to time reasonably request, including
information about Distribution Activities undertaken or to be
undertaken by the Distributor.
The Distributor will inform the Board of Directors of the Fund
of the commissions and account servicing fees to be paid by the
Distributor to account executives of the Distributor and to
broker-dealers and other financial institutions which have selected
dealer agreements with the Distributor.
5. Effectiveness; Continuation
The Plan shall not take effect until it has been approved by
a vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class B shares of the
Fund.
If approved by a vote of a majority of the outstanding voting
securities of the Class B shares of the Fund, the Plan shall,
unless earlier terminated in accordance with its terms, continue in
full force and effect thereafter for so long as such continuance is
specifically approved at least annually by a majority of the Board
of Directors of the Fund and a majority of the Rule 12b-1 Directors
by votes cast in person at a meeting called for the purpose of
voting on the continuation of the Plan.
6. Termination
This Plan may be terminated at any time by vote of a majority
of the Rule 12b-1 Directors, or by vote of a majority of the
outstanding voting securities (as defined in the Investment Company
Act) of the Class B shares of the Fund.
5
<PAGE>
7. Amendments
The Plan may not be amended to change the combined service and
distribution fees to be paid as provided for in Sections 2 and 3
hereof so as to increase materially the amounts payable under this
Plan unless such amendment shall be approved by the vote of a
majority of the outstanding voting securities (as defined in the
Investment Company Act) of the Class B shares of the Fund. All
material amendments of the Plan shall be approved by a majority of
the Board of Directors of the Fund and a majority of the Rule 12b-1
Directors by votes cast in person at a meeting called for the
purpose of voting on the Plan.
8. Rule 12b-1 Directors
While the Plan is in effect, the selection and nomination of
the Rule 12b-1 Directors shall be committed to the discretion of
the Rule 12b-1 Directors.
9. Records
The Fund shall preserve copies of the Plan and any related
agreements and all reports made pursuant to Section 4 hereof, for
a period of not less than six years from the date of effectiveness
of the Plan, such agreements or reports, and for at least the first
two years in an easily accessible place.
Dated: January 3, 1995
6
<PAGE>
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
Distribution and Service Plan
(Class C Shares)
Introduction
The Distribution and Service Plan (the Plan) set forth below
which is designed to conform to the requirements of Rule 12b-1
under the Investment Company Act of 1940 (the Investment Company
Act) and Article III, Section 26 of the Rules of Fair Practice of
the National Association of Securities Dealers, Inc. (NASD) has
been adopted by Prudential Diversified Bond Fund, Inc. (the Fund)
and by Prudential Securities Incorporated (Prudential Securities),
the Fund's distributor (the Distributor) and will become effective
upon the approval of the Plan by the sole shareholder of the Class
C shares.
The Fund has entered into a distribution agreement pursuant to
which the Fund will employ the Distributor to distribute Class C
shares issued by the Fund (Class C shares). Under the Plan, the
Fund wishes to pay to the Distributor, as compensation for its
services, a distribution and service fee with respect to Class C
shares.
A majority of the Board of Directors of the Fund, including a
majority who are not "interested persons" of the Fund (as defined
in the Investment Company Act) and who have no direct or indirect
financial interest in the operation of this Plan or any agreements
related to it (the Rule 12b-1 Directors), have determined by votes
cast in person at a meeting called for the purpose of voting on
<PAGE>
this Plan that there is a reasonable likelihood that adoption of
this Plan will benefit the Fund and its shareholders. Expenditures
under this Plan by the Fund for Distribution Activities (defined
below) are primarily intended to result in the sale of Class C
shares of the Fund within the meaning of paragraph (a)(2) of Rule
12b-1 promulgated under the Investment Company Act.
The purpose of the Plan is to create incentives to the
Distributor and/or other qualified broker-dealers and their account
executives to provide distribution assistance to their customers
who are investors in the Fund, to defray the costs and expenses
associated with the preparation, printing and distribution of
prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and
maintenance of shareholder accounts.
The Plan
The material aspects of the Plan are as follows:
1. Distribution Activities
The Fund shall engage the Distributor to distribute Class C
shares of the Fund and to service shareholder accounts using all of
the facilities of the Prudential Securities distribution network
including sales personnel and branch office and central support
systems, and also using such other qualified broker-dealers and
financial institutions as the Distributor may select, including
Pruco Securities Corporation (Prusec). Services provided and
activities undertaken to distribute Class C shares of the Fund are
referred to herein as "Distribution Activities."
2
<PAGE>
2. Payment of Service Fee
The Fund shall pay to the Distributor as compensation for
providing personal service and/or maintaining shareholder accounts
a service fee of .25 of 1% per annum of the average daily net
assets of the Class C shares (service fee). The Fund shall
calculate and accrue daily amounts payable by the Class C shares of
the Fund hereunder and shall pay such amounts monthly or at such
other intervals as the Board of Directors may determine.
3. Payment for Distribution Activities
The Fund shall pay to the Distributor as compensation for its
services a distribution fee of .75 of 1% per annum of the average
daily net assets of the Class C shares of the Fund for the
performance of Distribution Activities. The Fund shall calculate
and accrue daily amounts payable by the Class C shares of the Fund
hereunder and shall pay such amounts monthly or at such other
intervals as the Board of Directors may determine. Amounts payable
under the Plan shall be subject to the limitations of Article III,
Section 26 of the NASD Rules of Fair Practice.
Amounts paid to the Distributor by the Class C shares of the
Fund will not be used to pay the distribution expenses incurred
with respect to any other class of shares of the Fund except that
distribution expenses attributable to the Fund as a whole will be
allocated to the Class C shares according to the ratio of the sale
of Class C shares to the total sales of the Fund's shares over the
Fund's fiscal year or such other allocation method approved by the
Board of Directors. The allocation of distribution expenses among
3
<PAGE>
classes will be subject to the review of the Board of Directors.
Payments hereunder will be applied to distribution expenses in the
order in which they are incurred, unless otherwise determined by
the Board of Directors.
The Distributor shall spend such amounts as it deems
appropriate on Distribution Activities which include, among others:
(a) sales commissions (including trailer commissions)
paid to, or on account of, account executives of the
Distributor;
(b) indirect and overhead costs of the Distributor
associated with performance of Distribution Activities
including central office and branch expenses;
(c) amounts paid to Prusec for performing services under
a selected dealer agreement between Prusec and the
Distributor for sale of Class C shares of the Fund,
including sales commissions and trailer commissions paid
to, or on account of, agents and indirect and overhead
costs associated with Distribution Activities;
(d) advertising for the Fund in various forms through
any available medium, including the cost of printing and
mailing Fund prospectuses, statements of additional
information and periodic financial reports and sales
literature to persons other than current shareholders of
the Fund; and
(e) sales commissions (including trailer commissions)
paid to, or on account of, broker-dealers and other
financial institutions (other than Prusec) which have
entered into selected dealer agreements with the
Distributor with respect to Class C shares of the Fund.
4. Quarterly Reports; Additional Information
An appropriate officer of the Fund will provide to the Board
of Directors of the Fund for review, at least quarterly, a written
report specifying in reasonable detail the amounts expended for
Distribution Activities (including payment of the service fee) and
the purposes for which such expenditures were made in compliance
4
<PAGE>
with the requirements of Rule 12b-1. The Distributor will provide
to the Board of Directors of the Fund such additional information
as they shall from time to time reasonably request, including
information about Distribution Activities undertaken or to be
undertaken by the Distributor.
The Distributor will inform the Board of Directors of the Fund
of the commissions and account servicing fees to be paid by the
Distributor to account executives of the Distributor and to
broker-dealers and other financial institutions which have selected
dealer agreements with the Distributor.
5. Effectiveness; Continuation
The Plan shall not take effect until it has been approved by
a vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class C shares of the
Fund.
If approved by a vote of a majority of the outstanding voting
securities of the Class C shares of the Fund, the Plan shall,
unless earlier terminated in accordance with its terms, continue in
full force and effect thereafter for so long as such continuance is
specifically approved at least annually by a majority of the Board
of Directors of the Fund and a majority of the Rule 12b-1 Directors
by votes cast in person at a meeting called for the purpose of
voting on the continuation of the Plan.
6. Termination
This Plan may be terminated at any time by vote of a majority
of the Rule 12b-1 Directors, or by vote of a majority of the
5
<PAGE>
outstanding voting securities (as defined in the Investment Company
Act) of the Class C shares of the Fund.
7. Amendments
The Plan may not be amended to change the combined service and
distribution expenses to be paid as provided for in Sections 2 and
3 hereof so as to increase materially the amounts payable under
this Plan unless such amendment shall be approved by the vote of a
majority of the outstanding voting securities (as defined in the
Investment Company Act) of the Class C shares of the Fund. All
material amendments of the Plan shall be approved by a majority of
the Board of Directors of the Fund and a majority of the Rule 12b-1
Directors by votes cast in person at a meeting called for the
purpose of voting on the Plan.
8. Rule 12b-1 Directors
While the Plan is in effect, the selection and nomination of
the Rule 12b-1 Directors shall be committed to the discretion of
the Rule 12b-1 Directors.
9. Records
The Fund shall preserve copies of the Plan and any related
agreements and all reports made pursuant to Section 4 hereof, for
a period of not less than six years from the date of effectiveness
of the Plan, such agreements or reports, and for at least the first
two years in an easily accessible place.
Dated: January 3, 1995
6
<PAGE>
Exhibit 16
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
CLASS "A"
YIELD CALCULATION
a - b
YIELD = 2 [ ( ------ +1)6 - 1]
cd
Where: a= dividends and interest earned during the period.
b= expenses accrued for the period (net of reimbursements).
c= the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d= the maximum offering price per share on the last day of
the period.
30 day yield for
the period ending
April 30, 1995
-----------------
a = $ 34,924
b = $ 3,801
c = $391,817
d = $ 13.54
Yield = 7.14%
<PAGE>
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
CLASS "B"
YIELD CALCULATION
a - b
YIELD = 2 [ ( ------ +1)6 - 1]
cd
Where: a= dividends and interest earned during the period.
b= expenses accrued for the period (net of reimbursements).
c= the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d= the maximum offering price per share on the last day of
the period.
30 day yield for
the period ending
April 30, 1995
-----------------
a = $ 165,118
b = $ 29,851
c = $1,851,350
d = $ 13.00
Yield = 6.84%
<PAGE>
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
CLASS "C"
YIELD CALCULATION
a - b
YIELD = 2 [ ( ------ +1)6 - 1]
cd
Where: a= dividends and interest earned during the period.
b= expenses accrued for the period (net of reimbursements).
c= the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d= the maximum offering price per share on the last day of
the period.
30 day yield for
the period ending
April 30, 1995
-----------------
a = $ 5,381
b = $ 982
c = $60,246
d = $ 13.00
Yield = 6.84%
<PAGE>
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
CLASS "A"
EXHIBIT
AVERAGE ANNUAL TOTAL RETURN
CALCULATION
P (1+T)n = ERV
P = hypothetical initial payment of $1,000 less front end load of 4%
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 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).
==========================================================================
Inception
through
April 30
1995
-------------
P = $ 960
T = 1.96%
n= 1
ERV = $1,019.58
<PAGE>
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
CLASS "B"
EXHIBIT
AVERAGE ANNUAL TOTAL RETURN
CALCULATION
P (1+T)n = ERV
P = hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 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) less CDSC of 5%.
==========================================================================
Inception
through
April 30
1995
-------------
P = $1,000
T = 1.00%
n = 1
ERV = $1,009.96
<PAGE>
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
CLASS "C"
EXHIBIT
AVERAGE ANNUAL TOTAL RETURN
CALCULATION
P (1+T)n = ERV
P = hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 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) less CDSC of 1%.
==========================================================================
Inception
through
April 30
1995
-------------
P = $1,000
T = 5.00%
n = 1
ERV = $1,050.06
<PAGE>
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
CLASS "A"
EXHIBIT
AGGREGATE TOTAL RETURN
CALCULATION
ERV - P
T = --------
P
P = hypothetical initial payment of $1,000
ERV = ending redeemable value of a hypothetical $1,000 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).
T = aggregate total return
==========================================================================
Inception
through
April 30
1995
-------------
P = $1,000
ERV = $1,062.06
T = 6.21%
<PAGE>
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
CLASS "B"
EXHIBIT
AGGREGATE TOTAL RETURN
CALCULATION
ERV - P
T = --------
P
P = hypothetical initial payment of $1,000
ERV = ending redeemable value of a hypothetical $1,000 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).
T = aggregate total return
==========================================================================
Inception
through
April 30
1995
-------------
P = $1,000
ERV = $1,059.96
T = 6.00%
<PAGE>
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
CLASS "C"
EXHIBIT
AGGREGATE TOTAL RETURN
CALCULATION
ERV - P
T = --------
P
P = hypothetical initial payment of $1,000
ERV = ending redeemable value of a hypothetical $1,000 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).
T = aggregate total return
==========================================================================
Inception
through
April 30
1995
-------------
P = $1,000
ERV = $1,060.06
T = 6.00%
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000929523
<NAME> PRUDENTIAL DIVERSIFIED BOND FUND, INC.
<SERIES>
<NAME> PRUDENTIAL DIVERSIFIED BOND FUND, INC. (CLASS A)
<NUMBER> 1
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> APR-30-1995
<INVESTMENTS-AT-COST> 31,881,727
<INVESTMENTS-AT-VALUE> 32,407,282
<RECEIVABLES> 1,651,685
<ASSETS-OTHER> 322,308
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 34,381,275
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,127,025
<TOTAL-LIABILITIES> 1,127,025
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 32,490,136
<SHARES-COMMON-STOCK> 2,557,469
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 235,825
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 528,289
<NET-ASSETS> 33,254,250
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 501,523
<OTHER-INCOME> 0
<EXPENSES-NET> 86,573
<NET-INVESTMENT-INCOME> 414,950
<REALIZED-GAINS-CURRENT> 235,825
<APPREC-INCREASE-CURRENT> 528,289
<NET-CHANGE-FROM-OPS> 1,179,064
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (414,950)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 34,140,314
<NUMBER-OF-SHARES-REDEEMED> (1,961,845)
<SHARES-REINVESTED> 211,667
<NET-CHANGE-IN-ASSETS> 33,154,250
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 31,160
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (6,876)
<AVERAGE-NET-ASSETS> 3,820,000
<PER-SHARE-NAV-BEGIN> 12.50
<PER-SHARE-NII> 0.27
<PER-SHARE-GAIN-APPREC> 0.50
<PER-SHARE-DIVIDEND> (0.27)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 13.00
<EXPENSE-RATIO> 0.90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000929523
<NAME> PRUDENTIAL DIVERSIFIED BOND FUND, INC.
<SERIES>
<NUMBER> 2
<NAME> PRUDENTIAL DIVERSIFIED BOND FUND, INC. (CLASS B)
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> APR-30-1995
<INVESTMENTS-AT-COST> 31,881,727
<INVESTMENTS-AT-VALUE> 32,407,282
<RECEIVABLES> 1,651,685
<ASSETS-OTHER> 322,308
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 34,381,275
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,127,025
<TOTAL-LIABILITIES> 1,127,025
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 32,490,136
<SHARES-COMMON-STOCK> 2,557,469
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 235,825
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 528,289
<NET-ASSETS> 33,254,250
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 501,523
<OTHER-INCOME> 0
<EXPENSES-NET> 86,573
<NET-INVESTMENT-INCOME> 414,950
<REALIZED-GAINS-CURRENT> 235,825
<APPREC-INCREASE-CURRENT> 528,289
<NET-CHANGE-FROM-OPS> 1,179,064
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (414,950)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 34,140,314
<NUMBER-OF-SHARES-REDEEMED> (1,961,845)
<SHARES-REINVESTED> 211,667
<NET-CHANGE-IN-ASSETS> 33,154,250
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 31,160
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (6,876)
<AVERAGE-NET-ASSETS> 16,324,000
<PER-SHARE-NAV-BEGIN> 12.50
<PER-SHARE-NII> 0.25
<PER-SHARE-GAIN-APPREC> 0.50
<PER-SHARE-DIVIDEND> (0.25)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 13.00
<EXPENSE-RATIO> 1.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000929523
<NAME> PRUDENTIAL DIVERSIFIED BOND FUND, INC.
<SERIES>
<NUMBER> 3
<NAME> PRUDENTIAL DIVERSIFIED BOND FUND, INC. (CLASS C)
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> APR-30-1995
<INVESTMENTS-AT-COST> 31,881,727
<INVESTMENTS-AT-VALUE> 32,407,282
<RECEIVABLES> 1,651,685
<ASSETS-OTHER> 322,308
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 34,381,275
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,127,025
<TOTAL-LIABILITIES> 1,127,025
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 32,490,136
<SHARES-COMMON-STOCK> 2,557,469
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 235,825
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 528,289
<NET-ASSETS> 33,254,250
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 501,523
<OTHER-INCOME> 0
<EXPENSES-NET> 86,573
<NET-INVESTMENT-INCOME> 414,950
<REALIZED-GAINS-CURRENT> 235,825
<APPREC-INCREASE-CURRENT> 528,289
<NET-CHANGE-FROM-OPS> 1,179,064
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (414,950)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 34,140,314
<NUMBER-OF-SHARES-REDEEMED> (1,961,845)
<SHARES-REINVESTED> 211,667
<NET-CHANGE-IN-ASSETS> 33,154,250
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 31,160
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (6,876)
<AVERAGE-NET-ASSETS> 535,000
<PER-SHARE-NAV-BEGIN> 12.50
<PER-SHARE-NII> 0.25
<PER-SHARE-GAIN-APPREC> 0.50
<PER-SHARE-DIVIDEND> (0.25)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 13.00
<EXPENSE-RATIO> 1.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
