AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 29, 2002
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 30 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 33 /X/
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
(Exact name of registrant as specified in charter)
GATEWAY CENTER THREE,
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 367-7521
DEBORAH A. DOCS, ESQ.
GATEWAY CENTER THREE,
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(NAME AND ADDRESS OF AGENT FOR SERVICE)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE
DATE OF THE REGISTRATION STATEMENT.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX):
/X/ immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
/ / This post-effective amendment designates a new
effective date for a previously filed
post-effective amendment.
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Title of Securities Being
Registered............... Shares of Common Stock, par value $.01 per share.
PROSPECTUS
APRIL 30, 2002
PRUDENTIAL
GOVERNMENT INCOME FUND, INC.
FUND TYPE
Government securities
OBJECTIVE
High current return
As with all mutual funds, the Securities
and Exchange Commission has not approved or
disapproved the Fund's shares nor has the
SEC determined that this prospectus is
complete or accurate. It is a criminal
offense to state otherwise.
Prudential Financial is a service mark of
The Prudential Insurance Company of
America, Newark, NJ, and its affiliates.
[PRUDENTIAL FINANCIAL LOGO]
1 RISK/RETURN SUMMARY
1 Investment Objective and Principal Strategies
1 Principal Risks
2 Evaluating Performance
4 Fees and Expenses
6 HOW THE FUND INVESTS
6 Investment Objective and Policies
8 Other Investments and Strategies
13 Investment Risks
18 HOW THE FUND IS MANAGED
18 Board of Directors
18 Manager
18 Investment Adviser
19 Distributor
20 FUND DISTRIBUTIONS AND TAX ISSUES
20 Distributions
21 Tax Issues
22 If You Sell or Exchange Your Shares
24 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUND
24 How to Buy Shares
33 How to Sell Your Shares
37 How to Exchange Your Shares
39 Telephone Redemptions or Exchanges
39 Expedited Redemption Privilege
40 FINANCIAL HIGHLIGHTS
40 Class A Shares
41 Class B Shares
42 Class C Shares
43 Class Z Shares
44 THE PRUDENTIAL MUTUAL FUND FAMILY
FOR MORE INFORMATION (Back Cover)
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PRUDENTIAL GOVERNMENT INCOME FUND, INC. [TELEPHONE ICON] (800) 225-1852
This section highlights key information about PRUDENTIAL GOVERNMENT INCOME FUND, INC. which we refer to as "the Fund." Additional information follows this summary.
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is HIGH CURRENT RETURN. We invest, under normal circumstances, at least 80% of the Fund's investable assets in U.S. Government securities, including U.S. Treasury bills, notes, bonds, strips and other debt securities issued by the U.S. Treasury, and obligations, including mortgage-related securities, issued or guaranteed by U.S. Government agencies or instrumentalities. The term "investable assets" in this prospectus refers to the Fund's net assets plus any borrowings for investment purposes. The Fund's investable assets will be less than its total assets to the extent that it has borrowed money for non-investment purposes, such as to meet anticipated redemptions. We may also engage in active trading. While we make every effort to achieve our objective, we can't guarantee success.
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. In deciding which portfolio securities to buy and sell, the investment adviser will consider economic conditions and interest rate fundamentals. The investment adviser will also evaluate individual issues within each bond sector 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.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. The debt obligations in which the Fund invests are subject to the risk of losing value because interest rates rise or because there is a lack of confidence in the borrower. Certain securities may be subject to the risk that the issuer may be unable to make principal and interest payments when they are due. In addition, not all U.S. Government securities are insured or guaranteed by the U.S. Government; some are backed only by the issuing agency, which must rely on its own resources to repay the debt. Mortgage-related securities are also subject to prepayment risk, which means that if they are prepaid, the Fund may have to replace them with lower-yielding securities.
The Fund may actively and frequently trade its portfolio securities. High
portfolio turnover results in higher transaction costs and can affect the Fund's
performance and have adverse tax consequences.
Like any mutual fund, an investment in the Fund could lose value, and you
could lose money. For more detailed information about the risks associated with
the Fund, see "How the Fund Invests--Investment Risks."
An investment in the Fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
EVALUATING PERFORMANCE
A number of factors--including risk--can affect how the Fund performs. The following bar chart shows the Fund's performance for each full calendar year of operation for the last 10 years. The bar chart and table below demonstrate the risk of investing in the Fund by showing how returns can change from year to year and by showing how the Fund's average annual total returns compare with those of a broad measure of market performance and a group of similar mutual funds. Past performance, before and after taxes, does not mean that the Fund will achieve similar results in the future.
ANNUAL RETURNS* (CLASS B SHARES)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
1992 5.83% 1993 6.90% 1994 -4.76% 1995 19.01% 1996 0.81% 1997 8.56% 1998 8.02% 1999 -3.60% 2000 11.06% 2001 6.96% |
BEST QUARTER: 6.25% (2nd quarter of 1995) |
WORST QUARTER: (3.76)% (2nd quarter of 1994) |
* THESE ANNUAL RETURNS DO NOT INCLUDE SALES CHARGES. IF THE SALES CHARGES WERE INCLUDED, THE ANNUAL RETURNS WOULD BE LOWER THAN THOSE SHOWN. WITHOUT THE DISTRIBUTION AND SERVICE (12b-1) FEE WAIVER, THE ANNUAL RETURNS WOULD HAVE BEEN LOWER, TOO. THE RETURN OF THE CLASS B SHARES FOR THE QUARTER ENDED MARCH 31, 2002 WAS 3.92%.
2 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [TELEPHONE ICON] (800) 225-1852
AVERAGE ANNUAL TOTAL RETURNS(1) (AS OF 12-31-01)
RETURN BEFORE TAXES
1 YR 5 YRS 10 YRS SINCE INCEPTION
Class A shares 3.28% 5.83% 5.95% 6.99% (since 1-22-90)
Class C shares 4.98% 5.94% N/A 6.33% (since 8-1-94)
Class Z shares 7.84% 6.92% N/A 6.42% (since 3-4-96)
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CLASS B SHARES
RETURN BEFORE TAXES 1.96% 5.92% 5.67% 7.17% (since 4-22-85) RETURN AFTER TAXES ON DISTRIBUTIONS(2) (.08)% 3.61% 3.30% 4.66% (since 4-22-85) RETURN AFTER TAXES ON DISTRIBUTIONS AND SALE OF FUND SHARES(2) 1.16% 3.57% 3.37% 4.73% (since 4-22-85) |
INDEX (REFLECTS NO DEDUCTION FOR FEES, EXPENSES OR TAXES)
Lehman Gov't Bond Index(3) 7.23% 7.40% 8.12% **(3) Lipper Average(4) 6.17% 6.35% 6.27% **(4) |
(1) THE FUND'S RETURNS ARE AFTER DEDUCTION OF SALES CHARGES AND EXPENSES.
WITHOUT THE DISTRIBUTION AND SERVICE (12b-1) FEE WAIVER FOR CLASS A,
CLASS B, AND CLASS C SHARES, THE RETURNS WOULD HAVE BEEN LOWER.
(2) AFTER-TAX RETURNS ARE CALCULATED USING THE HISTORICAL HIGHEST INDIVIDUAL
FEDERAL MARGINAL INCOME TAX RATES AND DO NOT REFLECT THE IMPACT OF STATE
AND LOCAL TAXES. ACTUAL AFTER-TAX RETURNS DEPEND ON AN INVESTOR'S TAX
SITUATION AND MAY DIFFER FROM THOSE SHOWN. AFTER-TAX RETURNS SHOWN ARE NOT
RELEVANT TO INVESTORS WHO HOLD THEIR FUND SHARES THROUGH TAX-DEFERRED
ARRANGEMENTS, SUCH AS 401(K) PLANS OR INDIVIDUAL RETIREMENT ACCOUNTS.
AFTER-TAX RETURNS ARE SHOWN ONLY FOR CLASS B SHARES. AFTER-TAX RETURNS FOR
OTHER CLASSES WILL VARY DUE TO DIFFERING SALES CHARGES AND EXPENSES. PAST
PERFORMANCE, BEFORE AND AFTER TAXES, DOES NOT MEAN THAT THE FUND WILL
ACHIEVE SIMILAR RESULTS IN THE FUTURE.
(3) THE LEHMAN BROTHERS GOVERNMENT BOND INDEX (LEHMAN GOV'T BOND INDEX)--AN
UNMANAGED INDEX OF SECURITIES ISSUED OR BACKED BY THE U.S. GOVERNMENT, ITS
AGENCIES AND INSTRUMENTALITIES WITH BETWEEN ONE AND THIRTY YEARS REMAINING
TO MATURITY--GIVES A BROAD LOOK AT HOW U.S. GOVERNMENT BONDS WITH SUCH
MATURITIES HAVE PERFORMED. THESE RETURNS DO NOT INCLUDE THE EFFECT OF ANY
SALES CHARGES OR OPERATING EXPENSES OF A MUTUAL FUND OR TAXES. THESE
RETURNS WOULD BE LOWER IF THEY INCLUDED THE EFFECT OF SALES CHARGES,
OPERATING EXPENSES AND TAXES. THE LEHMAN GOV'T BOND INDEX RETURNS SINCE THE
INCEPTION OF EACH CLASS ARE 8.12% FOR CLASS A, 8.93% FOR CLASS B, 7.59% FOR
CLASS C AND 7.08% FOR CLASS Z SHARES. SOURCE: LEHMAN BROTHERS.
(4) THE LIPPER AVERAGE IS BASED ON THE AVERAGE RETURN OF ALL MUTUAL FUNDS IN
THE LIPPER GENERAL U.S. GOVERNMENT BOND FUND CATEGORY. THESE RETURNS DO NOT
INCLUDE THE EFFECT OF ANY SALES CHARGES OR TAXES. THESE RETURNS WOULD BE
LOWER IF THEY INCLUDED THE EFFECT OF SALES CHARGES AND TAXES. LIPPER
RETURNS SINCE THE INCEPTION OF EACH CLASS ARE 7.24% FOR CLASS A, 7.81% FOR
CLASS B, 6.60% FOR CLASS C AND 6.07% FOR CLASS Z SHARES. SOURCE:
LIPPER INC.
FEES AND EXPENSES
These tables show the sales charges, fees and expenses that you may pay if you buy and hold shares of each class of the Fund--Class A, B, C and Z. Each share class has different (or no) sales charges--known as loads--and expenses, but represents an investment in the same fund. Class Z shares are available only to a limited group of investors. For more information about which share class may be right for you, see "How to Buy, Sell and Exchange Shares of the Fund."
SHAREHOLDER FEES(1) (paid directly from your investment)
CLASS A CLASS B CLASS C CLASS Z
Maximum sales charge (load)
imposed on purchases (as a
percentage of offering
price) 4% None 1% None
Maximum deferred sales
charge (load) (as a
percentage of the lower of
original purchase price or
sale proceeds) None 5%(2) 1%(3) None
Maximum sales charge (load)
imposed on reinvested
dividends and other
distributions None None None None
Redemption fees None None None None
Exchange fee None None None None
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ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS)
CLASS A CLASS B CLASS C CLASS Z
Management fees .50% .50% .50% .50%
+ Distribution and service
(12b-1) fees(4) .30% 1.00% 1.00% None
+ Other expenses .23% .23% .23% .23%
= TOTAL ANNUAL FUND
OPERATING EXPENSES 1.03% 1.73% 1.73% .73%
- Fee waiver or expense
reimbursement(4) .05% .175% .25% None
= NET ANNUAL FUND OPERATING
EXPENSES .98% 1.55% 1.48% .73%
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(1) YOUR BROKER MAY CHARGE YOU A SEPARATE OR ADDITIONAL FEE FOR PURCHASES AND
SALES OF SHARES.
(2) THE CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B SHARES DECREASES BY
1% ANNUALLY TO 1% IN THE FIFTH AND SIXTH YEARS AND 0% IN THE SEVENTH YEAR.
CLASS B SHARES CONVERT TO CLASS A SHARES APPROXIMATELY SEVEN YEARS AFTER
PURCHASE.
(3) THE CDSC FOR CLASS C SHARES IS 1% FOR SHARES REDEEMED WITHIN 18 MONTHS OF
PURCHASE.
(4) FOR THE FISCAL YEAR ENDING FEBRUARY 28, 2003, THE DISTRIBUTOR OF THE FUND
HAS CONTRACTUALLY AGREED TO REDUCE ITS DISTRIBUTION AND SERVICE (12b-1)
FEES FOR CLASS A, CLASS B AND CLASS C SHARES TO .25 OF 1%, .825 OF 1% AND
.75 OF 1% OF THE AVERAGE DAILY NET ASSETS OF CLASS A, CLASS B AND CLASS C
SHARES, RESPECTIVELY.
EXAMPLE
This example will help you compare the fees and expenses of the Fund's different
share classes and compare the cost of investing in the Fund with the cost of
investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same, except for the Distributor's
reduction of distribution and service (12b-1) fees for Class A, Class B and
Class C shares during the first year. Although your actual costs may be higher
or lower, based on these assumptions, your costs would be:
1 YR 3 YRS 5 YRS 10 YRS
Class A shares $496 $710 $941 $1605
Class B shares $657 $819 $999 $1674
Class C shares $348 $608 $983 $2000
Class Z shares $ 74 $230 $396 $ 861
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You would pay the following expenses on the same investment if you did not sell your shares:
1 YR 3 YRS 5 YRS 10 YRS
Class A shares $496 $710 $941 $1605
Class B shares $157 $519 $899 $1674
Class C shares $248 $608 $983 $2000
Class Z shares $ 74 $230 $396 $ 861
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INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is HIGH CURRENT RETURN. While we make every
effort to achieve our objective, we can't guarantee success.
The Fund seeks to achieve its objective by investing, under normal circumstances, at least 80% of its investable assets in U.S. GOVERNMENT SECURITIES. The Fund will provide 60 days' prior written notice to shareholders of any change in this non-fundamental policy. U.S. Government securities include DEBT OBLIGATIONS ISSUED BY THE U.S. TREASURY. Treasury securities are all backed by the full faith and credit of the U.S. Government, which means that payment of interest and principal is guaranteed, but yield and market value are not.
anticipated duration of the mortgage-related securities. Conversely, during
periods of rising interest rates, prepayments can be expected to decelerate,
which has the effect of extending the anticipated duration at the same time that
the value of the securities declines. MBS strips tend to be even more highly
sensitive to changes in prepayment and interest rates than mortgage-related
securities and CMOs generally.
The Fund may also engage in ACTIVE TRADING--that is, frequent trading of its
securities--in order to take advantage of new investment opportunities or yield
differentials. There may be tax consequences, such as a possible increase in
short-term capital gains or losses, when the Fund sells a security without
regard to how long it has held the security. In addition, active trading may
result in greater transaction costs, which will reduce the Fund's return.
For more information, see "Investment Risks" below and the Statement of
Additional Information, "Description of the Fund, Its Investments and Risks."
The Statement of Additional Information--which we refer to as the SAI--contains
additional information about the Fund. To obtain a copy, see the back cover page
of this prospectus.
The Fund's investment objective is a fundamental policy that cannot be
changed without shareholder approval. The Board of the Fund can change
investment policies of the Fund that are not fundamental.
OTHER INVESTMENTS AND STRATEGIES
In addition to the principal strategies, we also may use the following
investment strategies to increase the Fund's returns or protect its assets if
market conditions warrant.
ASSET-BACKED SECURITIES
The Fund may invest up to 20% of the Fund's investable assets in PRIVATELY- ISSUED ASSET-BACKED SECURITIES. An asset-backed security is another type of pass-through instrument that pays interest based upon the cash flow of an underlying pool of assets, such as automobile loans and credit card receivables.
FOREIGN BANK OBLIGATIONS
The Fund may invest in OBLIGATIONS OF FOREIGN BANKS AND FOREIGN BRANCHES OF U.S. BANKS only if, after making that investment, all such investments would make up less than 10% of the Fund's investable assets (determined at the time of investment).
The Fund may invest in OBLIGATIONS OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT (THE WORLD BANK). Obligations of the World Bank are supported by appropriated but unpaid commitments of its member countries, including the U.S., and there is no assurance these commitments will be undertaken or met in the future.
FIXED AND ADJUSTABLE RATE DEBT SECURITIES
The Fund is permitted to invest in both fixed and adjustable rate debt securities. FIXED RATE DEBT SECURITIES are securities that have an interest rate that is set at the time the security is issued. ADJUSTABLE RATE DEBT SECURITIES are securities that have an interest rate that is adjusted periodically based on the market rate at a specified time. The value of adjustable rate debt securities will, like other debt securities, generally vary inversely with changes in prevailing interest rates. The value of adjustable rate debt securities is unlikely to rise in periods of declining interest rates to the same extent as fixed rate instruments. 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 debt obligations in which the Fund may invest are rated at least A by Standard & Poor's Ratings Group (S&P) or Moody's Investors Service, Inc. (Moody's) or, if unrated, are deemed to be of comparable credit quality by the Fund's investment adviser.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
The Fund may use REPURCHASE AGREEMENTS, where a party agrees to sell a security to the Fund and then repurchases it at an agreed-upon price at a stated time. This creates a fixed return for the Fund and is, in effect, a loan by the Fund. Repurchase agreements are used for cash management purposes only.
The Fund may use REVERSE REPURCHASE AGREEMENTS, where the Fund borrows money on a temporary basis by selling a security with an obligation to repurchase it at an agreed-upon price and time.
MONEY MARKET INSTRUMENTS
The Fund may, under normal circumstances, invest up to 20% of its investable assets in high-quality MONEY MARKET INSTRUMENTS, including commercial paper of domestic companies, certificates of deposit, bankers' acceptances and other obligations of domestic and foreign banks. Investments in
money market instruments for coverage purposes will be excluded in calculating the 20%. The Fund will only purchase money market instruments that are in one of the two highest quality grades of a major rating service or that we determine are of comparable quality.
TEMPORARY DEFENSIVE INVESTMENTS
In response to adverse market, economic or political conditions, we may
temporarily invest up to 100% of the Fund's total assets in high-quality money
market instruments, cash, repurchase agreements or U.S. Government securities.
Investing heavily in these securities limits our ability to achieve our
investment objective, but can help to preserve the Fund's assets.
DERIVATIVE STRATEGIES
We may use various DERIVATIVE STRATEGIES to try to improve the Fund's returns. We may use hedging techniques to try to protect the Fund's assets. We cannot guarantee that these strategies and techniques will work, that the instruments necessary to implement these strategies and techniques will be available, or that the Fund will not lose money. Derivatives--such as futures contracts, including interest rate futures contracts and Eurodollar instruments, options, including straddles, options on futures and interest rate swaps--involve costs and can be volatile. With derivatives, the investment adviser tries to predict if the underlying investment, whether a security, market index, currency, interest rate, or some other investment, will go up or down at some future date. We may use derivatives to try to reduce risk or to increase return consistent with the Fund's overall investment objective. The investment adviser will consider other factors (such as cost) in deciding whether to employ any particular strategy or technique, or use any particular instrument. Any derivatives we may use may not match the Fund's underlying holdings. Derivatives that involve leverage could magnify losses.
OPTIONS
The Fund may purchase and sell call or put options on U.S. Government securities traded on U.S. securities exchanges or in the over-the-counter market. An OPTION is the right to buy or sell securities or currencies in exchange for a premium. The Fund will sell only covered options.
FUTURES CONTRACTS AND RELATED OPTIONS
The Fund may purchase and sell financial futures contracts and related options on financial futures. A FUTURES CONTRACT is an agreement to buy or sell a set quantity of an underlying product at a future date, or to make or receive a cash payment based on the value of a securities index. The Fund may also invest in futures contracts on 10-year interest rate swaps for hedging purposes only. The terms of futures contracts are standardized. In the case of a financial futures contract based upon a broad index, there is no delivery of the securities comprising the underlying index, margin is uniform, a clearing corporation or an exchange is the counterparty and the Fund makes daily margin payments based on price movements in the index. The Fund may invest up to 5% of its investable assets for initial margin deposits on existing futures and options on futures and for premiums paid for these types of options.
The Fund may invest in Eurodollar instruments. EURODOLLAR INSTRUMENTS are essentially U.S. dollar-denominated futures contracts linked to the London Interbank Offered Rate (LIBOR). Eurodollar instruments enable purchasers to obtain a fixed rate for the lending of funds and sellers to obtain a fixed rate for borrowings.
INTEREST RATE SWAP TRANSACTIONS
The Fund may enter into INTEREST RATE SWAP TRANSACTIONS. In a swap transaction,
the Fund and another party "trade" income streams. The swap is done to preserve
a return or spread on a particular investment or portion of a portfolio or to
protect against any increase in the price of securities the Fund anticipates
purchasing at a later date.
For more information about these strategies, see the SAI, "Description of the Fund, Its Investments and Risks--Risk Management and Return Enhancement Strategies."
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
The Fund may purchase money market obligations on a WHEN-ISSUED or DELAYED-DELIVERY basis. When the Fund makes this type of purchase, the price and interest rate are fixed at the time of purchase, but delivery and payment for the obligations take place at a later time. The Fund does not earn interest income until the date the obligations are expected to be delivered.
ZERO COUPON BONDS
The Fund may invest up to 15% of its investable assets in zero coupon U.S. Government securities. ZERO COUPON BONDS do not pay interest during the life of the security. An investor makes money by purchasing the security at a price that is less than the money the investor will receive when the borrower repays the amount borrowed (face value).
The Fund records the amount zero coupon bonds rise in price each year (phantom income) for accounting and federal income tax purposes, but does not receive income currently. Because the Fund is required under federal tax laws to distribute income to its shareholders, in certain circumstances, the Fund may have to dispose of its portfolio securities under disadvantageous conditions or borrow to generate enough cash to distribute phantom income.
SHORT SALES AGAINST-THE-BOX
The Fund may use SHORT SALES AGAINST-THE-BOX. In a short sale "against the box,"
the Fund owns or has the right to acquire the security at no additional cost
through conversion or exchange of other securities it owns. The Fund may engage
in such short sales only to the extent that not more than 10% of the Fund's net
assets (as determined at the time of the short sale) are held as collateral for
such sales.
For more information about these strategies, see the SAI, "Description of the Fund, Its Investments and Risks."
ADDITIONAL STRATEGIES
The Fund also follows certain policies when it LENDS ITS SECURITIES to others (the Fund may lend up to 30% of the value of its total assets); BORROWS MONEY (the Fund can borrow up to 20% of the value of its total assets); and HOLDS ILLIQUID SECURITIES (the Fund may hold up to 15% of its net assets in illiquid securities, including securities with legal or contractual restrictions
on resale, those without a readily available market and repurchase agreements with maturities longer than seven days). The Fund is subject to certain other investment restrictions that are fundamental policies, which means they cannot be changed without shareholder approval. For more information about these restrictions, see the SAI.
INVESTMENT RISKS
As noted, all investments involve risk, and investing in the Fund is no exception. Since the Fund's holdings can vary significantly from broad market indexes, performance of the Fund can deviate from performance of the indexes. This chart outlines the key risks and potential rewards of the Fund's principal investments and certain other non-principal investments the Fund may make. The investment types are listed in the order in which they normally will be used by the investment adviser. Unless otherwise noted, the Fund's ability to engage in the particular type of investment is expressed as a percentage of investable assets. See, too, "Description of the Fund, Its Investments and Risks" in the SAI.
INVESTMENT TYPE
% OF FUND'S ASSETS RISKS POTENTIAL REWARDS
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U.S. GOVERNMENT -- Credit risk--the risk -- Regular interest
SECURITIES that the borrower income
can't pay back the -- Generally more secure
UP TO 100%; AT LEAST money borrowed or than lower-quality
80% make interest debt securities
payments (relatively -- The U.S. Government
low for U.S. guarantees interest
Government and principal
securities) payments on certain
-- Market risk--the risk U.S. Government
that obligations will securities
lose value in the -- May preserve the
market, sometimes Fund's assets
rapidly or -- If interest rates
unpredictably, decline, long-term
because interest yields should be
rates rise or there higher than money
is a lack of market yields
confidence in the -- Bonds have generally
borrower outperformed money
-- Not all U.S. market instruments
Government securities over the long term
are insured or -- Most bonds rise in
guaranteed by the value when interest
U.S. Government--some rates fall
are backed only by
the issuing agency,
which must rely on
its own resources to
repay the debt
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INVESTMENT TYPE (CONT'D)
% OF FUND'S ASSETS RISKS POTENTIAL REWARDS
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MORTGAGE-RELATED SECURITIES -- Prepayment risk--the -- Regular interest
risk that the income
PERCENTAGE VARIES; UP TO underlying mortgages -- The U.S. Government
100% IN U.S. GOVERNMENT may be pre-paid, guarantees interest
BACKED partially or and principal
completely, generally payments on certain
during periods of securities
falling interest -- May benefit from
rates, which could security interest in
adversely affect real estate
yield to maturity and collateral
could require the -- Pass-through
Fund to reinvest in instruments provide
lower yielding greater
securities diversification than
-- Credit risk--the risk direct ownership of
that the underlying loans
mortgages will not be
paid by debtors or by
credit insurers or
guarantors of such
instruments. Some
private mortgage
securities are
unsecured or secured
by lower-rated
insurers or
guarantors and thus
may involve greater
risk
-- See market risk
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MONEY MARKET INSTRUMENTS -- Limits potential for -- May preserve the
capital appreciation Fund's assets
UP TO 20%; UP TO 100% ON A and achieving our
TEMPORARY BASIS objective
-- See credit risk and
market risk (which
are less of a concern
for money market
instruments)
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14 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [TELEPHONE ICON] (800) 225-1852
INVESTMENT TYPE (CONT'D)
% OF FUND'S ASSETS RISKS POTENTIAL REWARDS
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ASSET-BACKED SECURITIES -- The security interest -- Regular interest
in the underlying income
UP TO 20% collateral may not be -- Prepayment risk is
as great as with generally lower than
mortgage-related with mortgage-related
securities securities
-- Credit risk--the risk -- Pass-through
that the underlying instruments provide
receivables will not greater
be paid by debtors or diversification than
by credit insurers or direct ownership of
guarantors of such loans
instruments. Some -- May offer higher yield
asset-backed due to their
securities are structure
unsecured or secured
by lower-rated
insurers or
guarantors and thus
may involve greater
risk
-- See market risk and
prepayment risk
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ILLIQUID SECURITIES -- Illiquidity risk--the -- May offer a more
risk that bonds may attractive yield or
UP TO 15% OF NET ASSETS be difficult to value potential for growth
precisely and sell at than more widely
time or price traded securities
desired, in which
case valuation would
depend more on
investment adviser's
judgment than is
generally the case
with more liquid
securities
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INVESTMENT TYPE (CONT'D)
% OF FUND'S ASSETS RISKS POTENTIAL REWARDS
----------------------------------------------------------------------------------------
ZERO COUPON BONDS -- Typically subject to -- Value rises faster
greater volatility when interest rates
UP TO 15% and less liquidity in fall
adverse markets than
other debt securities
-- See credit risk and
market risk
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FOREIGN BANK OBLIGATIONS -- Foreign markets, -- Investors can
economies and participate in the
LESS THAN 10% political systems may growth of foreign
not be as stable as markets through
those in the U.S., investments in
particularly those in companies operating
developing countries in those markets
-- May be less liquid -- Changing value of
than U.S. debt foreign currencies
securities can cause gains
-- Differences in foreign -- Opportunities for
laws, accounting diversification
standards, public
information, custody
and settlement
practices provide
less reliable
information on
foreign investments
and involve more
risks
-- Currency risk--
changing value of
foreign currencies
can cause losses
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16 PRUDENTIAL GOVERNMENT INCOME FUND, INC. [TELEPHONE ICON] (800) 225-1852
INVESTMENT TYPE (CONT'D)
% OF FUND'S ASSETS RISKS POTENTIAL REWARDS
----------------------------------------------------------------------------------------
DERIVATIVES -- The value of -- The Fund could make
derivatives (such as money and protect
PERCENTAGE VARIES futures, options, against losses if the
options on futures investment analysis
and interest rate proves correct
swaps), that are used -- One way to manage the
to hedge a portfolio Fund's risk/return
security is balance is to lock in
determined the value of an
independently from investment ahead of
that security and time
could result in a -- Derivatives used for
loss to the Fund when return enhancement
the price movement of purposes involve a
a derivative does not type of leverage and
correlate with a could generate
change in the value substantial gains at
of the portfolio low cost
security -- Hedges that correlate
-- Derivatives used for well with an
risk management may underlying position
not have the intended can increase or
effects and may enhance investment
result in losses or income or capital
missed opportunities gains at low cost
-- The other party to a
derivatives contract
could default
-- Certain types of
derivatives
involve costs to the
Fund that can reduce
returns
-- Derivatives used for
return enhancement
purposes involve a
type of leverage
(borrowing for
investment) and could
magnify losses
----------------------------------------------------------------------------------------
WHEN-ISSUED AND -- Value of securities -- May magnify underlying
DELAYED-DELIVERY SECURITIES, may decrease before investment gains
REPURCHASE AGREEMENTS, delivery occurs
REVERSE REPURCHASE -- Broker/dealer may
AGREEMENTS, DOLLAR ROLLS AND become insolvent
SHORT SALES AGAINST-THE-BOX prior to delivery
-- Investment costs may
PERCENTAGE VARIES exceed potential
underlying investment
gains
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BOARD OF DIRECTORS
The Fund's Board of Directors oversees the actions of the Manager, investment
adviser and Distributor and decides on general policies. The Board also oversees
the Fund's officers, who conduct and supervise the daily business operations of
the Fund.
MANAGER
PRUDENTIAL INVESTMENTS LLC (PI)
GATEWAY CENTER THREE, 100 MULBERRY STREET
NEWARK, NJ 07102
Under a Management Agreement with the Fund, PI manages the Fund's investment operations and administers its business affairs. PI also is responsible for supervising the Fund's investment adviser. For the fiscal year ended February 28, 2002, the Fund paid PI management fees of .50% of the Fund's average daily net assets.
PI and its predecessors have served as manager or administrator to investment companies since 1987. As of December 31, 2001, PI served as the investment manager to all of the Prudential U.S. and offshore open-end investment companies, and as administrator to closed-end investment companies, with aggregate assets of approximately $100.8 billion.
INVESTMENT ADVISER
Prudential Investment Management, Inc., (PIM) is the Fund's investment adviser and has served as an investment adviser to investment companies since 1984. Its address is Two Gateway Center, Newark, NJ 07102. PI has responsibility for all investment advisory services, supervises PIM and pays PIM for its services.
As of December 31, 2001, PIM's Fixed Income Group managed approximately $137 billion for Prudential's retail investors, institutional investors, and policyholders. Senior Managing Director James J. Sullivan heads the Group, which is organized into teams specializing in different market sectors. Top-down, broad investment decisions are made by the Fixed Income Investment Policy Committee, whereas bottom-up security selection is made by the sector teams.
Prior to joining PIM in 1998, Mr. Sullivan was a Managing Director in Prudential's Capital Management Group, where he oversaw portfolio management and credit research for Prudential's General Account and subsidiary fixed-income portfolios. He has more than 18 years of experience in risk management, arbitrage trading, and corporate bond investing.
The Fixed Income Investment Policy Committee is comprised of key senior investment managers, including Fixed Income's chief investment officer, chief investment strategist, head of risk management and head of quantitiative management. The Committee uses a top-down approach to investment strategy, asset allocation, and general risk management, identifying sectors in which to invest.
The U.S. Liquidity Team, headed by Peter Cordrey, is primarily responsible for overseeing the day-to-day management of the Fund. This Team uses a bottom-up approach, which focuses on individual securities, while staying within the guidelines of the Investment Policy Committee and the Fund's investment restrictions and policies. In addition, the Credit Research team of analysts supports the sector teams using bottom-up fundamentals, as well as economic and industry trends. Other sector teams may contribute to securities selection when appropriate.
U.S. LIQUIDITY
ASSETS UNDER MANAGEMENT: $27 billion (as of December 31, 2001).
TEAM LEADER: Peter Cordrey. GENERAL INVESTMENT EXPERIENCE: 20 years.
PORTFOLIO MANAGERS: 7. AVERAGE GENERAL INVESTMENT EXPERIENCE: 12 years, which
includes team members with significant mutual fund experience.
SECTOR: U.S. Treasuries, agencies and mortgages.
INVESTMENT STRATEGY: Focus is on high quality, liquidity and controlled risk.
Investors who buy shares of the Fund should be aware of some important tax
issues. For example, the Fund distributes DIVIDENDS of ordinary income monthly
and CAPITAL GAINS, if any, at least annually to shareholders. These
distributions are subject to federal income taxes, unless you hold your shares
in a 401(k) plan, an Individual Retirement Account (IRA) or some other qualified
or tax-deferred plan or account. Dividends and distributions from the Fund also
may be subject to state and local income tax in the state where you live.
Also, if you sell shares of the Fund for a profit, you may have to pay
capital gains taxes on the amount of your profit, again unless you hold your
shares in a qualified or tax-deferred plan or account.
The following briefly discusses some of the important federal income tax issues you should be aware of, but is not meant to be tax advice. For tax advice, please speak with your tax adviser.
DISTRIBUTIONS
The Fund distributes DIVIDENDS out of any net investment income, plus short-term capital gains, to shareholders typically every month. For example, if the Fund owns a U.S. Government bond and the bond pays interest, the Fund will pay out a portion of this interest as a dividend to its shareholders, assuming the Fund's income is more than its costs and expenses. The dividends you receive from the Fund will be taxed as ordinary income, whether or not they are reinvested in the Fund. Corporate shareholders are generally not eligible for the 70% dividends-received deduction in respect of dividends paid by the Fund.
The Fund also distributes LONG-TERM CAPITAL GAINS to shareholders-- typically once a year. Long-term capital gains are generated when the Fund sells for a profit assets that it held for more than 1 year. For an individual, the maximum federal long-term capital gains rate is generally 20%. The maximum capital gains rate for corporate shareholders currently is the same as the maximum tax rate for ordinary income.
For your convenience, Fund distributions of dividends and capital gains are AUTOMATICALLY REINVESTED in the Fund without any sales charge. If you ask us to pay the distributions in cash, we will send you a check if your account is with the Transfer Agent. Otherwise, if your account is with a broker, you will receive a credit to your account. Either way, the distributions may be subject to income taxes, unless your shares are held in a qualified
or tax-deferred plan or account. For more information about automatic reinvestment and other shareholder services, see "Step 4: Additional Shareholder Services" in the next section.
TAX ISSUES
FORM 1099
Every year, you will receive a Form 1099, which reports the amount of dividends and long-term capital gains we distributed to you during the prior year. If you own shares of the Fund as part of a qualified or tax-deferred plan or account, your taxes are deferred, so you will not receive a Form 1099. However, you will receive a Form 1099 when you take any distributions from your qualified or tax-deferred plan or account.
Fund distributions are generally taxable to you in the calendar year in which they are received, except when we declare certain dividends in the fourth quarter, and actually pay them in January of the following year. In such cases, the dividends are treated as if they were paid on December 31 of the prior year.
WITHHOLDING TAXES
If federal law requires you to provide the Fund with your taxpayer identification number and certifications as to your tax status, and you fail to do this, or if you are otherwise subject to backup withholding, we will withhold and pay to the U.S. Treasury 30% of your taxable distributions and gross sale proceeds. Dividends of net investment income and short-term capital gains paid to a nonresident foreign shareholder generally will be subject to a U.S. withholding tax of 30%. This rate may be lower, depending on any tax treaty the U.S. may have with the shareholder's country.
IF YOU PURCHASE JUST BEFORE RECORD DATE
If you buy shares of the Fund just before the record date for a distribution (the date that determines who receives the distribution), we will pay that distribution to you. As explained above, the distribution may be subject to ordinary income or capital gains taxes. You may think you've done well, since you bought shares one day and soon thereafter received a distribution. That is not so because when dividends are paid out, the value of each share of the Fund decreases by the amount of the dividend to reflect the payout, although this may not be apparent because the value of each share of the Fund also will be affected by market changes, if any. The distribution
you receive makes up for the decrease in share value. However, the timing of your purchase does mean that part of your investment came back to you as taxable income.
QUALIFIED OR TAX-DEFERRED RETIREMENT PLANS
Retirement plans and accounts allow you to defer paying taxes on investment income and capital gains. Contributions to these plans may also be tax deductible, although distributions from these plans generally are taxable. In the case of Roth IRA accounts, contributions are not tax deductible, but distributions from the plan may be tax free. Please contact your financial adviser for information on a variety of Prudential mutual funds that are suitable for retirement plans offered by Prudential.
IF YOU SELL OR EXCHANGE YOUR SHARES
If you sell any shares of the Fund for a profit, you have REALIZED A CAPITAL GAIN, which is subject to tax unless the shares are held in a qualified or tax-deferred plan or account. For individuals, the maximum capital gains tax rate is generally 20% for shares held for more than 1 year. However, capital gains of individuals from a sale of shares acquired after December 31, 2000 and held for more than 5 years will be eligible for a special maximum capital gains rate of 18%. If you sell shares of the Fund for a loss, you may have a capital loss, which you may use to offset certain capital gains you have.
[CHART]
===> + $ CAPITAL GAIN
(taxes owed)
$
RECEIPTS OR
FROM SALE
===> - $ CAPITAL LOSS
(offset against gain)
|
If you sell shares and realize a loss, you will not be permitted to use the loss to the extent you replace the shares (including pursuant to the reinvestment of a dividend) within a 61-day period (beginning 30 days before and ending 30 days after the sale of the shares). Under certain circumstances, if you acquire shares of the Fund and sell or exchange your shares within 90 days, you may not be allowed to include certain charges incurred in acquiring the shares for purposes of calculating gain or loss realized upon the sale of the shares.
Exchanging your shares of the Fund for the shares of another Prudential mutual fund is considered a sale for tax purposes. In other words, it's a "taxable event." Therefore, if the shares you exchanged have increased in value since you purchased them, you have capital gains, which are subject to the taxes described above.
Any gain or loss you may have from selling or exchanging Fund shares will not be reported on Form 1099; however, proceeds from the sale or exchange will be reported on Form 1099-B. Therefore, unless you hold your shares in a qualified or tax-deferred plan or account, you or your financial adviser should keep track of the dates on which you buy and sell--or exchange--Fund shares, as well as the amount of any gain or loss on each transaction. For tax advice, please see your tax adviser.
AUTOMATIC CONVERSION OF CLASS B SHARES
HOW TO BUY SHARES
STEP 1: OPEN AN ACCOUNT
If you don't have an account with us or a securities firm that is permitted to
buy or sell shares of the Fund for you, call Prudential Mutual Fund Services LLC
(PMFS) at (800) 225-1852 or contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: INVESTMENT SERVICES
P.O. BOX 8179
PHILADELPHIA, PA 19101
You may purchase shares by check or wire. We do not accept cash or money orders. To purchase by wire, call the number above to obtain an application. After PMFS receives your completed application, you will receive an account number. For additional information about purchasing shares of the Fund, see the back cover page of this prospectus. We have the right to reject any purchase order (including an exchange into the Fund) or suspend or modify the Fund's sale of its shares.
STEP 2: CHOOSE A SHARE CLASS
Individual investors can choose among Class A, Class B, Class C and Class Z
shares of the Fund, although Class Z shares are available only to a limited
group of investors.
Multiple share classes let you choose a cost structure that meets your
needs. With Class A shares, you pay the sales charge at the time of purchase,
but the operating expenses each year are lower than the expenses of Class B and
Class C shares. With Class B shares, you only pay a sales charge if you sell
your shares within six years (that is why it is called a Contingent Deferred
Sales Charge or CDSC), but the operating expenses each year are higher than
Class A share expenses. With Class C shares, you pay a 1% front-end sales charge
and a 1% CDSC if you sell within 18 months of purchase, but the operating
expenses are also higher than the expenses for Class A shares.
When choosing a share class, you should consider the following:
-- The amount of your investment
cost of your investment and may cost you more than paying other types of sales charges
-- The different sales charges that apply to a share class--Class A's front-end sales charge vs. Class B's CDSC vs. Class C's lower front-end sales charge and low CDSC
-- Whether you qualify for any reduction or waiver of sales charges
-- The fact that Class B shares automatically convert to Class A shares approximately seven years after purchase
-- The fact that, if you are purchasing Class B shares in an amount of $100,000 or more, you should consult with your financial adviser to determine whether other share classes are more beneficial given your circumstances
-- Whether you qualify to purchase Class Z shares.
SHARE CLASS COMPARISON. Use this chart to help you compare the Fund's different share classes. The discussion following this chart will tell you whether you are entitled to a reduction or waiver of any sales charges.
CLASS A CLASS B CLASS C CLASS Z
Minimum purchase $1,000 $1,000 $2,500 None
amount(1)
Minimum amount for $100 $100 $100 None
subsequent
purchases(1)
Maximum initial sales 4% of the None 1% of the None
charge public public
offering offering
price price(2)
Contingent Deferred None If sold 1% on sales None
Sales Charge (CDSC)(3) during: made within
Year 1 5% 18 months of
Year 2 4% purchase
Year 3 3%
Year 4 2%
Year 5 1%
Year 6 1%
Year 7 0%
Annual distribution and .30 of 1% 1% up to 1% None
service (12b-1) fees (.25 of 1% $3 billion, (.75 of 1%
(shown as currently) .80 of 1% next currently)
a percentage of $1 billion,
average net and
assets)(4) .50 of 1% over
$4 billion
(.825 of 1%
currently)
|
(1) THE MINIMUM INVESTMENT REQUIREMENTS DO NOT APPLY TO CERTAIN
RETIREMENT AND EMPLOYEE SAVINGS PLANS AND CUSTODIAL ACCOUNTS
FOR MINORS. THE MINIMUM INITIAL AND SUBSEQUENT INVESTMENT
FOR PURCHASES MADE THROUGH THE AUTOMATIC INVESTMENT PLAN IS
$50. FOR MORE INFORMATION, SEE "STEP 4: ADDITIONAL
SHAREHOLDER SERVICES--AUTOMATIC INVESTMENT PLAN."
(2) 1.01% OF THE NET AMOUNT INVESTED.
(3) FOR MORE INFORMATION ABOUT THE CDSC AND HOW IT IS
CALCULATED, SEE "HOW TO SELL YOUR SHARES--CONTINGENT
DEFERRED SALES CHARGE (CDSC)."
(4) THESE DISTRIBUTION AND SERVICE (12b-1) FEES ARE PAID FROM
THE FUND'S ASSETS ON A CONTINUOUS BASIS. THE SERVICE FEE FOR
CLASS A, CLASS B AND CLASS C SHARES IS .25 OF 1%. THE
DISTRIBUTION FEE FOR CLASS A SHARES IS LIMITED TO .30 OF 1%
(INCLUDING UP TO .25 OF 1% AS A SERVICE FEE), IS .75 OF 1%
UP TO $3 BILLION, .55 OF 1% OF THE NEXT $1 BILLION, AND .25
OF 1% OVER $4 BILLION FOR CLASS B SHARES AND IS .75 OF 1%
FOR CLASS C SHARES. FOR THE FISCAL YEAR ENDING FEBRUARY 28,
2003, THE DISTRIBUTOR OF THE FUND HAS CONTRACTUALLY AGREED
TO REDUCE ITS DISTRIBUTION AND SERVICE (12b-1) FEES FOR
CLASS A, CLASS B, AND CLASS C SHARES TO .25 OF 1%, .825 OF
1%, AND .75 OF 1% OF THE AVERAGE DAILY NET ASSETS OF
CLASS A, CLASS B, AND CLASS C SHARES, RESPECTIVELY.
|
REDUCING OR WAIVING CLASS A'S INITIAL SALES CHARGE
The following describes the different ways investors can reduce or avoid
paying Class A's initial sales charge.
INCREASE THE AMOUNT OF YOUR INVESTMENT. You can reduce Class A's initial sales charge by increasing the amount of your investment. This table shows how the sales charge decreases as the amount of your investment increases.
SALES CHARGE AS % OF SALES CHARGE AS % OF DEALER
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED REALLOWANCE
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(1) None None None
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(1) IF YOU INVEST $1 MILLION OR MORE, YOU CAN BUY ONLY CLASS A
SHARES, UNLESS YOU QUALIFY TO BUY CLASS Z SHARES.
|
To satisfy the purchase amounts above, you can:
-- Invest with an eligible group of investors who are related to you
-- Buy Class A shares of two or more Prudential mutual funds at the same time
-- Use your RIGHTS OF ACCUMULATION, which allow you to combine (1) the
current value of Prudential mutual fund shares you already own,
(2) the value of money market shares you have received in an exchange
transaction and (3) the value of the shares you are purchasing for
purposes of determining the applicable sales charge (note: you must
notify the Transfer Agent at the time of purchase if you qualify for
Rights of Accumulation)
-- Sign a LETTER OF INTENT, stating in writing that you or an eligible group of related investors will purchase a certain amount of shares in the Fund and other Prudential mutual funds within 13 months.
The Distributor may reallow Class A's sales charge to dealers.
eligible employees. For more information about these requirements, call Prudential at (800) 353-2847.
MUTUAL FUND PROGRAMS. The initial sales charge will be waived for investors in certain programs sponsored by broker-dealers, investment advisers and financial planners who have agreements with Prudential Investments Advisory Group relating to:
-- Mutual fund "wrap" or asset allocation programs, where the sponsor places Fund trades and charges its clients a management, consulting or other fee for its services, or
-- Mutual fund "supermarket" programs, where the sponsor links its clients' accounts to a master account in the sponsor's name and the sponsor charges a fee for its services.
Broker-dealers, investment advisers or financial planners sponsoring these mutual fund programs may offer their clients more than one class of shares in the Fund in connection with different pricing options for their programs. Investors should consider carefully any separate transaction and other fees charged by these programs in connection with investing in each available share class before selecting a share class.
OTHER TYPES OF INVESTORS. Other investors may pay no sales charges, including certain officers, employees or agents of Prudential and its affiliates, the Prudential mutual funds, the investment advisers of the Prudential mutual funds and registered representatives and employees of brokers that have entered into a dealer agreement with the Distributor. To qualify for a reduction or waiver of the sales charge, you must notify the Transfer Agent or your broker at the time of purchase. For more information, see the SAI, "Purchase, Redemption and Pricing of Fund Shares--Reduction and Waiver of Initial Sales Charge--Class A Shares."
WAIVING CLASS C'S INITIAL SALES CHARGE
BENEFIT PLANS. Certain group retirement plans may purchase Class C shares
without the initial sales charge. For more information, call Prudential at
(800) 353-2847.
purchase is made with money from the redemption of shares of any unaffiliated investment company, as long as the shares were not held in an account at Prudential Securities Incorporated (Prudential Securities) or one of its affiliates. These purchases must be made within 60 days of redemption. To qualify for this waiver, you must do one of the following:
-- Purchase your shares through an account at Prudential Securities,
-- Purchase your shares through a COMMAND Account or an Investor Account with Pruco Securities Corporation, or
-- Purchase your shares through another broker.
This waiver is not available to investors who purchase shares directly from the Transfer Agent. If you are entitled to the waiver, you must notify either the Transfer Agent or your broker, who may require any supporting documents they consider appropriate.
QUALIFYING FOR CLASS Z SHARES
BENEFIT PLANS. Certain group retirement plans may purchase Class Z shares if
they meet the required minimum for amount of assets, average account balance or
number of eligible employees. For more information about these requirements,
call Prudential at (800) 353-2847.
MUTUAL FUND PROGRAMS. Class Z shares also can be purchased by participants in any fee-based program or trust program sponsored by Prudential or an affiliate that includes the Fund as an available option. Class Z shares also can be purchased by investors in certain programs sponsored by broker-dealers, investment advisers and financial planners who have agreements with Prudential Investments Advisory Group relating to:
-- Mutual fund "wrap" or asset allocation programs, where the sponsor places Fund trades, links its clients' accounts to a master account in the sponsor's name and charges its clients a management, consulting or other fee for its services, or
-- Mutual fund "supermarket" programs, where the sponsor links its clients' accounts to a master account in the sponsor's name and the sponsor charges a fee for its services.
other fees charged by these programs in connection with investing in each available share class before selecting a share class.
OTHER TYPES OF INVESTORS. Class Z shares also can be purchased by any of the following:
-- Certain participants in the MEDLEY Program (group variable annuity contracts) sponsored by Prudential for whom Class Z shares of the Prudential mutual funds are an available option,
-- Current and former Directors/Trustees of the Prudential mutual funds (including the Fund), and
-- Prudential, with an investment of $10 million or more.
In connection with the sale of shares, the Manager, the Distributor or one of their affiliates may pay brokers, financial advisers and other persons a commission of up to 4% of the purchase price for Class B shares, up to 2% of the purchase price for Class C shares and a finder's fee for Class A or Class Z shares from their own resources based on a percentage of the net asset value of shares sold or otherwise.
CLASS B SHARES CONVERT TO CLASS A SHARES AFTER APPROXIMATELY SEVEN YEARS
If you buy Class B shares and hold them for approximately seven years, we will
automatically convert them into Class A shares without charge. At that time, we
will also convert any Class B shares that you purchased with reinvested
dividends and other distributions. Since the 12b-1 fees for Class A shares are
lower than for Class B shares, converting to Class A shares lowers your Fund
expenses.
When we do the conversion, you will get fewer Class A shares than the number
of converted Class B shares if the price of the Class A shares is higher than
the price of Class B shares. The total dollar value will be the same, so you
will not have lost any money by getting fewer Class A shares. We do the
conversions quarterly, not on the anniversary date of your purchase. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Class B Shares."
(assets minus liabilities) divided by the total number of shares outstanding.
For example, if the value of the investments held by Fund XYZ (minus its
liabilities) is $1,000 and there are 100 shares of Fund XYZ owned by
shareholders, the price of one share of the fund--or the NAV--is $10 ($1,000
divided by 100).
Portfolio securities are valued based upon market quotations or, if not
readily available, at fair value as determined in good faith under procedures
established by the Fund's Board. The Fund also may use fair value pricing if it
determines that a market quotation is not reliable based, among other things, on
events that occur after the quotation is derived or after the close of the
primary market on which the security is traded, but before the time that the
Fund's NAV is determined. This use of fair value pricing most commonly occurs
with securities that are primarily traded outside the U.S., but also may occur
with U.S.-traded securities. The fair value of a portfolio security that the
Fund uses to determine its NAV may differ from the security's quoted or
published price. For purposes of computing the Fund's NAV, we will value the
Fund's futures contracts 15 minutes after the close of regular trading on the
New York Stock Exchange (NYSE). Except when we fair value securities or as noted
below, we normally value each foreign security held by the Fund as of the close
of the security's primary market.
We determine the Fund's NAV once each business day at the close of regular trading on the NYSE, usually 4:00 p.m. New York time. The NYSE is closed on most national holidays and Good Friday. We do not price, and you will not be able to purchase or redeem, the Fund's shares on days when the NYSE is closed but the primary markets for the Fund's foreign securities are open, even though the value of these securities may have changed. Conversely, the Fund will ordinarily price its shares, and you may purchase and redeem shares, on days that the NYSE is open but foreign securities markets are closed. We may not determine the NAV of the Fund on days when we have not received any orders to purchase, sell or
MUTUAL FUND SHARES
exchange the Fund's shares, or when changes in the value of the Fund's portfolio do not materially affect its NAV.
Most national newspapers report the NAVs of larger mutual funds, allowing investors to check the price of those funds daily.
WHAT PRICE WILL YOU PAY FOR SHARES OF THE FUND?
For Class A and Class C shares, you'll pay the public offering price, which is
the NAV next determined after we receive your order to purchase, plus an initial
sales charge (unless you're entitled to a waiver). For Class B and Class Z
shares, you will pay the NAV next determined after we receive your order to
purchase (remember, there are no up-front sales charges for these share
classes). Your broker may charge you a separate or additional fee for purchases
of shares.
Unless regular trading on the NYSE closes before 4:00 p.m., your order to purchase must be received by 4:00 p.m. New York time in order to receive that day's NAV. In the event that regular trading on the NYSE closes before 4:00 p.m. New York time, you will receive the following day's NAV if your order to purchase is received after the close of regular trading on the NYSE.
STEP 4: ADDITIONAL SHAREHOLDER SERVICES
As a Fund shareholder, you can take advantage of the following services and
privileges:
AUTOMATIC REINVESTMENT. As we explained in the "Fund Distributions and Tax Issues" section, the Fund pays out--or distributes--its net investment income and capital gains to all shareholders. For your convenience, we will automatically reinvest your distributions in the Fund at NAV, without any sales charge. If you want your distributions paid in cash, you can indicate this preference on your application, notify your broker, or notify the Transfer Agent in writing (at the address below) at least five business days before the date we determine who receives dividends.
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: ACCOUNT MAINTENANCE
P.O. BOX 8159
PHILADELPHIA, PA 19101
AUTOMATIC INVESTMENT PLAN. You can make regular purchases of the Fund for as little as $50 by having the money automatically withdrawn from your bank or brokerage account at specified intervals.
RETIREMENT PLAN SERVICES. Prudential offers a wide variety of retirement plans for individuals and institutions, including large and small businesses. For information on IRAs, including Roth IRAs or SEP-IRAs for a one-person business, please contact your financial adviser. If you are interested in opening a 401(k) or other company-sponsored retirement plan (SIMPLEs, SEP plans, Keoghs, 403(b) plans, pension and profit-sharing plans), your financial adviser will help you determine which retirement plan best meets your needs. Complete instructions about how to establish and maintain your plan and how to open accounts for you and your employees will be included in the retirement plan kit you receive in the mail.
SYSTEMATIC WITHDRAWAL PLAN. A Systematic Withdrawal Plan is available that will provide you with monthly, quarterly, semi-annual or annual redemption checks. Remember, the sale of Class B and Class C shares may be subject to a CDSC. The Systematic Withdrawal Plan is not available to participants in certain retirement plans. Please contact PMFS at (800) 225-1852 for more details.
REPORTS TO SHAREHOLDERS. Every year we will send you an annual report (along with an updated prospectus) and a semi-annual report, which contain important financial information about the Fund. To reduce Fund expenses, we may send one annual shareholder report, one semi-annual shareholder report and one annual prospectus per household, unless you instruct us or your broker otherwise.
HOW TO SELL YOUR SHARES
You can sell your shares of the Fund for cash (in the form of a check) at any
time, subject to certain restrictions.
When you sell shares of the Fund--also known as redeeming your shares--the price you will receive will be the NAV next determined after the Transfer Agent, the Distributor or your broker receives your order to sell (less any applicable CDSC). If your broker holds your shares, your broker must receive your order to sell by 4:00 p.m. New York time, to process the sale on that day. In the event that regular trading on the NYSE closes before 4:00 p.m. New York time, you will receive the following day's NAV if your
order to sell is received after the close of regular trading on the NYSE. Otherwise, contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: REDEMPTION SERVICES
P.O. BOX 8149
PHILADELPHIA, PA 19101
Generally, we will pay you for the shares that you sell within seven days after the Transfer Agent, the Distributor or your broker receives your sell order. If you hold shares through a broker, payment will be credited to your account. If you are selling shares you recently purchased with a check, we may delay sending you the proceeds until your check clears, which can take up to 10 days from the purchase date. You can avoid delay if you purchase by wire, certified check or cashier's check. Your broker may charge you a separate or additional fee for sales of shares.
RESTRICTIONS ON SALES
There are certain times when you may not be able to sell shares of the Fund, or when we may delay paying you the proceeds from a sale. To the extent permitted by the Securities and Exchange Commission, this may happen only during unusual market conditions or emergencies when the Fund can't determine the value of its assets or sell its holdings. For more information, see the SAI, "Purchase, Redemption and Pricing of Fund Shares--Sale of Shares."
If you are selling more than $100,000 of shares, if you want the redemption proceeds payable to or sent to someone or some place that is not in our records, or you are a business or a trust and if you hold your shares directly with the Transfer Agent, you will need to have the signature on your sell order signature guaranteed by an "eligible guarantor institution." An "eligible guarantor institution" includes any bank, broker-dealer, savings association or credit union. For more information, see the SAI, "Purchase, Redemption and Pricing of Fund Shares--Sale of Shares--Signature Guarantee."
CDSC as low as possible, we will sell amounts representing shares in the following order:
-- Amounts representing shares you purchased with reinvested dividends and distributions,
-- Amounts representing the increase in NAV above the total amount of payments for shares made during the past six years for Class B shares and 18 months for Class C shares, and
-- Amounts representing the cost of shares held beyond the CDSC period (six years for Class B shares and 18 months for Class C shares).
Since shares that fall into any of the categories listed above are not
subject to the CDSC, selling them first helps you to avoid--or at least
minimize--the CDSC.
Having sold the exempt shares first, if there are any remaining shares that
are subject to the CDSC, we will apply the CDSC to amounts representing the cost
of shares held for the longest period of time within the applicable CDSC period.
As we noted before in the "Share Class Comparison" chart, the CDSC for
Class B shares is 5% in the first year, 4% in the second, 3% in the third, 2% in
the fourth, and 1% in the fifth and sixth years. The rate decreases on the first
day of the month following the anniversary date of your purchase, not on the
anniversary date itself. The CDSC is 1% for Class C shares--which is applied to
shares sold within 18 months of purchase. For both Class B and Class C shares,
the CDSC is calculated based on the lesser of the original purchase price or the
redemption proceeds. For purposes of determining how long you've held your
shares, all purchases during the month are grouped together and considered to
have been made on the last day of the month.
The holding period for purposes of determining the applicable CDSC will be
calculated from the first day of the month after purchase, excluding any time
shares were held in a money market fund.
WAIVER OF THE CDSC--CLASS B SHARES
The CDSC will be waived if the Class B shares are sold:
tenancy, provided the shares were purchased before the death or disability
-- To provide for certain distributions--made without IRS penalty--from a qualified or tax-deferred retirement plan, IRA or Section 403(b) custodial account, and
-- On certain sales effected through the Systematic Withdrawal Plan.
For more information on the above and other waivers, see the SAI, "Purchase, Redemption and Pricing of Fund Shares--Contingent Deferred Sales Charge--Waiver of Contingent Deferred Sales Charge--Class B Shares."
WAIVER OF THE CDSC--CLASS C SHARES
BENEFIT PLANS. The CDSC will be waived for redemptions by certain group
retirement plans for which Prudential or brokers not affiliated with Prudential
provide administrative or recordkeeping services. The CDSC also will be waived
for certain redemptions by benefit plans sponsored by Prudential and its
affiliates. For more information, call Prudential at (800) 353-2847.
REDEMPTION IN KIND
If the sales of Fund shares you make during any 90-day period reach the lesser
of $250,000 or 1% of the value of the Fund's net assets, we can then give you
securities from the Fund's portfolio instead of cash. If you want to sell the
securities for cash, you would have to pay the costs charged by a broker.
SMALL ACCOUNTS
If you make a sale that reduces your account value to less than $500, we may
sell the rest of your shares (without charging any CDSC) and close your account.
We would do this to minimize the Fund's expenses paid by other shareholders. We
will give you 60 days' notice, during which time you can purchase additional
shares to avoid this action. This involuntary sale does not apply to
shareholders who own their shares as part of a 401(k) plan, an IRA, or some
other qualified or tax-deferred plan or account.
shares of the same Fund without paying an initial sales charge. Also, if you paid a CDSC when you redeemed your shares, we will credit your account with the appropriate number of shares to reflect the amount of the CDSC you paid on that reinvested portion of your redemption proceeds. In order to take advantage of this one-time privilege, you must notify the Transfer Agent or your broker at the time of the repurchase. See the SAI, "Purchase, Redemption and Pricing of Fund Shares--Sale of Shares."
RETIREMENT PLANS
To sell shares and receive a distribution from your retirement account, call
your broker or the Transfer Agent for a distribution request form. There are
special distribution and income tax withholding requirements for distributions
from retirement plans and you must submit a withholding form with your request
to avoid delay. If your retirement plan account is held for you by your employer
or plan trustee, you must arrange for the distribution request to be signed and
sent by the plan administrator or trustee. For additional information, see the
SAI.
HOW TO EXCHANGE YOUR SHARES
You can exchange your shares of the Fund for shares of the same class in certain other Prudential mutual funds--including certain money market funds--if you satisfy the minimum investment requirements. For example, you can exchange Class A shares of the Fund for Class A shares of another Prudential mutual fund, but you can't exchange Class A shares for Class B, Class C or Class Z shares. Class B and Class C shares may not be exchanged into money market funds other than Special Money Market Fund, Inc. After an exchange, at redemption the CDSC will be calculated from the first day of the month after initial purchase, excluding any time shares were held in a money market fund. We may change the terms of any exchange privilege after giving you 60 days' notice.
If you hold shares through a broker, you must exchange shares through your broker. Otherwise contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: EXCHANGE PROCESSING
P.O. BOX 8157
PHILADELPHIA, PA 19101
There is no sales charge for exchanges. If, however, you exchange--and then sell--Class B shares within approximately six years of your original purchase or Class C shares within 18 months of your original purchase, you must still pay the applicable CDSC. If you have exchanged Class B or Class C shares into a money market fund, the time you hold the shares in the money market account will not be counted in calculating the required holding period for CDSC liability.
Remember, as we explained in the section entitled "Fund Distributions and Tax Issues--If You Sell or Exchange Your Shares," exchanging shares is considered a sale for tax purposes. Therefore, if the shares you exchange are worth more than the amount that you paid for them, you may have to pay capital gains tax. For additional information about exchanging shares, see the SAI, "Shareholder Investment Account--Exchange Privilege."
If you own Class B or Class C shares and qualify to purchase Class A shares of any Prudential mutual fund without paying an initial sales charge, we will exchange your Class B or Class C shares which are not subject to a CDSC for Class A shares unless you elect otherwise. We make such exchanges on a quarterly basis, if you qualify for this exchange privilege. You must notify the Transfer Agent that you are eligible for this special exchange privilege. We have obtained a legal opinion that this exchange is not a "taxable event" for federal income tax purposes. This opinion is not binding on the IRS.
timer to enter into a written agreement to follow certain procedures and limitations.
TELEPHONE REDEMPTIONS OR EXCHANGES
You may redeem or exchange your shares in any amount by calling the Fund at
(800) 225-1852 before 4:00 p.m. New York time. You will receive a redemption or
exchange amount based on that day's NAV. In the event that regular trading on
the NYSE closes before 4:00 p.m. New York time, you will receive the following
day's NAV if your order to sell or exchange is received after the close of
regular trading on the NYSE.
The Fund's Transfer Agent will record your telephone instructions and
request specific account information before redeeming or exchanging shares. The
Fund will not be liable if it follows instructions that it reasonably believes
are made by the shareholder. If the Fund does not follow reasonable procedures,
it may be liable for losses due to unauthorized or fraudulent telephone
instructions.
In the event of drastic economic or market changes, you may have difficulty
in redeeming or exchanging your shares by telephone. If this occurs, you should
consider redeeming or exchanging your shares by mail or through your broker.
The telephone redemption and exchange procedures may be modified or terminated at any time. If this occurs, you will receive a written notice from the Fund.
EXPEDITED REDEMPTION PRIVILEGE
If you have selected the Expedited Redemption Privilege, you may have your redemption proceeds sent directly to your bank account. Expedited redemption requests may be made by telephone or letter, must be received by the Fund prior to 4:00 p.m., New York time, to receive a redemption amount based on that day's NAV and are subject to the terms and conditions regarding the redemption of shares. In the event that regular trading on the NYSE closes before 4:00 p.m., you will receive the following day's NAV if your order to sell is received after the close of regular trading on the NYSE. For more information, see "Purchase, Redemption and Pricing of Fund Shares--Expedited Redemption Privilege" in the SAI. The Expedited Redemption Privilege may be modified or terminated at any time without notice.
The financial highlights will help you evaluate the Fund's financial performance for the past 5 years. The TOTAL RETURN in each chart represents the rate that a shareholder earned on an investment in that share class of the Fund, assuming reinvestment of all dividends and other distributions. The information is for each share class for the periods indicated.
A copy of the Fund's annual report is available, upon request, at no charge, as described on the back cover of this prospectus.
CLASS A SHARES
The financial highlights were audited by PricewaterhouseCoopers LLP, independent accountants, whose report was unqualified.
CLASS A SHARES (FISCAL YEARS ENDED 2-28/29)
PER SHARE OPERATING PERFORMANCE 2002 2001 2000 1999 1998 NET ASSET VALUE, BEGINNING OF YEAR $8.94 $8.41 $8.98 $9.05 $8.76 INCOME FROM INVESTMENT OPERATIONS Net investment income 0.46 0.54 0.55 0.55 0.58 Net realized and unrealized gain (loss) on investment transactions 0.17 0.53 (0.57) (0.07) 0.29 TOTAL FROM INVESTMENT OPERATIONS 0.63 1.07 (0.02) 0.48 0.87 LESS DISTRIBUTIONS Dividends from net investment income (0.48) (0.54) (0.55) (0.55) (0.58) NET ASSET VALUE, END OF YEAR $9.09 $8.94 $8.41 $8.98 $9.05 TOTAL INVESTMENT RETURN(1) 7.36% 13.10% (0.15)% 5.40% 10.26% ----------------------------------------------------------------------------------------- |
RATIOS/SUPPLEMENTAL DATA 2002 2001 2000 1999 1998 NET ASSETS, END OF YEAR (000) $952,466 $845,525 $806,620 $895,039 $819,536 AVERAGE NET ASSETS (000) $954,797 $810,113 $857,586 $836,143 $842,431 RATIOS TO AVERAGE NET ASSETS Expenses, including distribution and service (12b-1) fees 0.98% 1.00% 0.94% 0.84% 0.86% Expenses, excluding distribution and service (12b-1) fees 0.73% 0.75% 0.69% 0.68% 0.71% Net investment income 5.43% 6.25% 6.39% 6.05% 6.52% FOR CLASS A, B, C & Z Portfolio turnover rate 440% 337% 68% 106% 88% ----------------------------------------------------------------------------------------- |
(1) TOTAL INVESTMENT RETURN DOES NOT CONSIDER THE EFFECT OF
SALES LOADS. TOTAL INVESTMENT RETURN IS CALCULATED ASSUMING
A PURCHASE OF SHARES ON THE FIRST DAY AND A SALE ON THE LAST
DAY OF EACH YEAR REPORTED AND INCLUDES REINVESTMENT OF
DIVIDENDS AND DISTRIBUTIONS.
|
CLASS B SHARES
The financial highlights were audited by PricewaterhouseCoopers LLP, independent accountants, whose report was unqualified.
CLASS B SHARES (FISCAL YEARS ENDED 2-28/29)
PER SHARE OPERATING PERFORMANCE 2002 2001 2000 1999 1998 NET ASSET VALUE, BEGINNING OF YEAR $8.95 $8.41 $8.99 $9.05 $8.77 INCOME FROM INVESTMENT OPERATIONS Net investment income 0.41 0.49 0.50 0.49 0.52 Net realized and unrealized gain (loss) on investment transactions 0.16 0.54 (0.58) (0.06) 0.28 TOTAL FROM INVESTMENT OPERATIONS 0.57 1.03 (0.08) 0.43 0.80 LESS DISTRIBUTIONS Dividends from net investment income (0.43) (0.49) (0.50) (0.49) (0.52) NET ASSET VALUE, END OF YEAR $9.09 $8.95 $8.41 $8.99 $9.05 TOTAL INVESTMENT RETURN(1) 6.62% 12.58% (0.83)% 4.83% 9.40% ----------------------------------------------------------------------------------------- |
RATIOS/SUPPLEMENTAL DATA 2002 2001 2000 1999 1998 NET ASSETS, END OF YEAR (000) $153,685 $130,732 $193,394 $343,425 $346,059 AVERAGE NET ASSETS (000) $134,237 $146,034 $262,863 $322,626 $385,145 RATIOS TO AVERAGE NET ASSETS Expenses, including distribution and service (12b-1) fees 1.55% 1.58% 1.52% 1.50% 1.53% Expenses, excluding distribution and service (12b-1) fees 0.73% 0.75% 0.69% 0.68% 0.71% Net investment income 4.87% 5.68% 5.77% 5.39% 5.85% ----------------------------------------------------------------------------------------- |
(1) TOTAL INVESTMENT RETURN DOES NOT CONSIDER THE EFFECT OF
SALES LOADS. TOTAL INVESTMENT RETURN IS CALCULATED ASSUMING
A PURCHASE OF SHARES ON THE FIRST DAY AND A SALE ON THE LAST
DAY OF EACH YEAR REPORTED AND INCLUDES REINVESTMENT OF
DIVIDENDS AND DISTRIBUTIONS.
|
CLASS C SHARES
The financial highlights were audited by PricewaterhouseCoopers LLP, independent accountants, whose report was unqualified.
CLASS C SHARES (FISCAL YEARS ENDED 2-28/29)
PER SHARE OPERATING PERFORMANCE 2002 2001 2000 1999 1998 NET ASSET VALUE, BEGINNING OF YEAR $8.95 $8.41 $8.99 $9.05 $8.77 INCOME FROM INVESTMENT OPERATIONS Net investment income 0.42 0.50 0.51 0.50 0.53 Net realized and unrealized gain (loss) on investment transactions 0.16 0.54 (0.58) (0.06) 0.28 TOTAL FROM INVESTMENT OPERATIONS 0.58 1.04 (0.07) 0.44 0.81 LESS DISTRIBUTIONS Dividends from net investment income (0.44) (0.50) (0.51) (0.50) (0.53) NET ASSET VALUE, END OF YEAR $9.09 $8.95 $8.41 $8.99 $9.05 TOTAL INVESTMENT RETURN(1) 6.71% 12.67% (0.76)% 4.91% 9.48% ----------------------------------------------------------------------------------------- |
RATIOS/SUPPLEMENTAL DATA 2002 2001 2000 1999 1998 NET ASSETS, END OF YEAR (000) $18,405 $9,711 $8,508 $8,236 $2,840 AVERAGE NET ASSETS (000) $13,454 $7,904 $9,014 $4,878 $2,523 RATIOS TO AVERAGE NET ASSETS Expenses, including distribution and service (12b-1) fees 1.48% 1.50% 1.44% 1.43% 1.46% Expenses, excluding distribution and service (12b-1) fees 0.73% 0.75% 0.69% 0.68% 0.71% Net investment income 4.97% 5.75% 5.90% 5.50% 5.92% ----------------------------------------------------------------------------------------- |
(1) TOTAL INVESTMENT RETURN DOES NOT CONSIDER THE EFFECT OF
SALES LOADS. TOTAL INVESTMENT RETURN IS CALCULATED ASSUMING
A PURCHASE OF SHARES ON THE FIRST DAY AND A SALE ON THE LAST
DAY OF EACH YEAR REPORTED AND INCLUDES REINVESTMENT OF
DIVIDENDS AND DISTRIBUTIONS.
|
CLASS Z SHARES
The financial highlights were audited by PricewaterhouseCoopers LLP, independent accountants, whose report was unqualified.
CLASS Z SHARES (FISCAL YEARS ENDED 2-28/29)
PER SHARE OPERATING PERFORMANCE 2002 2001 2000 1999 1998 NET ASSET VALUE, BEGINNING OF YEAR $8.93 $8.40 $8.97 $9.04 $8.76 INCOME FROM INVESTMENT OPERATIONS Net investment income 0.49 0.56 0.57 0.57 0.59 Net realized and unrealized gain (loss) on investment transactions 0.16 0.53 (0.57) (0.07) 0.28 TOTAL FROM INVESTMENT OPERATIONS 0.65 1.09 -- 0.50 0.87 LESS DISTRIBUTIONS Dividends from net investment income (0.51) (0.56) (0.57) (0.57) (0.59) NET ASSET VALUE, END OF YEAR $9.07 $8.93 $8.40 $8.97 $9.04 TOTAL INVESTMENT RETURN(1) 7.61% 13.39% 0.09% 5.58% 10.30% ------------------------------------------------------------------------------------------ |
RATIOS/SUPPLEMENTAL DATA 2002 2001 2000 1999 1998 NET ASSETS, END OF YEAR (000) $78,642 $103,523 $93,390 $97,629 $84,733 AVERAGE NET ASSETS (000) $94,143 $94,635 $97,811 $86,892 $71,425 RATIOS TO AVERAGE NET ASSETS: Expenses, including distribution and service (12b-1) fees 0.73% 0.75% 0.69% 0.68% 0.71% Expenses, excluding distribution and service (12b-1) fees 0.73% 0.75% 0.69% 0.68% 0.71% Net investment income 5.71% 6.50% 6.64% 6.22% 6.67% ------------------------------------------------------------------------------------------ |
(1) TOTAL INVESTMENT RETURN IS CALCULATED ASSUMING A PURCHASE OF
SHARES ON THE FIRST DAY AND A SALE ON THE LAST DAY OF EACH
YEAR REPORTED AND INCLUDES REINVESTMENT OF DIVIDENDS AND
DISTRIBUTIONS.
|
Prudential offers a broad range of mutual funds designed to meet your individual needs. For information about these funds, contact your financial adviser or call us at (800) 225-1852. Please read the prospectus carefully before you invest or send money.
STOCK FUNDS
LARGE CAPITALIZATION STOCK FUNDS
PRUDENTIAL 20/20 FOCUS FUND
PRUDENTIAL EQUITY FUND, INC.
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL STOCK INDEX FUND
PRUDENTIAL TAX-MANAGED FUNDS
PRUDENTIAL TAX-MANAGED EQUITY FUND
PRUDENTIAL VALUE FUND
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL JENNISON GROWTH FUND
SMALL-TO-MID-CAPITALIZATION STOCK
FUNDS
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
PRUDENTIAL SMALL COMPANY FUND, INC.
PRUDENTIAL TAX-MANAGED SMALL-CAP FUND, INC.
PRUDENTIAL U.S. EMERGING GROWTH FUND, INC.
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL JENNISON EQUITY OPPORTUNITY FUND
SECTOR STOCK FUNDS
PRUDENTIAL NATURAL RESOURCES FUND, INC.
PRUDENTIAL REAL ESTATE SECURITIES FUND
PRUDENTIAL SECTOR FUNDS, INC.
PRUDENTIAL FINANCIAL SERVICES FUND
PRUDENTIAL HEALTH SCIENCES FUND
PRUDENTIAL TECHNOLOGY FUND
PRUDENTIAL UTILITY FUND
GLOBAL/INTERNATIONAL STOCK FUNDS
PRUDENTIAL EUROPE GROWTH FUND, INC.
PRUDENTIAL PACIFIC GROWTH FUND, INC.
PRUDENTIAL WORLD FUND, INC.
PRUDENTIAL GLOBAL GROWTH FUND
PRUDENTIAL INTERNATIONAL VALUE FUND
PRUDENTIAL JENNISON INTERNATIONAL GROWTH FUND
BALANCED/ALLOCATION FUND
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL ACTIVE BALANCED FUND
BOND FUNDS
TAXABLE BOND FUNDS
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
PRUDENTIAL HIGH YIELD FUND, INC.
PRUDENTIAL SHORT-TERM CORPORATE BOND FUND, INC.
INCOME PORTFOLIO
PRUDENTIAL TOTAL RETURN BOND FUND, INC.
MUNICIPAL BOND FUNDS
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA SERIES
CALIFORNIA INCOME SERIES
PRUDENTIAL MUNICIPAL BOND FUND
HIGH INCOME SERIES
INSURED SERIES
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
NEW JERSEY SERIES
NEW YORK SERIES
PENNSYLVANIA SERIES
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
GLOBAL/INTERNATIONAL BOND FUND
PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.
MONEY MARKET FUNDS
TAXABLE MONEY MARKET FUNDS
CASH ACCUMULATION TRUST
LIQUID ASSETS FUND
NATIONAL MONEY MARKET FUND
PRUDENTIAL GOVERNMENT SECURITIES TRUST
MONEY MARKET SERIES
U.S. TREASURY MONEY MARKET SERIES
PRUDENTIAL INSTITUTIONAL LIQUIDITY PORTFOLIO, INC.
INSTITUTIONAL MONEY MARKET SERIES
PRUDENTIAL MONEYMART ASSETS, INC.
MUNICIPAL MONEY MARKET FUNDS
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA MONEY MARKET SERIES
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY MONEY MARKET SERIES
NEW YORK MONEY MARKET SERIES
TAX-FREE MONEY MARKET FUNDS
COMMAND TAX-FREE FUND
PRUDENTIAL TAX-FREE MONEY FUND, INC.
OTHER MONEY MARKET FUNDS
COMMAND GOVERNMENT FUND
COMMAND MONEY FUND
SPECIAL MONEY MARKET FUND, INC.*
MONEY MARKET SERIES
MONEY MARKET SERIES
*This fund is not a direct purchase money fund and is only an exchangeable
money fund.
**Not exchangeable with the Prudential mutual funds.
- FOR MORE INFORMATION
Please read this prospectus before you invest in the Fund and keep it for future reference. For information or shareholder questions contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
P.O. BOX 8098
PHILADELPHIA, PA 19101
(800) 225-1852
(732) 482-7555 (Calling from outside the U.S.)
Outside Brokers should contact:
Prudential Investment Management
Services LLC
P.O. Box 8310
Philadelphia, PA 19101
(800) 778-8769
Visit Prudential's website at:
www.prudential.com
Additional information about the Fund
can be obtained without charge and can
be found in the following documents:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
(incorporated by reference into this prospectus)
ANNUAL REPORT
(contains a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the last fiscal year)
SEMI-ANNUAL REPORT
You can also obtain copies of Fund documents from the Securities and Exchange
Commission as follows:
BY MAIL
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-0102
BY ELECTRONIC REQUEST
publicinfo@sec.gov
(The SEC charges a fee to copy documents.)
IN PERSON
Public Reference Room in
Washington, DC
(For hours of operation, call
1-202-942-8090)
VIA THE INTERNET
on the EDGAR Database at
http://www.sec.gov
Investment Company Act File No. 811-3712
Fund Symbols Nasdaq CUSIP
------ -----
Class A PGVAX 744339-10-2
Class B PBGPX 744339-20-1
Class C PRICX 744339-30-0
Class Z PGVZX 744339-40-9
|
MF128A
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED APRIL 30, 2002
Prudential Government Income Fund, Inc. (the Fund), is an open-end, diversified management investment company, or mutual fund, which has as its investment objective the seeking of a high current return. The Fund will seek to achieve this objective primarily by investing in U.S. Government securities, including U.S. Treasury Bills, Notes and Bonds and other debt securities issued by the U.S. Treasury, and obligations issued or guaranteed by U.S. Government agencies or instrumentalities; writing covered put and call options and purchasing put and call options. In an effort to hedge against changes in interest rates and thus preserve its capital, the Fund may also engage in transactions involving futures contracts on U.S. Government securities and options on such contracts. There can be no assurance that the Fund's investment objective will be achieved. See "Description of the Fund, Its Investments and Risks."
The Fund's address is Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, and its telephone number is (800) 225-1852.
This Statement of Additional Information (SAI) is not a prospectus and should be read in conjunction with the Fund's Prospectus, dated April 30, 2002, a copy of which may be obtained at no charge from the Fund upon request at the address or telephone number noted above. The Fund's audited financial statements for the fiscal year ended February 28, 2002, are incorporated into this SAI by reference to the Fund's 2002 annual report to shareholders (File No. 2-82976 and 811-3712). You may obtain a copy of the Fund's annual report at no charge by request to the Fund at the address or telephone number noted above.
TABLE OF CONTENTS
PAGE
-----
Fund History.......................................... B-2
Description of the Fund, Its Investments and Risks.... B-2
Investment Restrictions............................... B-22
Management of the Fund................................ B-24
Control Persons and Principal Holders of Securities... B-30
Investment Advisory and Other Services................ B-30
Brokerage Allocation and Other Practices.............. B-36
Capital Shares, Other Securities and Organization..... B-38
Purchase, Redemption and Pricing of Fund Shares....... B-38
Shareholder Investment Account........................ B-48
Net Asset Value....................................... B-53
Taxes, Dividends and Distributions.................... B-54
Performance Information............................... B-57
Financial Statements.................................. B-61
Appendix I -- Historical Performance Data............. I-1
Appendix II -- General Investment Information......... II-1
Appendix III -- Information Relating to Portfolio
Securities........................................... III-1
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MF128B
FUND HISTORY
The Fund was organized under the laws of Maryland on April 8, 1983. During the Fund's last fiscal year, the Board of Directors of the Fund approved a proposal in which Short-Intermediate Term Series of Prudential Government Securities Trust merged into the Fund. The merger was consummated during the Fund's last fiscal year.
DESCRIPTION OF THE FUND, ITS INVESTMENTS AND RISKS
(a) CLASSIFICATION. The Fund is a diversified, open-end management investment company.
(b) AND (c) INVESTMENT STRATEGIES, POLICIES AND RISKS.
The Fund will seek to achieve its investment objective of high current return primarily by investing in U.S. Government securities, including U.S. Treasury Bills, Notes, Bonds and other debt securities issued by the U.S. Treasury, and obligations issued or guaranteed by U.S. Government agencies or instrumentalities. These guarantees apply only to the payment of principal and interest on these securities and do not extend to the securities' yield or value, which are likely to vary with fluctuations in interest rates, nor do the guarantees extend to the yield or value of the Fund's shares. The Fund will also write covered call options and covered put options and purchasing put and call options. Under normal circumstances, at least 80% of the investable assets of the Fund will be invested in U.S. Government securities. The term "investable assets" in this SAI refers to the Fund's net assets plus any borrowings for investment purposes. The Fund's investable assets will be less than its total assets to the extent that it has borrowed money for non-investment purposes, such as to meet anticipated redemptions. U.S. Government securities which are purchased pursuant to repurchase agreements or on a when-issued or delayed-delivery basis will be treated as U.S. Government securities for purposes of this calculation.
High current return means the return received from interest income from U.S. Government and other debt securities and from net gains realized from sales of portfolio securities. The Fund may also realize income from premiums from covered put and call options written by the Fund on U.S. Government securities as well as options on futures contracts on U.S. Government securities and net gains from closing purchase and sales transactions with respect to these options. The writing of options on U.S. Government securities and options on futures contracts on U.S. Government securities may limit the Fund's potential for capital gains on its portfolio. While the principal investment policies and strategies for seeking to achieve this objective are described in the Fund's Prospectus, the Fund may from time to time also use the securities, instruments, policies and principal and non-principal strategies described below in seeking to achieve its objective. 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. U.S. Government guarantees do not extend to the yield or value of the securities or the Fund's shares.
SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND INSTRUMENTALITIES. The Fund may invest in securities issued by the U.S. Government, 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. Securities in which the Fund may invest, include, among others, obligations of the Government National Mortgage Association (GNMA), the Farmers Home Administration, the Export-Import Bank 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 that 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, the Resolution Funding Corporation, the Tennessee Valley Authority, and the United States Postal Service, 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.
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 purchased by the Fund include conventional thirty-year fixed rate mortgages, graduated payment mortgages, fifteen-year mortgages and adjustable rate mortgages. The Fund may also invest in balloon payment mortgage-backed securities. A balloon payment mortgage-backed security is an amortizing mortgage security with installments of principal and interest, the last installment of which is predominantly principal. All of these mortgages can be used to create pass-through securities. A pass-through security is formed when mortgages are pooled together and undivided interests in the pool or pools are sold. The cash flow from the mortgages is passed through to the holders of the securities in the form of periodic payments of interest, principal and prepayments (net of a service fee). Prepayments occur when the holder of an undivided mortgage prepays the remaining principal before the mortgage's scheduled maturity date. As a result of the pass-through of prepayments of principal on the underlying securities, mortgage-backed securities are often subject to more rapid prepayment of principal than their stated maturity would indicate. The remaining expected average life of a pool of mortgage loans underlying a mortgage-backed security is a prediction of when the mortgage loans will be repaid and is based upon a variety of factors, such as the demographic and geographic characteristics of the borrowers and the mortgaged properties, the length of time that each of the mortgage loans has been outstanding, the interest rates payable on the mortgage loans and the current interest rate environment. Because the prepayment characteristics of the underlying mortgages vary, it is not possible to predict accurately the realized yield or average life of a particular issue of pass-through certificates. Prepayment rates are important because of their effect on the yield and price of the securities. Accelerated prepayments adversely impact yields for pass-throughs purchased at a premium. The opposite is true for pass-throughs purchased at a discount.
CHARACTERISTICS OF MORTGAGE-BACKED SECURITIES. The market value of mortgage securities, like other U.S. Government 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 accelerate the recognition of income which when distributed to shareholders will be taxable as ordinary income.
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. For further information about mortgage-backed securities see "Mortgage-Related Securities and Asset-Backed Securities" below.
STRIPS. The Fund may invest in component parts of U.S. Government Securities, namely, either the corpus (principal) of such obligations or one of the interest payments scheduled to be paid on such obligations. These obligations may take the form of (i) obligations from which the interest coupons have been stripped, (ii) the interest coupons that are stripped, (iii) book entries at the 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. U.S. Government obligations, including those underlying such receipts, are backed by the full faith and credit of the U.S. Government.
The Fund may also invest in mortgage pass-through securities where all interest payments go to one class of holders (Interest Only Securities or IOs) and all principal payments go to a second class of holders (Principal Only Securities or POs). These securities are commonly referred to as mortgage-backed securities strips or MBS strips. The yields to maturity on IOs and POs are very sensitive to the rate of principal payments (including prepayments) on the related underlying mortgage assets, and a rapid rate of principal payments may have a material adverse 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 these securities. Conversely, if the underlying mortgage assets experience less than anticipated prepayments of principal, the yield on POs could be materially adversely affected. Derivative mortgage-backed securities such as MBS strips are highly sensitive to changes in prepayment and interest rates.
GNMA CERTIFICATES. Certificates of the Government National Mortgage
Association (GNMA Certificates) are mortgage-backed securities, which evidence
an undivided interest in a pool of mortgage loans. GNMA Certificates differ from
bonds in that principal is paid back monthly by the borrower over the term of
the loan rather than returned in a lump sum at maturity. GNMA Certificates that
the Fund purchases are the modified pass-through type. Modified pass-through
GNMA Certificates entitle the holder to receive timely payment of all interest
and principal payments paid and owed on the mortgage pool, net of fees paid to
the issuer and GNMA, regardless of whether or not the mortgagor actually makes
the payment. The GNMA Certificates will represent a PRO RATA interest in one or
more pools of the following types of mortgage loans: (1) fixed-rate level
payment mortgage loans; (2) fixed-rate graduated payment mortgage loans;
(3) fixed-rate growing equity mortgage loans; (4) fixed-rate mortgage loans
secured by manufactured (mobile) homes; (5) mortgage loans on multifamily
residential properties under construction; (6) mortgage loans on completed
multifamily projects; (7) 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); (8) 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 (9) mortgage-backed serial notes. All
of these mortgage loans will be FHA Loans or VA Loans (as defined below) and,
except as otherwise specified above, will be fully-amortizing loans secured by
first liens on one-to-four-family housing units. Legislative changes may be
proposed from time to time in relation to the Department of Housing and Urban
Development which, if adopted, could alter the viability of investing in GNMAs.
The Fund's investment adviser may re-evaluate the Fund's investment objective
and policies if any such legislative proposals are adopted.
GNMA GUARANTEE. GNMA is a wholly-owned corporate instrumentality of the United States with the Department of Housing and Urban Development. The National Housing Act of 1934, as amended (the Housing Act), authorizes GNMA to guarantee the timely payment of the principal of and interest on certificates that are based on and backed by a pool of mortgage loans issued by the Federal Housing Administration (FHA) under the Housing Act, or Title V of the Housing Act of 1949 (FHA Loans) or the Farmers' Home Administration (FMHA), or guaranteed by the Veterans' Administration (VA) under the Servicemen's Readjustment Act of 1944, as amended (VA Loans) or by pools of other eligible mortgage loans. The Housing Act provides that the GNMA guarantee is backed by the full faith and credit of the United States. The GNMA is also empowered to borrow without limitation from the U.S. Treasury if necessary to make any payments required under its guarantee.
LIFE OF GNMA CERTIFICATES. The average life of a GNMA Certificate is likely to be substantially shorter than the original maturity of the mortgages underlying the securities. Prepayments of principal by mortgagors and mortgage foreclosures will usually result in the return of the greater part of principal investment long before the maturity of the mortgages in the pool. Foreclosures impose no risk to principal investment because of the GNMA guarantee, except to the extent that the Fund has purchased the certificates above par in the secondary market.
FHLMC SECURITIES. The Federal Home Loan Mortgage Corporation 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 owed 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.
FNMA SECURITIES. The Federal National Mortgage Association was established in 1938 to create a secondary market in mortgages insured by the FHA. FNMA issues guaranteed mortgage pass-through certificates (FNMA Certificates). FNMA Certificates resemble GNMA Certificates in that each FNMA Certificate represents a PRO RATA share of all interest and principal payments made and owed on the underlying pool. FNMA guarantees timely payment of interest on FNMA Certificates and the full return of principal. Like GNMA Certificates, FNMA Certificates are assumed to be prepaid fully in their twelfth year.
MORTGAGE-RELATED SECURITIES AND ASSET-BACKED SECURITIES
MORTGAGE-RELATED 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 TWO BASIC TYPES OF MORTGAGE- RELATED SECURITIES: (1) THOSE ISSUED OR GUARANTEED, DIRECTLY OR INDIRECTLY, BY THE U.S. GOVERNMENT OR ONE OF ITS AGENCIES OR INSTRUMENTALITIES, (SEE, U.S. GOVERNMENT SECURITIES ABOVE) AND (2) THOSE ISSUED OR GUARANTEED PRIVATELY. MORTGAGE-RELATED SECURITIES THAT ARE ISSUED BY PRIVATE ISSUERS WITHOUT A GOVERNMENT GUARANTEE USUALLY HAVE SOME FORM OF PRIVATE CREDIT ENHANCEMENT TO ENSURE TIMELY RECEIPT OF PAYMENTS AND TO PROTECT AGAINST DEFAULT.
The Fund may invest in mortgage-related securities and other derivative mortgage products, including those representing an undivided ownership interest in a pool of mortgages, for example, 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 of the Fund's shares. See "U.S. Government Securities" above. 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-related 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. The market value of mortgage-related 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-related 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-related 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.
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 and Multiclass Pass-Through Securities.
In a CMO, a series of bonds or certificates is issued in multiple classes. Each class of CMOs, often referred to as a tranche, is issued at a specific fixed or floating coupon rate and has a stated maturity or final distribution date. Principal prepayments on the 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 more predictable cash flow to the individual tranches than exists with the underlying collateral of the CMO. As a general rule, the more predictable the cash flow is on a CMO tranche, the lower the anticipated yield will be on that tranche at the time of issuance relative to prevailing market yields on mortgage-backed securities.
Certain issuers of CMOs, including certain CMOs that have elected to be
treated as REMICs, are not considered investment companies pursuant to a rule
adopted by the Securities and Exchange Commission (Commission), and the Fund may
invest in the securities of such issuers without the limitations imposed by the
Investment Company Act of 1940, as amended (the Investment Company Act) on
investments by the Fund in other investment companies. In addition, in reliance
on an earlier Commission interpretation, the Fund's investments in certain other
qualifying CMOs, which cannot or do not rely on the rule, are also not subject
to the limitation of the Investment Company Act on acquiring interests in other
investment companies. In order to be able to rely on the Commission's
interpretation, these CMOs must be unmanaged, fixed asset issuers, that
(a) invest primarily in mortgage-backed securities, (b) do not issue redeemable
securities, (c) operate under general exemptive orders exempting them from all
provisions of the Investment Company Act and (d) are not registered or regulated
under the Investment Company Act as investment companies. To the extent that the
Fund selects CMOs or REMICs that cannot rely on the rule or do not meet the
above requirements, the Fund may not invest more than 10% of its assets in all
such entities and may not acquire more than 3% of the voting securities of any
single such entity.
The underlying mortgages which collateralize the CMOs and REMICs in which the Fund invests may have caps and floors which limit the maximum amount by which the loan rate to the residential borrower may change up or down (1) per reset or adjustment interval and (2) over the life of the loan. Some residential mortgage loans restrict periodic adjustments by limiting changes in the borrower's monthly principal and interest payments rather than limiting interest rate changes. These payment caps may result in negative amortization.
STRIPPED MORTGAGE-BACKED SECURITIES (PRIVATELY ISSUED). In addition to MBS strips issued by agencies or instrumentalities of the U.S. Government, the Fund may purchase MBS strips issued by private originators of, or investors in, mortgage loans, including depository institutions, mortgage banks, investment banks and special purpose subsidiaries of the foregoing. Privately issued MBS strips are subject to similar risks of MBS strips issued by agencies or instrumentalities of the U.S. Government. See "Strips" above.
ASSET-BACKED SECURITIES. The Fund may also invest up to 20% of its investable assets in privately-issued asset-backed securities. Through the use of trusts and special purpose subsidiaries, various types of assets, primarily home equity loans, automobile and credit card receivables, have been securitized in pass-through structures similar to mortgage pass-through structures or in a pay-through structure similar to the collateralized mortgage structure. The Fund may invest in these and other types of asset-backed securities which may be developed in the future. Asset-backed securities present certain risks that are not presented by mortgage-backed securities. Primarily, these securities do not have the benefit of the same security interest in the related collateral. Credit card receivables are generally unsecured. In connection with 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 relative stability of their credit quality. The Fund will only invest in asset-backed securities rated at least A by S&P or Moody's or, if unrated, of equivalent quality in the judgment of the Fund's investment adviser.
RISK FACTORS RELATING TO INVESTING IN MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. Mortgage-backed securities, including those issued or guaranteed privately or by the U.S. Government or one of its agencies or instrumentalities, and asset-backed securities differ from traditional debt securities. Among the major differences are that interest and principal payments are made more frequently, usually monthly, and principal may be prepaid at any time because the underlying mortgage loans or other assets generally may be prepaid at any time. As a result, if the Fund purchases such a
security at a premium, a prepayment rate that is faster than expected will reduce yield to maturity, while a prepayment rate that is slower than expected will have the opposite effect of increasing yield to maturity. Alternatively, if the Fund purchases these securities at a discount, faster than expected prepayments will increase, while slower than expected prepayments will reduce, yield to maturity.
In addition, mortgage-backed securities which are secured by manufactured (mobile) homes and multi-family residential properties, such as GNMA and FNMA certificates, are subject to a higher risk of default than are other types of mortgage-backed securities. See "U.S. Government Securities" above.
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. Prepayments of mortgages which underlie securities purchased at a premium generally will result in capital losses. Asset-backed securities, although less likely to experience the same prepayment rate as mortgage-backed securities, may respond to certain of the same factors influencing prepayments, while at other times different factors may predominate. Mortgage-backed securities and asset-backed securities generally decrease in value as a result of increases in interest rates and usually have less potential for capital appreciation during periods of declining interest rates than other fixed-income securities with comparable maturities because of the risk of prepayment. In addition, to the extent such mortgage securities are purchased at a premium, mortgage foreclosures and unscheduled principal prepayments generally will result in some loss of the holders' principal to the extent of the premium paid. On the other hand, if such mortgage securities are purchased at a discount, an unscheduled prepayment of principal will increase current and total returns and accelerate the recognition of income which when distributed to shareholders will be taxable as ordinary income.
During periods of rising interest rates, the rate of prepayment of mortgages underlying mortgage-backed securities can be expected to decline, extending the projected average maturity of the mortgage-backed securities. The maturity extension risk may effectively change a security which was considered short-or intermediate-term at the time of purchase into a long-term security. Long-term securities generally fluctuate more widely in response to changes in interest rates than short-or intermediate-term securities.
Asset-backed securities involve certain risks that are not posed by mortgage-backed securities, resulting mainly from the fact that asset-backed securities do not usually contain the complete benefit of a security interest in the related collateral. For example, credit card receivables generally are unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit card laws, some of which may reduce the ability to obtain full payment. In the case of automobile receivables, due to various legal and economic factors, proceeds from repossessed collateral may not always be sufficient to support payments on these securities. The remaining maturity of an asset-backed security will be deemed to be equal to the average maturity of the assets underlying such security determined by the investment adviser on the basis of assumed prepayment rates and other factors with respect to such assets. In general, these types of loans are of shorter duration than mortgage loans and are less likely to have substantial prepayments.
OTHER INVESTMENTS AND POLICIES
Up to 20% of the investable assets of the Fund may be committed to investments other than U.S. Government securities. These investments would include the securities described in this subsection as well as purchased put and call options and purchased put options on futures contracts. See "Options Transactions" and "Futures Contracts on U.S. Government Securities below." The Fund may invest in debt obligations rated at least A by Standard & Poor's Ratings Group (S&P) or Moody's Investors Service (Moody's) or, if unrated, deemed to be of comparable credit quality by the Fund's investment adviser. These debt securities may have adjustable or fixed rates of interest and in certain instances may be secured by assets of the issuer. Fixed rate debt securities may also be subject to call provisions.
MONEY MARKET INSTRUMENTS
The Fund may, under normal circumstances, invest up to 20% of its investable assets in high-quality money market instruments, including commercial paper of domestic companies, certificates of deposit, bankers' acceptances and other
obligations of domestic and foreign banks. Investments in money market instruments for "coverage purposes" (as described herein) will be excluded in calculating the 20% limitation. Such obligations will, at the time of purchase, be rated within the two highest quality grades as determined by a nationally recognized statistical rating organization (NRSRO) (such as Moody's or S&P) or, if unrated, will be of equivalent quality in the judgment of the Fund's investment adviser. Money market instruments typically have a maturity of one year or less as measured from the date of purchase.
FOREIGN BANK OBLIGATIONS
The Fund may invest in obligations of foreign banks and foreign branches of U.S. banks only if after giving effect to such investment all such investments would constitute less than 10% of the Fund's investable assets (determined at the time of investment). These 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. In addition, there may be less publicly available information about a foreign bank or foreign branch of a U.S. bank than about a domestic bank and such entities may not be subject to the same accounting, auditing and financial recordkeeping standards and requirements as domestic banks.
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, particularly in instances in which the amount of income the Fund is required to distribute is not immediately reduced by the decline in such currency. 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.
RISK FACTORS AND SPECIAL CONSIDERATIONS OF INVESTING IN FOREIGN BANK OBLIGATIONS. 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, the seizure or nationalization of foreign deposits, 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 issuer than about a domestic issuer or the U.S. Government. Foreign issuers 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 and diplomatic developments which could affect investment. In many instances, foreign debt securities may provide higher yields than securities of domestic issuers that have similar maturities and quality. These investments, however, may be less liquid than the securities of U.S. issuers. 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.
Additional costs could be incurred in connection with the Fund's international investment activities. Foreign countries may impose taxes on income on foreign investments. Foreign brokerage commissions are generally higher than U.S. brokerage commissions. 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 a 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.
Shareholders should be aware that investing in the financial 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 securities, described above, may be greater with respect to investments in developing countries.
RISK FACTORS AND SPECIAL CONSIDERATIONS OF INVESTING IN EURO-DENOMINATED SECURITIES. On January 1, 1999, 11 of the 15 member states of the European Monetary Union introduced the "euro" as a common currency. During a three-year transitional period, the euro will coexist with each member state's currency. By July 1, 2002, the euro is expected to become the sole currency of the member states. During the transition period, the Fund will treat the euro as a separate currency from that of any member state.
The conversion may adversely affect the Fund if the euro does not take effect as planned; if a participating state withdraws from the European Monetary Union; or if the computing, accounting and trading systems used by the Fund's service providers, or by entities with which the Fund or its service providers do business, are not capable of recognizing the euro as a distinct currency at the time of, and following, euro conversion. In addition, the conversion could cause markets to become more volatile.
The conversion may impact the trading in securities of issuers located in, or denominated in the currencies of, the member states, as well as foreign exchanges, payments, the settlement process, custody of assets and accounting. In addition, the transition of member states' currency into the euro will eliminate the risk among member states and will likely affect the investment process and considerations of the Fund's investment adviser. To the extent the Fund holds non-U.S. dollar-denominated securities, including those denominated in euros, the Fund will still be subject to currency risk due to fluctuations in those currencies as compared to the U.S. dollar.
The introduction of the euro is expected to affect derivative and other financial contracts in which the Fund may invest insofar as price sources based upon current currencies of the member states will be replaced, and market conventions, such as day-count fractions or settlement dates, applicable to underlying instruments may be changed to conform to the conventions applicable to the euro currency.
The overall effect of the transition of member states' currencies to the euro is not known at this time. It is likely that more general short- and long-term ramifications can be expected, such as changes in the economic environment and change in the behavior of investors, which would affect the Fund's investments and its net asset value. In addition, although U.S. Treasury regulations generally provide that the euro conversion will not, in itself, cause a U.S. taxpayer to realize gain or loss, other changes that occur at the time of the conversion, such as accrual periods, holiday conventions, indexes, and other features may require the realization of a gain or loss by the Fund as determined under existing tax law.
WORLD BANK OBLIGATIONS
The Fund may also purchase obligations of the International Bank for Reconstruction and Development (the World Bank). Obligations of the World Bank are supported by appropriated but unpaid commitments of its member countries, including the U.S., and there is no assurance these commitments will be undertaken or met in the future.
ADJUSTABLE RATE DEBT SECURITIES
The Fund is permitted to invest in adjustable 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 rate securities will, like other debt securities, generally vary inversely with changes in prevailing interest rates. The value of adjustable 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 NAV until the coupon rate resets to market rates.
RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES
The Fund may engage in various portfolio strategies, including using derivatives to seek and to reduce certain risks of its investments and to enhance return. The Fund, and thus its investors, may lose money through any unsuccessful use of these strategies. These strategies currently include the use of options, including straddles, interest rate swaps, futures contracts, including Eurodollar instruments, and options on futures contracts. The Fund's ability to use these strategies may be limited by various factors, such as market conditions, regulatory limits and tax considerations, and there can be no assurance that any of these strategies will succeed. If new financial products and risk management techniques are developed, the Fund may use them to the extent consistent with its investment objective and policies.
OPTION WRITING AND RELATED RISKS. The Fund may write (that is, sell) covered call or put options which are traded on registered securities exchanges (the Exchanges) and may also write such options with primary U.S. Government securities dealers recognized by the Federal Reserve Bank of New York (OTC options). A call option gives the purchaser of the option the right to buy, and the writer the obligation to sell, the underlying security at the exercise price during the option period. Conversely, a put option gives the purchaser the right to sell, and the writer the obligation to buy, the underlying security at the exercise price during the option period.
OPTIONS TRANSACTIONS. The Fund may write and purchase put and call options only on U.S. Government securities and financial futures contracts. Exchange-traded options are issued by the Options Clearing Corporation (OCC) which, in effect, gives its guarantee to every exchange-traded option transaction. In contrast, OTC options represent a contract between a U.S. Government securities dealer and the Fund with no guarantee of the OCC. 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 U.S. Government securities underlying the OTC option. Failure by the dealer to do so would result in the loss of premium paid by the Fund as well as loss of the expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market while OTC options do not. Consequently, the Fund will generally be able to realize the value of an OTC option it has purchased only by exercising it or reselling it to the issuing dealer. Similarly, 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 option transactions only with dealers who will 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, as a covered OTC call option writer, is able to effect a closing purchase transaction, it will not be able to liquidate securities used as cover until the option expires, is exercised or the Fund provides substitute cover. In the event of insolvency of the counterparty, the Fund may be unable to liquidate an OTC option. With respect to options written by the Fund, the inability to enter into a closing transaction may result in material losses to the Fund. This requirement may impair the Fund's ability to sell a portfolio security at a time when such a sale might be advantageous.
The principal reason for writing options on a securities portfolio is to attempt to realize, through the receipt of premiums, a greater return than would be realized on the underlying securities alone. In return for the premium, the covered call option writer has given up the opportunity for profit from a price increase in the underlying security above the exercise price so long as the option remains open, but retains the risk of loss should the price of the security decline. Conversely, the put option writer gains a profit, in the form of the premium, so long as the price of the underlying security remains above the exercise price, but assumes an obligation to purchase the underlying security from the buyer of the put option at the exercise price, even though the security may fall below the exercise price, at any time during the option period. If an option expires, the writer realizes a gain in the amount of the premium. Such a gain may, in the case of a covered call option, be offset by a decline in the market value of the underlying security during the option period. If a call option is exercised, the writer realizes a gain or loss from the sale of the underlying security. If a put option is exercised, the writer must fulfill its obligation to purchase the underlying security at the exercise price, which will usually exceed the market value of the underlying security at that time.
So long as the obligation of the writer continues, the writer may be assigned an exercise notice by the broker-dealer through whom the option was sold. The exercise notice would require the writer to deliver, in the case of a call, or take delivery of, in the case of a put, the underlying security against payment of the exercise price. This obligation terminates upon expiration of the option, or at such earlier time that the writer effects a closing purchase transaction by purchasing an option covering the same underlying security and having the same exercise price and expiration date (of the same series)
as the one previously sold. Once an option has been exercised, the writer may not execute a closing purchase transaction. To secure the obligation to deliver the underlying security in the case of a call option, the writer of the option is required to pledge for the benefit of the broker the underlying security or other assets in accordance with the rules of the OCC, an institution created to interpose itself between buyers and sellers of options. Technically, the OCC assumes the other side of every purchase and sale transaction on an Exchange and, by doing so, guarantees the transaction.
The Fund writes only "covered" options. This means that, so long as the Fund
is obligated as the writer of a call option, it will (a) own the underlying
securities subject to the option, except that, in the case of call options on
U.S. Treasury Bills, the Fund might own U.S. Treasury Bills of a different
series from those underlying the call option, but with a principal amount and
value corresponding to the option contract amount and a maturity date no later
than that of the securities deliverable under the call option or (b) deposit and
maintain in a segregated account cash or other liquid assets having a value at
least equal to the fluctuating market value of the securities underlying the
call. The Fund will be considered "covered" with respect to a put option it
writes if, so long as it is obligated as the writer of a put option, it will
(a) deposit and maintain in a segregated account cash or other liquid assets
having a value equal to or greater than the exercise price of the option, or
(b) own a put option on the same security with an exercise price the same or
higher than the exercise price of the put option sold or, if lower, deposit and
maintain the differential in cash or other liquid assets in a segregated
account.
To the extent that a secondary market is available on the Exchanges, the covered option writer may close out options it has written prior to the assignment of an exercise notice by purchasing, in a closing purchase transaction, an option of the same series as the option previously written. If the cost of such a closing purchase, plus transaction costs, is greater than the premium received upon writing the original option, the writer will incur a loss in the transaction.
Because the Fund can write only covered options, it may at times be unable to write additional options unless it sells a portion of its portfolio holdings to obtain new debt securities or other cover against which it can write options. If the Fund writes a substantial number of options, its portfolio turnover will be higher than if it did not do so. Portfolio turnover will increase to the extent that options written by the Fund are exercised. Because the exercise of such options depends on changes in the price of the underlying securities, the Fund's portfolio turnover rate cannot be accurately predicted. See "Portfolio Turnover" below.
The Fund may also buy and write straddles (i.e., a combination of a call and
a put written on the same security at the same strike price where the same
segregated collateral is considered "cover" for both the put and the call). In
such cases, the Fund will segregate with its Custodian cash or other liquid
assets equivalent to the amount, if any, by which the put is "in-the-money,"
i.e., the amount by which the exercise price of the put exceeds the current
market value of the underlying security. It is contemplated that the Fund's use
of straddles will be limited to 5% of the Fund's net assets (meaning that the
securities used for cover or segregated as described above will not exceed 5% of
the Fund's net assets at the time the straddle is written.
SPECIAL CONSIDERATIONS APPLICABLE TO OPTIONS
ON TREASURY BONDS AND NOTES. Because trading interest in Treasury Bonds and Notes tends to center on the most recently auctioned issues, the Exchanges will not indefinitely continue to introduce new series of options with expirations to replace expiring options on particular issues. Instead, the expirations introduced at the commencement of options trading on a particular issue will be allowed to run their course, with the possible addition of a limited number of new expirations as the original ones expire. Options trading on each series of Bonds or Notes will thus be phased out as new options are listed on the more recent issues, and a full range of expiration dates will not ordinarily be available for every series on which options are traded.
ON TREASURY BILLS. Because the availability of deliverable Treasury Bills changes from week to week, writers of Treasury Bill call options cannot provide in advance for their potential exercise settlement obligations by acquiring and holding the underlying security. However, if the Fund holds a long position in Treasury Bills with a principal amount corresponding to the option contract size, the Fund may be hedged from a risk standpoint. In addition, the Fund will maintain in a segregated account Treasury Bills maturing no later than those which would be deliverable in the event of an assignment of an exercise notice to ensure that it can meet its open option obligations.
ON GNMA CERTIFICATES. Options on GNMA Certificates are not currently traded on any Exchange. However, the Fund intends to purchase and write such options should they commence trading on any Exchange.
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.
INTEREST RATE SWAP TRANSACTIONS. The Fund may enter into interest rate swaps (including interest rate swaps with embedded options), on either an asset-based or liability-based basis, depending on whether it is hedging its assets or its liabilities. Under normal circumstances, the Fund will enter into interest rate swaps on a net basis, that is, the two payment streams are netted out, with the Fund receiving or paying, as the case may be, only the net amount of the two payments. The net amount of the excess, if any, of the Fund's obligations over its entitlements with respect to each interest rate swap will be accrued on a daily basis and an amount of cash or other liquid assets having an aggregate net asset value per share (NAV) at least equal to the accrued excess will be maintained in a segregated account by a custodian that satisfies the requirements of the Investment Company Act. To the extent that the Fund enters into interest rate swaps on other than a 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 Fund may enter into interest rate swaps as a hedge against changes in the interest rate of a security in its portfolio or that of a security the Fund anticipates buying. If the Fund purchases an interest rate swap to hedge against a change in an interest rate of a security the Fund anticipates buying, and such interest rate changes unfavorably for the Fund, then the Fund may determine not to invest in the securities as planned and will realize a loss on the interest rate swap that is not offset by a change in the interest rates or the price of the securities.
The use of interest rate swaps is a 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 enter into interest rate swaps traded on an exchange or in the over-the-counter market. 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 rate 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.
FUTURES CONTRACTS. A futures contract may obligate the seller of a contract to deliver to the purchaser of a contract cash equal to a specific dollar amount times the difference between the value of a specific fixed-income security or index at the close of the last trading day of the contract and the price at which the agreement is made. As a purchaser of a futures contract, the Fund incurs an obligation to acquire a specified amount of the obligations 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, U.S. Government securities, including futures contracts or options linked to the London Interbank Offered Rate (LIBOR), and interest rate swaps. 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 Transactions in Options and Financial Futures" below.
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, that the price of the Fund's portfolio securities may fall, then 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.
The Fund will purchase or sell futures contracts also to attempt to enhance
return. In addition, futures contracts will be bought or sold in order to close
out a short or long position in a corresponding futures contract.
Notwithstanding the foregoing, the Fund may purchase or sell futures contracts
on 10-year interest rate swaps for hedging purposes only. See "Futures Contracts
On 10-Year Interest Rate Swaps (Swap Futures)" below.
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.
The Fund neither pays nor receives money upon the purchase or sale of a futures contract. Instead, when the Fund enters into a futures contract, it will initially be required to deposit in a segregated account for the benefit of the broker (the futures commission merchant) an amount of "initial margin" of cash or U.S. Treasury Bills, currently equal to approximately 1 1/2 to 2% of the contract amount for futures on Treasury Bonds and Notes and approximately 1/10 of 1% of the contract amount for futures on Treasury Bills. Initial margin in futures transactions is different from margin in securities transactions in that futures contract initial margin does not involve the borrowing of funds by the customer to finance the transactions. Rather, initial margin is in the nature of a good faith deposit on the contract which is returned to the Fund upon termination of the futures contract, assuming all contractual obligations have been satisfied. Subsequent payments, called variation margin, to and from the futures commission merchant are made on a daily basis as the market price of the futures contract fluctuates. This process is known as "marking to market." At any time prior to expiration of the futures contract, the Fund may elect to close the position by taking an offsetting position which will operate to terminate the Fund's position in the futures contract. While interest rate futures contracts provide for the delivery and acceptance of securities, most futures contracts are terminated by entering into offsetting transactions.
Successful use of futures contracts by the Fund is also subject to the ability of the Fund's investment adviser to predict correctly movements in the direction of interest rates and other factors affecting markets for securities. For example, if the Fund has hedged against the possibility of an increase in interest rates which would adversely affect the price of securities in its portfolio and the price of such securities increases instead, the Fund will lose part or all of the benefit of the increased value of its securities because it will have offsetting losses in its futures positions. In addition, in
such situations, if the Fund has insufficient cash to meet daily variation margin requirements, it may have to sell securities to meet such requirements. Such sales of securities may be, but will not necessarily be, at increased prices which reflect the rising market. The Fund may have to sell securities at a time when it is disadvantageous to do so.
The hours of trading futures contracts on U.S. Government securities may not conform to the hours during which the Fund may trade such securities. To the extent that the futures markets close before or after the U.S. Government securities markets, significant variations can occur in one market that cannot be reflected in the other market. See "Risks of Hedging and Return Enhancement Strategies" below.
FUTURES CONTRACTS ON U.S. GOVERNMENT SECURITIES
CHARACTERISTICS AND PURPOSE OF INTEREST RATE FUTURES. The Fund may purchase and sell U.S. Exchange-traded interest-rate futures. Currently, there are futures contracts based on U.S. Treasury Bonds, U.S. Treasury Notes, three- month U.S. Treasury Bills and GNMA certificates. A clearing corporation associated with the commodities exchange on which a futures contract trades assumes responsibility for the completion of transactions and guarantees that futures contracts will be performed. Although futures contracts call for actual delivery or acceptance of debt securities, in most cases the contracts are closed out before the settlement date without the making or taking of delivery.
OPTIONS ON FUTURES CONTRACTS. An option on a futures contract gives the purchaser the right, but not the obligation, in return for the premium paid, 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 option exercise period. The writer of the option is required upon exercise to assume an offsetting futures position (a short position if the option is a call and a long position if the option is a put). Upon exercise of the option, the assumption of offsetting futures positions 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. Currently, options can be purchased or written with respect to futures contracts on GNMAs, U.S. Treasury Bonds and U.S. Treasury Notes on The Chicago Board of Trade and U.S. Treasury Bills on the International Monetary Market at the Chicago Mercantile Exchange.
The holder or writer of an option may terminate its position by selling or purchasing an option of the same series. There is no guarantee that such closing transactions can be effected.
The Fund may only write covered call or put options. The Fund will be considered covered with respect to a call option it writes on a futures contract if it (a) owns a long position in the underlying futures contract or the security underlying the futures contract, (b) owns a security which is deliverable under the futures contract or (c) owns a separate call option to purchase the same futures contract at a price no higher than the exercise price of the call option written by the Fund or, if higher, the Fund deposits and maintains the differential in cash or other liquid assets in a segregated account. The Fund is considered covered with respect to a put option it writes on a futures contract if it (a) segregates and maintains in a segregated account cash or other liquid assets at all times equal in value to the exercise price of the put (less any related margin deposited), or (b) owns 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 or, if lower, the Fund deposits and maintains the differential in cash or other liquid assets in a segregated account. There is no limitation on the amount of the Fund's assets which can be placed in the segregated account.
The Fund will be required to deposit initial and maintenance margin with respect to put and call options on futures contracts written by it pursuant to the Fund's futures commissions merchants' requirements similar to those applicable to futures contracts, described above.
The skills needed to trade futures contracts and options thereon are different than those needed to select U.S. Government securities. The Fund's investment adviser has experience in managing other securities portfolios which uses similar options and futures strategies as the Fund.
FUTURES CONTRACTS ON 10-YEAR INTEREST RATE SWAPS (SWAP FUTURES). Swap Futures, introduced by the Chicago Board of Trade in October 2001, enable purchasers to cash settle at a future date at a price determined by the International
Swaps and Derivatives Association Benchmark Rate for a 10-year U.S. dollar interest rate swap on the last day of trading, as published on the following business day by the Federal Reserve Board in its Daily Update to the H.15 Statistical Release. Swap Futures attempt to replicate the pricing of interest rate swaps.
The $100,000 par value trading units of Swap Futures represent the fixed-rate side of a 10-year interest rate swap that exchanges semiannual fixed-rate payments at a 6% annual rate for floating-rate payments based on 3-month LIBOR. Swap Futures trade in price terms quoted in points ($1,000) and 32nds ($31.25) of the $100,000 notional par value. The contract settlement-date cycle is March, June, September and December, which is comparable to other fixed-income futures contracts.
The structure of Swap Futures blends certain characteristics of existing over-the-counter (OTC) swaps and futures products. Unlike most swaps traded in the OTC market that are so-called "par" swaps with a fixed market value trading on a rate basis, Swap Futures have fixed notional coupons and trade on a price basis. In addition, Swap Futures are constant maturity products that will not mature like OTC swaps, but rather represent a series of ten-year instruments expiring quarterly. Because Swap Futures are traded on an exchange, there is minimal counterparty or default risk, although, like all futures contracts, the Fund could experience delays and/or losses associated with the bankruptcy of a broker through which the Fund engages in futures transactions. Investing in Swap Futures is subject to the same risks of investing in futures, which are described above and below.
The Fund may invest in Swap Futures for hedging purposes only.
RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES. Participation in the
options or futures markets involves investment risks and transaction costs to
which the Fund would not be subject absent the use of these strategies. The
Fund, and thus its investors, may lose money through the unsuccessful use of
these strategies. If the investment adviser's predictions of movements in the
direction of the securities, 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, 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
and (5) the possible inability of the Fund to purchase or sell a portfolio
security at a time that otherwise would be favorable for it to do so, or the
possible need for the Fund to sell a portfolio security at a disadvantageous
time, due to the need for the Fund to maintain cover or to segregate securities
in connection with hedging transactions.
There may exist an imperfect correlation between the price movements of futures contracts purchased by the Fund and the movements in the prices of the securities (or currencies) which are the subject of the hedge. If participants in the futures market elect to close out their contracts through offsetting transactions rather than meet margin deposit requirements, distortions in the normal relationships between the debt securities (or currencies) and futures market could result. Price distortions could also result if investors in futures contracts elect to make or take delivery of underlying securities (or currencies) rather than engage in closing transactions due to the resultant reduction in the liquidity of the futures market. In addition, due to the fact that, from the point of view of speculators, the deposit requirements in the futures markets are less onerous than margin requirements in the cash market, increased participation by speculators in the futures markets could cause temporary price distortions. Due to the possibility of price distortions in the futures market and because of the imperfect correlation between movements in the prices of securities (or currencies) and movements in the prices of futures contracts, a correct forecast of interest rate trends by the investment adviser may still not result in a successful hedging transaction.
The risk of imperfect correlation increases as the composition of the Fund's securities portfolio diverges from the securities that are the subject of the futures contract, for example, those included in the municipal index. Because the change in price of the futures contract may be more or less than the change in prices of the underlying securities, even a correct forecast of interest rate changes may not result in a successful hedging transaction.
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.
There is a risk that the prices of securities subject to futures contracts (and thereby the futures contract prices) may correlate imperfectly with the behavior of the cash prices of the Fund's portfolio securities. Another such risk is that prices 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.
Pursuant to the requirements of the Commodity Exchange Act, as amended (the Commodity Exchange Act), all futures contracts and options thereon must be traded on an exchange. The Fund intends to purchase and sell futures contracts only on exchanges where there appears to be a market in such futures sufficiently active to accommodate the volume of its trading activity. The Fund's ability to establish and close out positions in futures contracts and options on futures contracts would be impacted by the liquidity of these exchanges. Although the Fund generally would purchase or sell only those futures contracts and options thereon for which there appeared to be a liquid market, there is no assurance that a liquid market on an exchange will exist for any particular futures contract or option at any particular time. In the event no liquid market exists for a particular futures contract or option thereon in which the Fund maintains a position, it would not be possible to effect a closing transaction in that contract or to do so at a satisfactory price and the Fund would have to either make or take delivery under the futures contract or, in the case of a written call option, wait to sell the underlying securities until the option expired or was exercised, or, in the case of a purchased option, exercise the option and comply with the margin requirements for the underlying futures contract to realize any profit. In the case of a futures contract or an option on a futures contract which the Fund had written and which the Fund was unable to close, the Fund would be required to maintain margin deposits on the futures contract or option and to make variation margin payments until the contract was closed. In the event futures contracts have been sold to hedge portfolio securities, such securities will not be sold until the offsetting futures contracts can be executed. Similarly, in the event futures have been bought to hedge anticipated securities purchases such purchases will not be executed until the offsetting futures contracts can be sold.
Exchanges on which futures and related options trade may impose limits on the positions that the Fund may take in certain circumstances. In addition, the hours of trading of financial futures contracts and options thereon may not conform to the hours during which the Fund may trade the underlying securities. To the extent the futures markets close before the securities markets, significant price and rate movements can take place in the securities markets that cannot be reflected in the futures markets.
Under regulations of the Commodity Exchange Act, investment companies registered under the Investment Company Act are exempt from the definition of commodity pool operator, subject to compliance with certain conditions. The Fund may enter into futures or related options contracts for return enhancement purposes if the aggregate initial margin and option premiums do not exceed 5% of the liquidation value of the Fund's total assets, after taking into account unrealized profits and unrealized losses on any such contracts, provided, however, that in the case of an option that is in-the-money, the in-the-money amount may be excluded in computing such 5%. The above restriction does not apply to the purchase and sale of futures and related options contracts for BONA FIDE hedging purchases within the meaning of the regulations of the CFTC.
In order to determine that the Fund is entering into transactions in futures contracts for hedging purposes as such term is defined by the CFTC, either: (1) a substantial majority (THAT IS, approximately 75%) of all anticipatory hedge transactions (transactions in which the Fund does not own at the time of the transaction, but expects to acquire, the securities underlying the relevant futures contract) involving the purchase of futures contracts will be completed by the purchase of securities which are the subject of the hedge, or (2) the underlying value of all long positions in futures
contracts will not exceed the total value of (a) all short-term debt obligations held by the Fund; (b) cash held by the Fund; (c) cash proceeds due to the Fund on investments within thirty days; (d) the margin deposited on the contracts; and (e) any unrealized appreciation in the value of the contracts.
If the Fund maintains a short position in a futures contract, it will cover this position by holding, in a segregated account, cash or liquid assets equal in value (when added to any initial or variation margin on deposit) to the market value of the securities underlying the futures contracts. 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, the Fund holds a long position in a futures contract, it will hold cash or liquid assets equal to the purchase price of the contract (less the amount of initial or variation margin on deposit) in a segregated account. Alternatively, the Fund could cover its long position by purchasing a put option on the same futures contract with an exercise 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, than 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.
RISKS OF TRANSACTIONS IN OPTIONS AND FINANCIAL FUTURES. Compared to the purchase or sale of futures contracts, the purchase and sale of call or put options on futures contracts involves less potential risk to the Fund because the maximum amount at risk is the premium paid for the options (plus transaction costs). However, there may be circumstances when the purchase of a call or put option on a futures contract would result in a loss to the Fund notwithstanding that the purchase or sale of a futures contract would not result in a loss, as in the instance where there is no movement in the prices of the futures contracts or underlying securities (or currencies).
An option position may be closed out only on an exchange which provides a secondary market for an option of the same series. As described above, although the Fund generally will purchase only those options for which there appears to be an active secondary market, there is no assurance that a liquid secondary market on an exchange will exist for any particular option, or at any particular time, and for some options, no secondary market on an exchange may exist. In such event it might not be possible to effect closing transactions in particular options with the result that the Fund would have to exercise its options in order to realize any profit and would incur transaction costs upon the sale of underlying securities pursuant to the exercise of put options.
Reasons for the absence of a liquid secondary market on an exchange include the following: (1) there may be insufficient trading interest in certain options; (2) restrictions may be imposed by an exchange on opening transactions or closing transactions or both; (3) trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options or underlying securities; (4) unusual or unforseen circumstances may interrupt normal operations on an exchange; (5) the facilities of an exchange or the Options Clearing Corporation may not at all times be adequate to handle current trading volume; or (6) one or more exchanges could, for economic or other reasons, decide to be compelled at some future date 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 Options Clearing Corporation as a result of trades on that exchange could continue to be exercisable in accordance with their terms.
There is no assurance that higher than anticipated trading activity or other unforseen events might not, at times, render certain of the facilities of the Options Clearing Corporation inadequate, and thereby result in the institution by an exchange of special procedures which may interfere with the timely execution of customers' orders.
REPURCHASE AGREEMENTS
The Fund may on occasion enter into repurchase agreements, whereby the seller of a security agrees to repurchase that security from the Fund at a mutually agreed-upon time and price. The period of maturity is usually quite short, possibly overnight or a few days, although it may extend over a number of months. The resale price is in excess of the purchase price, reflecting an agreed-upon rate of return effective for the period of time the Fund's money is invested in the repurchase agreement. The instruments held as collateral are valued daily and, if the value of the instruments declines, the Fund will require additional collateral. If the seller defaults and the value of the collateral securing the repurchase agreement declines, the Fund may incur a loss.
The Fund will enter into repurchase transactions only with parties meeting creditworthiness standards approved by the Fund's investment adviser. The Fund's repurchase agreements will at all times be fully collateralized by U.S. Government obligations in an amount at least equal to the resale price. The Fund's investment adviser will monitor the creditworthiness of such parties, under the general supervision of the Board of Directors. In the event of a default or bankruptcy by a seller, the Fund will promptly seek to liquidate the collateral. To the extent that the proceeds from any sale of such collateral upon a default in the obligation to repurchase are less than the repurchase price, the Fund will suffer a loss.
The Fund participates in a joint repurchase account with other investment companies managed by Prudential Investments LLC (PI or the Manager) pursuant to an order of the Commission. On a daily basis, any uninvested cash balances of the Fund may be aggregated with such of other investment companies and invested in one or more repurchase agreements. Each fund participates in the income earned or accrued in the joint account based on the percentage of its investment.
SECURITIES LENDING
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 determined daily 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. As a matter of fundamental policy, the Fund cannot lend more than 30% of the value of its total assets. 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. 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. On termination of the loan, the borrower is required to return the securities to the Fund, and any gain or loss in the market price during the loan would inure to the Fund.
Since voting or consent rights 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.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
From time to time, in the ordinary course of business, the Fund may purchase or sell U.S. Government 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 as much as a month or more in the future in order to secure what is considered to be an advantageous price and yield to the Fund at the time of entering into the transaction. The purchase price and the interest rate payable on the securities are fixed on the transaction date. The Fund will maintain
in a segregated account cash or other liquid assets, marked-to-market daily, having a value equal to or greater than the Fund's purchase commitments. The securities so purchased are subject to market fluctuation and no interest accrues to the purchaser during the period between purchase and settlement. At the time the Fund makes the commitment to purchase securities on a when-issued or delayed-delivery basis, it will record the transaction and thereafter reflect the value of such securities in determining its NAV each day. At the time of delivery of the securities the value may be more or less than the purchase price and an increase in the percentage of the Fund's assets committed to the purchase of securities on a when-issued or delayed-delivery basis may increase the volatility of the Fund's NAV. If the Fund chooses to dispose of the right to acquire a when-issued security prior to this acquisition, it could, as with the disposition of any other portfolio security, incur a gain or loss due to market fluctuations.
ZERO COUPON BONDS
The Fund may invest up to 15% of its investable assets in zero coupon U.S. Government securities. Zero coupon bonds are purchased at a discount from the face amount because the buyer receives only the right to receive a fixed payment on a certain date in the future and does not receive any periodic interest payments. 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. Upon maturity, the holder is entitled to receive the par value of the security. Zero coupon securities do not require the periodic payment of interest. While interest payments are not made on such securities, holders of such securities are deemed to have received annual income (phantom income) notwithstanding that cash may not be received currently. The effect of owning instruments which do not make current interest payments is that a fixed yield is earned not only on the original investment but also, in effect, on all discount accretion during the life of the obligations. This implicit reinvestment of earnings at the same rate eliminates the risk of being unable to invest distributions at a rate as high as the implicit yield on the zero coupon bond, but at the same time eliminates the holder's ability to reinvest at higher rates in the future. For this reason, zero coupon bonds are subject to substantially greater price fluctuations during periods of changing market interest rates than are comparable securities which pay interest currently, which fluctuation increases the longer the period to maturity. The Fund accrues income with respect to these securities for federal income tax and accounting purposes prior to the receipt of cash payments. 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. Because the Fund accrues income which may not be represented by cash, the Fund may be required to sell other securities in order to satisfy the distribution requirements applicable to the Fund. Zero coupon bonds may be subject to greater fluctuation in value and lesser liquidity in the event of adverse market conditions than comparably rated securities paying cash interest at regular interest payment periods.
In addition to the above described risks, there are certain other risks related to investing in zero coupon securities. These securities generally are more sensitive to movements in interest rates and are less liquid than comparably rated securities paying cash interest at regular intervals. Consequently, such securities may be subject to greater fluctuation in value. During a period of severe market conditions, the market for such securities may become even less liquid. In addition, as these securities do not pay cash interest, the Fund's investment exposure to these securities and their risks, including credit risk, will increase during the time these securities are held in the Fund's portfolio. Further, to maintain its qualification for pass-through treatment under the federal tax laws, the Fund is required to distribute income to its shareholders and, consequently, may have to dispose of its portfolio securities under disadvantageous circumstances to generate the cash, or may have to leverage itself by borrowing the cash to satisfy these distributions, as they relate to the distribution of phantom income. The required distributions will result in an increase in the Fund's exposure to such securities.
SHORT SALES AGAINST-THE-BOX
The Fund may, under certain circumstances, make short sales against-the-box. A short sale against-the-box is a short sale in which the Fund owns an equal amount of the securities sold short or securities, convertible into or exchangeable for, without payment of any further consideration, securities of the same issue as, and equal in amount to, the securities sold short. The Fund may engage in such short sales only to the extent that not more than 10% of the Fund's
net assets (determined at the time of the short sale) are held as collateral for such sales. For federal income tax purposes, a short sale against-the-box of an appreciated position will be treated as a sale of the appreciated position, thus generating gain, by the Fund.
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 to be issued and delivered 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. Reverse repurchase agreements and dollar rolls (other than covered dollar rolls) are considered borrowings by the Fund for purposes of the percentage limitations applicable to borrowings. Covered dollar rolls, however, are not treated as borrowings or other senior securities and will be excluded from the calculation of the Fund's borrowings and other senior securities.
The Fund will establish a segregated account with its custodian in which it will maintain cash or other liquid assets, 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 the securities under a dollar roll or 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.
ILLIQUID SECURITIES
The Fund may hold up to 15% of its net assets in illiquid securities. If the Fund were to exceed this limit, the investment adviser would take prompt action to reduce the Fund's holdings in illiquid securities to no more than 15% of its net assets as required by applicable law. Illiquid securities include repurchase agreements which have a maturity of longer than seven days, or other illiquid securities including certain securities with legal or contractual restrictions on resale (restricted securities) either within or outside of the United States and securities that are illiquid by virtue of the absence of a readily available market (either within or outside of the United States). The Subadviser (as defined below) will monitor the liquidity of such restricted securities under the supervision of the Directors.
Historically, illiquid securities have included securities subject to contractual or legal restrictions on resale because they have not been registered under the Securities Act of 1933, as amended (Securities Act), securities which are otherwise not readily marketable and repurchase agreements having a maturity of longer than seven days. Securities which have not been registered under the Securities Act are referred to as private placements or restricted securities and are purchased directly from the issuer or in the secondary market. Mutual funds do not typically hold a significant amount of these restricted or other illiquid securities because of the potential for delays on resale and uncertainty in valuation. Limitations on resale may have an adverse effect on the marketability of portfolio securities and a mutual fund might be unable to dispose of restricted or other illiquid securities promptly or at reasonable prices and might thereby experience difficulty satisfying redemptions within seven days. A mutual fund might also have to register such restricted securities in order to dispose of them resulting in additional expense and delay. Adverse market conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed for certain securities that are not registered under the Securities Act including repurchase agreements, commercial paper, foreign securities, municipal securities and corporate bonds and notes. Institutional investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for repayment. The fact that there are contractual or legal restrictions on resale to the general public or to certain institutions may not be indicative of the liquidity of such investments.
Rule 144A of the Securities Act allows for a broader institutional trading market for securities otherwise subject to restriction on resale to the general public. Rule 144A establishes a "safe harbor" from the registration requirements of the Securities Act for resales of certain securities to qualified institutional buyers. The Fund's investment in Rule 144A securities could have the effect of increasing illiquidity to the extent that qualified institutional buyers become, for a time, uninterested in purchasing Rule 144A securities.
Restricted securities, including securities eligible for resale pursuant to
Rule 144A under the Securities Act, securities with contractual restrictions and
commercial paper that have 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 (for example, the time needed to dispose of the security, the
method of soliciting offers and the mechanics of the transfer). In addition, in
order for commercial paper that is issued in reliance on Section 4(2) of the
Securities Act to be considered liquid, (a) it must be rated in one of the two
highest rating categories by at least two nationally recognized statistical
rating organizations (NRSRO), or if only one NRSRO rates the securities, by that
NRSRO, or, if unrated, be of comparable quality in the view of the investment
adviser; and (b) it must not be "traded flat" (that is, without accrued
interest) or in default as to principal or interest. Repurchase agreements
subject to demand are deemed to have a maturity equal to the notice period.
The staff of the Commission has taken the position, which the Fund will follow, 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 the Fund's election, to unwind the OTC option. The exercise of such an option would ordinarily involve the payment by the Fund of an amount designed to reflect the counterparty's economic loss from an early termination, but does allow the Fund to treat the assets used as cover as liquid.
BORROWING
The Fund may borrow up to 20% of the value of its total assets (calculated when the loan is made) for temporary, extraordinary or emergency purposes or for the clearance of transactions. The Fund may pledge up to 20% of the value of its total assets to secure such borrowings. If the Fund's asset coverage for borrowings falls below 300%, the Fund will take prompt action to reduce its borrowings as required by law. If the 300% asset coverage should decline as a result of market fluctuations or other reasons, the Fund may be required to sell portfolio securities to reduce the debt and restore the 300% asset coverage, even though it may be disadvantageous from an investment standpoint to sell securities at that time. Such liquidations could cause the Fund to realize gains on securities held for less than three months. The Fund will not purchase securities when borrowings exceed 5% of the value of the Fund's total assets unless this policy is changed by the Board of Directors.
SEGREGATED ASSETS
When the Fund is required to segregate assets in connection with certain transactions, it will maintain cash or liquid assets in a segregated account. "Liquid assets" means cash, U.S. Government securities, foreign securities, equity securities, debt obligations or other liquid, unencumbered assets marked-to-market daily. Such transactions may involve, among other transactions, dollar rolls, reverse repurchase agreements, when-issued and delayed-delivery securities, futures contracts, options and options on futures contracts (unless otherwise covered). If collateralized or otherwise covered, in accordance with Commission guidelines, these will not be deemed to be senior securities.
SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest up to 10% of its total assets in securities of other investment companies. To the extent that the Fund does invest in securities of other investment companies, shareholders of the Fund may be subject to duplicate management and advisory fees. See "Investment Restrictions" below.
(d) TEMPORARY DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS
In response to adverse market, economic or political conditions, the Fund may temporarily invest up to 100% of the Fund's assets in high-quality money market instruments, cash, repurchase agreements or U.S. Government Securities. Investing heavily in these securities is not consistent with the Fund's investment objective and limits our ability to achieve our investment objective, but can help to preserve the Fund's assets.
(e) PORTFOLIO TURNOVER
The Fund's portfolio turnover rate for the fiscal years ended February 28, 2001 and February 28, 2002 was 337% and 440%, respectively. The increase in portfolio turnover during fiscal year 2002 was caused by the Fund selling securities to allocate a greater percentage of its investments into mortgage securities and mortgage dollar-rolls. The investment adviser expects that, under normal circumstances, the Fund's portfolio turnover rate may be as high as 250% or higher. 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 "Brokerage Allocation and Other Practices" and "Taxes, Dividends and Distributions" below.
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 SAI, 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); the deposit or payment by the Fund of initial or variation margin in connection with interest rate futures contracts or related options transactions is not considered the purchase of a security on margin.
2. Make short sales of securities or maintain a short position, except short sales "against the box."
3. Issue senior securities, borrow money or pledge its assets except that the Fund may borrow up to 20% of the value of its total assets (calculated when the loan is made) for temporary, extraordinary or emergency purposes or for the clearance of transactions. The Fund may pledge up to 20% 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, collateral arrangements with respect to interest rate swap transactions, reverse repurchase agreements or dollar roll transactions or the writing of options on debt securities or on interest rate futures contracts or other financial futures contracts are not deemed to be a pledge of assets and neither such arrangements, nor the purchase or sale of interest rate futures contracts or other financial futures contracts or the purchase or sale of related options, nor obligations of the Fund to Directors pursuant to deferred compensation arrangements are deemed to be the issuance of a senior security.
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 investment) would be invested in a single industry.
5. Purchase any security if as a result the Fund would then hold more than 10% of the outstanding voting securities of an issuer.
6. Buy or sell commodities or commodity contracts or real estate or interests in real estate, except it may purchase and sell securities which are secured by real estate, securities of companies which invest or deal in real estate, interest rate futures contracts and other financial futures contracts and options thereon.
7. Act as underwriter except to the extent that, in connection with the disposition of portfolio securities, it may be deemed to be an underwriter under certain federal securities laws.
8. Make investments for the purpose of exercising control or management.
9. Invest in securities of other registered investment companies, except by purchases in the open market involving only customary brokerage commissions and as a result of which not more than 10% of its total assets (determined at the time of investment) would be invested in such securities, or except as part of a merger, consolidation or other acquisition.
10. Invest in interests in oil, gas or other mineral exploration or development programs.
11. Make loans, except through (i) repurchase agreements and (ii) loans of portfolio securities (limited to 30% of the Fund's total assets).
12. Purchase warrants if as a result the Fund would then have more than 5% of its total assets (determined at the time of investment) invested in warrants.
13. Write, purchase or sell puts, calls or combinations thereof, or purchase or sell futures contracts or related options, except that the Fund may write put and call options on U.S. Government securities, purchase put and call options on U.S. Government securities and purchase or sell interest rate futures contracts and other financial futures contracts and related options.
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.
The Fund will provide 60 days' prior written notice to shareholders of a change in the Fund's non-fundamental policy of investing at least 80% of its investable assets (that is, net assets plus borrowings for investment purposes) in the type of investments suggested by the Fund's name.
MANAGEMENT OF THE FUND
Information pertaining to the Directors of the Fund is set forth below. Directors who are not deemed to be "interested persons" of the Fund, as defined in the Investment Company Act of 1940, as amended (the Investment Company Act or the 1940 Act) are referred to as "Independent Directors." Directors who are deemed to be "interested persons" of the Fund are referred to as "Interested Directors." "Fund Complex" consists of the Fund and any other investment companies managed by Prudential Investments LLC (PI).
INDEPENDENT DIRECTORS
NUMBER OF
TERM OF PORTFOLIOS IN
POSITION OFFICE*** AND FUND COMPLEX OTHER DIRECTORSHIPS
WITH THE LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY HELD BY THE
NAME, ADDRESS** AND AGE FUND TIME SERVED DURING PAST FIVE YEARS DIRECTOR DIRECTOR****
----------------------- ---- ----------- ---------------------- -------- ------------
Eugene C. Dorsey (75) Director Since 1996 Retired President, Chief 78 Director (since 1996) of
Executive Officer and First Financial Fund, Inc.
Trustee of the Gannett and Director (since 1996)
Foundation (now Freedom of The High Yield Plus
Forum) (since December Fund, Inc.
1989); formerly Publisher
of four Gannett newspapers
and Vice President of
Gannett Co., Inc.; Chairman
of Independent Sector,
Washington, D.C. (largest
national coalition of
philanthropic
organizations); Chairman of
the American Council for
the Arts; Director of the
Advisory Board of Chase
Manhattan Bank of
Rochester.
Delayne Dedrick Gold (63) Director Since 1983 Marketing Consultant. 89 --
Thomas T. Mooney (60) Director Since 1985 President of the Greater 95 Director, President and
Rochester Metro Chamber of Treasurer (since 1986) of
Commerce; formerly First Financial Fund, Inc.
Rochester City Manager; and Director (since 1988)
formerly Deputy Monroe of The High Yield Plus
County Executive; Trustee Fund, Inc.
of Center for Governmental
Research, Inc.; Director of
Blue Cross of Rochester,
Monroe County Water
Authority and Executive
Service Corps of Rochester.
Stephen P. Munn (59) Director Since 1999 Formerly Chief Executive 73 Chairman of the Board (since
Officer (1988-2001) and January 1994) and Director
President of Carlisle (since 1988) of Carlisle
Companies Incorporated. Companies Incorporated
(manufacturer of industrial
products); Director of
Gannett Co. Inc.
(publishing and media).
|
NUMBER OF
TERM OF PORTFOLIOS IN
POSITION OFFICE*** AND FUND COMPLEX OTHER DIRECTORSHIPS
WITH THE LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY HELD BY THE
NAME, ADDRESS** AND AGE FUND TIME SERVED DURING PAST FIVE YEARS DIRECTOR DIRECTOR****
----------------------- ---- ----------- ---------------------- -------- ------------
Richard A. Redeker (58) Director Since 1993 Formerly Management 73 --
Consultant of Invesmart,
Inc. (August 2001-October
2001); formerly employee of
PI (October 1996-January
1998); formerly, President,
Chief Executive Officer and
Director (October
1993-September 1996) of
Prudential Mutual Fund
Management, Inc. (PMF);
Executive Vice President,
Director and Member of the
Operating Committee
(October 1993-September
1996) of Prudential
Securities Incorporated
(Prudential Securities);
Director (October
1993-September 1996) of
Prudential Securities
Group, Inc.; Executive Vice
President (January
1994-September 1996) of The
Prudential Investment
Corporation; Director
(January 1994-September
1996) of Prudential Mutual
Fund Distributors, Inc. and
Prudential Mutual Fund
Services, Inc.
Nancy H. Teeters (71) Director Since 1996 Economist; formerly Vice 72 --
President and Chief
Economist of International
Business Machines
Corporation; formerly
Director of Inland Steel
Industries (July
1984-1999); formerly
Governor of The Federal
Reserve
(September 1978-June 1984).
Louis A. Weil, III (61) Director Since 1996 Formerly Chairman (January 73 --
1999-July 2000), President
and Chief Executive Officer
(January 1996-July 2000)
and Director (since
September 1991) of Central
Newspapers, Inc.; formerly
Chairman of the Board
(January 1996-July 2000),
Publisher and Chief
Executive Officer (August
1991-December 1995) of
Phoenix Newspapers, Inc.
|
INTERESTED DIRECTORS
NUMBER OF
TERM OF PORTFOLIOS IN
POSITION OFFICE*** AND FUND COMPLEX OTHER DIRECTORSHIPS
WITH THE LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY HELD BY THE
NAME, ADDRESS** AND AGE FUND TIME SERVED DURING PAST FIVE YEARS DIRECTOR DIRECTOR****
----------------------- ---- ----------- ---------------------- -------- ------------
*Robert F. Gunia (55) Vice Since 1996 Executive Vice President and 112 Vice President and Director
President Chief Administrative (since May 1989) of The
and Officer (since June 1999) Asia Pacific Fund, Inc.
Director of PI; Executive Vice
President and Treasurer
(since January 1996) of PI;
President (since April
1999) of Prudential
Investment Management
Services LLC (PIMS);
Corporate Vice President
(since September 1997) of
The Prudential Insurance
Company of America
(Prudential); formerly
Senior Vice President
(March 1987-May 1999) of
Prudential Securities
Incorporated (Prudential
Securities); formerly Chief
Administrative Officer
(July 1989-September 1996),
Director (January
1989-September 1996) and
Executive Vice President,
Treasurer and Chief
Financial Officer (June
1987-December 1996) of PMF;
Vice President and Director
(since May 1992) of
Nicholas-Applegate
Fund, Inc.
*David R. Odenath, Jr. President Since 1999 President, Chief Executive 115 --
(45) and Officer and Chief Operating
Director Officer (since June 1999)
of PI; Senior Vice
President (since June 1999)
of Prudential; formerly
Senior Vice President
(August 1993-May 1999) of
PaineWebber Group, Inc.
*Judy A. Rice (54) Vice Since 2000 Executive Vice President 111 --
President (since 1999) of PI;
and formerly various positions
Director to Senior Vice President
(1992-1999) of Prudential
Securities; and various
positions to Managing
Director (1975-1992) of
Salomon Smith Barney;
Member of Board of
Governors of the Money
Management Institute;
Member of the Prudential
Securities Operating
Council and a Member of the
Board of Directors for the
National Association for
Variable Annuities.
|
Information pertaining to the officers of the Fund who are not Directors is set forth below.
OFFICERS
TERM OF
OFFICE*** AND
POSITION LENGTH OF PRINCIPAL OCCUPATIONS
NAME, ADDRESS** AND AGE WITH FUND TIME SERVED DURING PAST FIVE YEARS
----------------------- --------- ----------- ----------------------
Grace C. Torres (42) Treasurer and Since 1996 Senior Vice President (since January 2000) of
Principal PI; formerly First Vice President (December
Financial and 1996-January 2000) of PIFM and First Vice
Accounting President (March 1993-1999) of Prudential
Officer Securities.
Deborah A. Docs (44) Secretary Since 1996 Vice President and Corporate Counsel (since
January 2001) of Prudential; Vice President
and Assistant Secretary (since December
1996) of PI.
William V. Healey (48) Assistant Since 2000 Vice President and Associate General Counsel
Secretary (since 1998) of Prudential; Executive Vice
President, Secretary and Chief Legal Officer
(since February 1999) of PI; Senior Vice
President, Chief Legal Officer and Secretary
(since December 1998) of PIMS; Executive
Vice President, Chief Legal Officer and
Secretary (since February 1999) of
Prudential Mutual Fund Services LLC;
Director (since June 1999) of ICI Mutual
Insurance Company; prior to August 1998,
Associate General Counsel of the Dreyfus
Corporation (Dreyfus), a subsidiary of
Mellon Bank, N.A. (Mellon Bank), and an
officer and/or director of various
affiliates of Mellon Bank and Dreyfus.
|
* "Interested" Director, as defined in the 1940 Act, by reason of employment with the Manager, the Subadviser or the Distributor.
** Unless otherwise noted, the address of the Directors and officers is c/o:
Prudential Investments LLC, Gateway Center Three, 100 Mulberry Street,
Newark, New Jersey 07102-4077.
*** There is no set term of office for Directors and Officers. The Independent Directors have adopted a retirement policy, which calls for the retirement of Directors on December 31 of the year in which they reach the age of 75. The table shows the number of years for which they have served as Director and/or Officer.
**** This column includes only directorships of companies required to register, or file reports with the SEC under the Securities and Exchange Act of 1934 (that is, "public companies") or other investment companies registered under the 1940 Act.
The Fund has Directors who, in addition to overseeing the actions of the Fund's Manager, Subadviser and Distributor, decide upon matters of general policy in accordance with Maryland law and the 1940 Act. In addition to their functions set forth under "Investment Advisory and Other Services--Manager and Investment Adviser" and "Principal Underwriter, Distributor and Rule 12b-1 Plans," the Directors also review the actions of the Fund's officers, who conduct and supervise the daily business operations of the Fund. Pursuant to the Fund's Management Agreement, the Board may contract for advisory and management services for the Fund. Any such contract may permit the Manager to delegate certain or all of its duties under such contract to the Subadviser.
Directors and officers of the Fund are also trustees, directors and officers of some or all of the other investment companies advised by the Fund's Manager and distributed by PIMS.
STANDING BOARD COMMITTEES
The Board of Directors has established two standing committees in connection with the governance of the Fund--Audit and Nominating.
The Audit Committee consists of all of the Independent Directors. The responsibilities of the Audit Committee are to assist the Board of Directors in overseeing the Fund's independent accountants, accounting policies and procedures, and other areas relating to the Fund's auditing processes. The scope of the Audit Committee's responsibilities is oversight. It is management's responsibility to maintain appropriate systems for accounting and internal control and the independent accountants' responsibility to plan and carry out a proper audit. The Audit Committee met four times during the fiscal year ended February 28, 2002.
The Nominating Committee consists of all of the Independent Directors. This Committee interviews and recommends to the Board persons to be nominated for election as Directors by the Fund's shareholders and selects and proposes nominees for election by the Board between annual meetings. This Committee does not normally consider candidates proposed by shareholders for election as Directors. The Nominating Committee also reviews the independence of Directors currently serving on the Board and recommends to the Board Independent Directors to be selected for membership on Board Committees. The Nominating Committee reviews each Director's investment in the Fund, matters relating to Director compensation and expenses and compliance with the Fund's retirement policy. The Nominating Committee did not meet during the fiscal year ended February 28, 2002.
In addition to the two standing Committees of the Fund, The Board of Directors has also approved Director participation in an Executive Committee designed to coordinate the governance of all of the mutual funds in the Prudential mutual fund complex. The role of the Executive Committee is solely advisory and consultative, without derogation of any of the duties or responsibilities of the Board of Directors. The following Independent Directors serve on the Executive Committee: Eugene C. Dorsey, Thomas T. Mooney and Nancy H. Teeters. Independent Directors from other funds in the Prudential mutual fund complex also serve on the Executive Committee. The responsibilities of the Executive Committee include: facilitating communication and coordination between the Independent Directors and fund management on issues that affect more than one fund; serving as a liaison between the Boards of Directors/Trustees of funds and fund management; developing, in consultation with outside counsel and management, draft agendas for Board meetings; reviewing and recommending changes to Board practices generally and monitoring and supervising the performance of legal counsel to the funds generally and the Independent Directors.
COMPENSATION
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 Interested Directors of the Fund.
The Fund pays each of it Independent Directors annual compensation in addition to certain out-of-pocket expenses. Directors who serve on the Committees may receive additional compensation. The amount of compensation paid to each Independent Director may change as a result of the introduction of additional funds upon whose Boards the Directors may be asked to serve.
Independent Directors may defer receipt of their Directors' fees pursuant to a deferred fee agreement with the Fund. Under the terms of such agreement, the Fund accrues deferred Directors' fees daily which, in turn, accrues interest at a rate equivalent to the prevailing rate of 90-day U.S. Treasury bills at the beginning of each calendar quarter or, at the daily rate of return of any Prudential Mutual Fund chosen by the Director. The Fund's obligation to make payments of deferred Directors' fees, together with interest thereon, is a general obligation of the Fund.
The Fund has no retirement or pension plan for its Directors.
The following table sets forth the aggregate compensation paid by the Fund for the fiscal year ended February 28, 2002 to the Independent Directors. The table also shows aggregate compensation paid to those Directors for service on the Fund's Board and the Board of any other investment company in the Fund Complex, for the calendar year ended December 31, 2001.
COMPENSATION TABLE
PENSION OR TOTAL 2001
RETIREMENT COMPENSATION FROM
AGGREGATE BENEFITS ACCRUED FUND AND FUND
COMPENSATION AS PART OF FUND COMPLEX PAID TO
NAME AND POSITION FROM FUND EXPENSES INDEPENDENT DIRECTORS
----------------- ------------- ---------------- ---------------------
Eugene C. Dorsey--Director**....... $ 3,475 None $120,833(21/62)*
Delayne Dedrick Gold--Director..... $ 4,313 None $173,000(40/73)*
Thomas T. Mooney--Director**....... $ 3,550 None $164,000(36/90)*
Stephen P. Munn--Director.......... $ 3,513 None $114,000(28/54)*
Richard A. Redeker--Director....... $ 3,475 None $110,000(28/54)*
Nancy H. Teeters--Director......... $ 3,475 None $118,000(25/45)*
Louis A. Weil, III--Director....... $ 3,876 None $113,667(28/54)*
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* Indicates number of funds/portfolios in Fund Complex (including the Fund) to which aggregate compensation relates.
** Although the last column shows the total amount paid to Directors from the Fund Complex during the calendar year ended December 31, 2001, such compensation was deferred at the election of the Directors, in total or in part, under the Fund's deferred fee agreement. Including accrued interest on amounts deferred through December 31, 2001, total value of deferred compensation for the year amounted to $135,070 and $148,850 for Messrs. Dorsey and Mooney, respectively.
Directors who are interested do not receive compensation from the Fund or any fund in the Fund Complex and therefore are not shown in the Compensation Table.
The following table sets forth the dollar range of equity securities in the Fund beneficially owned by a Director, and, on an aggregate basis, in all registered investment companies overseen by a Director in the Fund Complex as of December 31, 2001.
DIRECTOR SHARE OWNERSHIP TABLE
INDEPENDENT DIRECTORS
AGGREGATE DOLLAR RANGE
OF EQUITY SECURITIES IN ALL
REGISTERED INVESTMENT
DOLLAR RANGE OF EQUITY COMPANIES OVERSEEN BY
NAME OF DIRECTOR SECURITIES IN THE FUND DIRECTOR IN FUND COMPLEX
---------------- ---------------------- ---------------------------
Eugene C. Dorsey................... -- ($ 10,001-$50,000)
Delayne Dedrick Gold............... ($50,000-$100,000) over $100,000
Thomas T. Mooney................... ($10,001-$50,000) over $100,000
Stephen P. Munn.................... -- over $100,000
Richard A Redeker.................. -- over $100,000
Nancy H. Teeters................... ($1-$10,000) ($1-$10,000)
Louis A. Weil III.................. -- over $100,000
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INTERESTED DIRECTORS
AGGREGATE DOLLAR RANGE
OF EQUITY SECURITIES IN ALL
DOLLAR RANGE OF REGISTERED INVESTMENT
EQUITY SECURITIES COMPANIES OVERSEEN BY
NAME OF DIRECTOR IN THE FUND DIRECTOR IN FUND COMPLEX
---------------- ----------------- ---------------------------
Robert F. Gunia.................... ($1-$10,000) over $100,000
David R. Odenath, Jr............... -- over $100,000
Judy A. Rice....................... -- over $100,000
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The following table sets forth information regarding each class of securities owned beneficially or of record by each Independent Director, and his/her immediate family members, in an investment adviser or principal underwriter of the Fund or a person (other than a registered investment company) directly or indirectly "controlling," "controlled by," or "under common control with" (within the meaning of the 1940 Act) an investment adviser or principal underwriter of the Fund as of December 31, 2001.
NAME OF
OWNERS AND
RELATIONSHIPS TO TITLE OF VALUE OF PERCENT OF
NAME OF DIRECTOR DIRECTOR COMPANY CLASS SECURITIES CLASS
---------------- ---------------- -------- -------- ---------- ----------
Eugene C. Dorsey................... -- -- -- -- --
Delayne Dedrick Gold............... -- -- -- -- --
Thomas T. Mooney................... -- -- -- -- --
Stephen P. Munn.................... -- -- -- -- --
Richard A. Redeker................. -- -- -- -- --
Nancy H. Teeters................... -- -- -- -- --
Louis A. Weil, III................. -- -- -- -- --
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CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Directors of the Fund are eligible to purchase Class Z shares of the Fund.
As of April 5, 2002, the Directors and officers of the Fund, as a group, owned less than 1% of each class of the outstanding shares of the Fund. As of such date, there were no beneficial owners of more than 5% of any class of shares of the Fund.
As of April 5, 2002, the only beneficial owners, directly or indirectly of more than 5% of any class of shares of the Fund were: Prudential Trust Company, FBOPru-DC Trust Accounts, Attn: PMFS Coordinator, 30 Scranton Office Park, Moosic, PA 18507 who held 8,775,045 Class A shares of the Fund (or 8.3% of the outstanding Class A shares); Prudential Trust Company, FBO La Rosa Del Monte Express, 1133-35 Tiffany Street, Bronx, NY 10459 who held 292,435 Class C shares of the Fund (or 14% of the outstanding Class C shares); Prudential Trust Company, FBO PRU-DC Trust Accounts, Attn: PMFS Coordinator, 30 Scranton Office Park, Moosic PA 18507-1796 who held 5,319,427 Class Z shares of the Fund (or 6.1% of the outstanding Class Z shares); Pru Defined Contribution Services, FBO PRU-NON-Trust Accounts, Attn: PMFS Coordinator, 30 Scranton Office Park, Moosic PA 18507-1755 who held 963,022 Class Z shares of the Fund (or 11.0% of the outstanding Class Z shares). Mr. John E. Dierks TTEE, John E. Dierks Living Trust, D7D 1/7/86, 1350 E. Flamingo Rd. #489, Las Vegas, NV 89119-5263 who held 1,640,067 Class Z shares of the Fund (or 18.8% of the outstanding Class Z shares). American Prime Asset, Escrow Agent, ND Insurance Escrow Account, 8700 N. Stemmons FWY STE 414, Dallas TX 75247-3713 who held 479,815 Class Z shares of the Fund (or 5.5% of the outstanding Class Z shares); and Wachovia Bank N.A. AS TTEE, for Jennison Retention Trust, FBO: Spiros Segalas, 301 North Church Street, P.O. Box 3073, Winston, Salem, NC 27150 who held 652,498 Class Z shares of the Fund (or 7.5% of the outstanding Class Z shares).
As of April 5, 2002, Prudential Securities was the record holder for other beneficial owners of 46,253,849 Class A shares (or 43.8% of the outstanding Class A shares), 8,869,411 Class B shares (or 54% of the outstanding Class B shares), 1,536,350 Class C shares (or 73.3% of the outstanding Class C shares) and 1,640,067 Class Z shares (or 18.8% of the outstanding Class Z shares) of the Fund. In the event of any meetings of shareholders, Prudential Securities will forward, or cause the forwarding of, proxy materials to the beneficial owners for which it is the record holder.
INVESTMENT ADVISORY AND OTHER SERVICES
(a) MANAGER AND INVESTMENT ADVISER
The Manager of the Fund is Prudential Investments LLC (PI or the Manager), Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. PI 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
December 31, 2001, PI served as the investment manager to all of the Prudential U.S. and offshore open-end investment companies, and as administrator to closed-end investment companies, with aggregate assets of approximately $100.8 billion.
PI is a wholly-owned subsidiary of PIFM HoldCo., Inc., which is a wholly-owned subsidiary of Prudential Asset Management Holding Company, which is a wholly-owned subsidiary of Prudential. Prudential Mutual Fund Services LLC (PMFS or the Transfer Agent), an affiliate of PI, serves as the transfer agent and dividend distribution agent for the Prudential mutual funds and, in addition, provides customer service, record keeping and management and administrative services to qualified plans.
Pursuant to the Management Agreement with the Fund (the Management Agreement), PI, 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, PI is obligated to keep certain books and records of the Fund. PI has hired Prudential Investment Management, Inc., (PIM, the Subadviser or the Investment Adviser), to provide subadvisory services to the Fund. PI 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 the Fund's custodian (the Custodian), and PMFS. The management services of PI to the Fund are not exclusive under the terms of the Management Agreement and PI is free to, and does, render management services to others.
For its services, PI receives, pursuant to the Management Agreement, a fee at an annual rate of 0.50 of 1% of the average daily net assets of the Fund up to $3 billion and .35 of 1% of the average daily net assets of the Fund in excess of $3 billion. 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 PI, 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 PI will be reduced by the amount of such excess. Reductions in excess of the total compensation payable to PI will be paid by PI to the Fund. No such reduction was required during the current fiscal year ended February 28, 2002. Currently, the Fund believes there are no such expense limitations.
PI 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 subsidies will increase the Fund's total return.
In connection with its management of the corporate affairs of the Fund, PI bears the following expenses:
(a) the salaries and expenses of all personnel of the Fund and the Manager, except the fees and expenses of Independent Directors;
(b) 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 as described below; and
(c) the costs and expenses payable to the Subadviser pursuant to a Subadvisory Agreement between PI and the Investment Adviser (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 Independent Directors; (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;
(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
directors and officers errors and omissions insurance; (j) the fees and expenses
involved in registering and maintaining registration of the Fund and of its
shares with the Commission, 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, prospectuses and statements of
additional information
for filing under federal and state securities laws 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 to shareholders; (l) litigation and indemnification expenses and
other extraordinary expenses not incurred in the ordinary course of the Fund's
business; and (m) distribution and service (12b-1) fees.
The Management Agreement provides that PI 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 duties. The Management Agreement provides that it will terminate automatically if assigned (as defined in the Investment Company Act), and that it may be terminated without penalty by either the Manager or the Fund (by the Board of Directors or vote of a majority of the outstanding voting securities of the Fund, as defined in the 1940 Act) 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 accordance with the requirements of the Investment Company Act.
For the fiscal years ended February 28, 2002, February 28, 2001 and February 29, 2000, the Fund paid management fees to the Manager or its predecessors of $5,983,155, $5,293,429 and $6,136,364, respectively.
PI has entered into the Subadvisory Agreement with the Subadviser, a wholly-owned subsidiary of Prudential. The Subadvisory Agreement provides that the Subadviser furnish investment advisory services in connection with the management of the Fund. In connection therewith, the Subadviser is obligated to keep certain books and records of the Fund. PI continues to have responsibility for all investment advisory services pursuant to the Management Agreement and supervises the Subadviser's performance of such services. The Subadviser was reimbursed by PI for the reasonable costs and expenses it incurred in furnishing those services. The Subadviser is paid by PI at an annual rate of .25 of 1% up to and including $3 billion, and .166 of 1% of over $3 billion of the Fund's average daily net assets. For the fiscal year ended February 28, 2001 and fiscal year ended February 28, 2002, PI paid PIM approximately $2,991,578 and $2,646,715, respectively, for its investment advisory services to the Fund.
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, the Manager or the Subadviser 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 1940 Act.
(b) MATTERS CONSIDERED BY THE BOARD
The Management and Subadvisory Agreements were last approved by the Board of Directors, including all of the Independent Directors, on May 23, 2001 at a meeting called for that purpose. In approving the Management and Subadvisory Agreements, the Board primarily considered, with respect to the Fund, the nature and quality of the services provided under the Agreements and the overall fairness of the Agreements to the Fund. The Board requested and evaluated reports from the Manager and Subadviser that addressed specific factors designed to inform the Board's consideration of these and other issues.
With respect to the nature and quality of the services provided by the Manager and Subadviser, respectively, the Board considered the performance of the Fund in comparison to relevant market indices and the performance of a peer group of investment companies pursuing broadly similar strategies, and reviewed reports prepared by an unaffiliated organization applying various statistical and financial measures of fund performance compared to such indices and peer groups of funds, over the past one, three, five, and ten years. The Board also evaluated the division of responsibilities among the Manager and its affiliates, and the capabilities of the personnel providing services. The Board also considered the Manager's and the Subadvisers' positive compliance history as neither the Manager nor the Subadviser has been subject to any significant compliance problems.
With respect to the overall fairness of the Management and Subadvisory Agreements, the Board considered the fee structure of the Agreements and the profitability of the Manager and the Subadviser and their affiliates from their association with the Fund. The Board reviewed information from an independent data service about the rates of compensation paid to investment advisers, and overall expense ratios, for funds comparable in size, character and
investment strategy to the Fund. The Board noted that the fee rate paid by the Fund to the Manager was below the median compensation paid by comparable funds. The Board also considered that the Fund fee structure provides for a reduction of payments resulting from economies of scale. The Board also considered the contractual limits on Fund expenses undertaken by the Manager. The Board also evaluated the aggregate amount and structure of fees paid by the Manager to the Subadviser. In concluding that the direct and indirect benefits accruing to the Manager, the Subadviser and their affiliates by virtue of their relationship to the Fund were reasonable in comparison with the costs of the provision of investment advisory services and the benefits accruing to the Fund, the Board reviewed specific data as to the Manager's and the Subadviser's profit or loss on the Fund for the recent period. With respect to profitability, the Manager and the Subadviser discussed with the Board the allocation methodologies for intercompany revenues and expenses (not including the costs of distributing shares or providing shareholder services) in order to approximate their respective profits from the Management or Subadvisory fees. The Board understood that neither the Manager nor the Subadviser use these profitability analyses in the management of their businesses other than in connection with the approval or continuation of management and advisory agreements, at least in part because they exclude significant costs and include certain revenues that judicial interpretations have required in the context of Board approval of mutual fund advisory agreements. These matters were also considered at the meeting of the Independent Directors.
PIM's Fixed Income Group includes the following sector teams which may contribute towards security selection in addition to the sector team described in the Prospectus (assets under management are as of December 31, 2001):
CORPORATES
ASSETS UNDER MANAGEMENT: $42 billion.
TEAM LEADER: Steven Kellner, CFA. GENERAL INVESTMENT EXPERIENCE: 16 years.
PORTFOLIO MANAGERS: 7. AVERAGE GENERAL INVESTMENT EXPERIENCE: 12 years, which
includes team members with significant mutual fund experience.
SECTOR: U.S. investment-grade corporate securities.
INVESTMENT STRATEGY: Focus is on identifying spread, credit quality and
liquidity trends to capitalize on changing opportunities in the market.
Ultimately, they seek the highest expected return with the least risk.
GLOBAL BOND & EMERGING MARKETS
ASSETS UNDER MANAGEMENT: $3 billion.
TEAM LEADERS: David Bessey and Steven Koomar. GENERAL INVESTMENT EXPERIENCE: 12
years and 15 years, respectively.
PORTFOLIO MANAGERS: 5. AVERAGE GENERAL INVESTMENT EXPERIENCE: 9 years, which
includes team members with significant mutual fund experience.
SECTOR: Government and corporate securities of foreign issuers.
INVESTMENT STRATEGY: Focus is on higher quality sovereign debt and currency risk
and on high-grade and high yield foreign corporate and emerging market issues.
MONEY MARKETS
ASSETS UNDER MANAGEMENT: $52 billion.
TEAM LEADER: Joseph Tully. GENERAL INVESTMENT EXPERIENCE: 18 years.
PORTFOLIO MANAGERS: 8. AVERAGE GENERAL INVESTMENT EXPERIENCE: 12 years.
SECTOR: High-quality short-term securities, including both taxable and
tax-exempt instruments.
INVESTMENT STRATEGY: Focus is on safety of principal, liquidity and controlled
risk.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics. In addition, the Manager, Subadviser and Distributor have each adopted a Code of Ethics (the Codes). The Codes permit personnel subject to the Codes to invest in securities, including securities that may be purchased or held by the Fund. However, the protective provisions of the Codes prohibit certain investments and limit such personnel from making investments during periods when the Fund is making such investments. The Codes are on public file with, and are available from, the Commission.
(b) PRINCIPAL UNDERWRITER, DISTRIBUTOR AND RULE 12b-1 PLANS
Prudential Investment Management Services LLC (PIMS or the Distributor), Three Gateway Center, 14th Floor, Newark, New Jersey 07102-4077, acts as the distributor of the shares of the Fund. The Distributor is a subsidiary of Prudential. See "How the Fund is Managed--Distributor" in the Prospectus.
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 pursuant to Rule 12b-1 under the Investment Company Act and a distribution agreement (the Distribution Agreement), the Distributor incurs the expenses of distributing the Fund's Class A, Class B and Class C shares. The Distributor also incurs the expenses of distributing the Fund's Class Z shares under the Distribution Agreement, none of which are reimbursed by or paid for by the Fund. See "How the Fund is Managed--Distributor" in the Prospectus.
The expenses incurred under the Plans include commissions and account servicing fees paid to or on account of brokers or financial institutions which have entered into agreements with the Distributor, advertising expenses, the cost of printing and mailing prospectuses to potential investors and indirect and overhead costs of the Distributor associated with the sale of Fund shares, including lease, utility communications and sales promotion expenses.
Under the Plans, the Fund is obligated to pay distribution and/or service fees to the Distributor as compensation for its distribution and services activities, not as reimbursement for specific expenses incurred. If the Distributor's expenses exceed its distribution and service fees, the Fund will not be obligated to pay any additional expenses. If the Distributor's expenses are less than such distribution and service fees, it will retain its full fees and realize a profit.
The distribution and/or service fees may also be used by the Distributor to compensate on a continuing basis brokers in consideration for the distribution, marketing, administrative and other services and activities provided by brokers with respect to the promotion of the sale of the Fund's shares and the maintenance of related shareholder accounts.
CLASS A PLAN. Under the Class A Plan, the Fund may pay the Distributor for
its distribution-related activities with respect to Class A shares at an annual
rate of up to .30 of 1% of the average daily net assets of the Class A shares.
The Class A Plan provides that (1) up to .25 of 1% of the average daily net
assets of the Class A shares may be used to pay for personal service and/or the
maintenance of shareholder accounts (service fee) and (2) total distribution
fees (including the service fee of .25 of 1%) may not exceed .30 of 1%. The
Distributor has contractually agreed to limit its distribution and service
(12b-1) related fees payable under the Class A Plan to .25 of 1% of the average
daily net assets of the Class A shares for the fiscal year ending February 28,
2003. Fee waivers will increase the Fund's total return.
For the fiscal year ended February 28, 2002, the Distributor received payments of $2,386,992 under the Class A Plan and spent approximately $1,909,099 in distributing the Fund's Class A shares. The amount was primarily expended for payments of account servicing fees to financial advisers and other persons who sell Class A shares. For the same period, the Distributor also received approximately $349,100 in initial sales charges attributable to Class A shares.
CLASS B AND CLASS C PLANS. Under the Class B and Class C Plans, the Fund pays the Distributor for its distribution-related activities with respect to Class B and Class C shares at an annual rate of up to 1% of the average daily net assets of each of the Class B and Class C shares. The Class B Plan provides that (1) up to .25 of 1% of the average daily net assets of the Class B shares shall be paid as a service fee and (2) up to .75 of 1% (not including the service fee) of the average daily net assets of the Class B shares up to $3 billion, .55 of 1% of the next $1 billion of such assets and .25 of 1% of such assets in excess of $4 billion (asset-based sales charge), shall be paid for distribution-related expenses with respect to the Class B shares. The Class C Plan provides that (1) up to .25 of 1% of the average daily net assets of the Class C shares shall be paid as a service fee for providing personal service and/or maintaining shareholder accounts and (2) up to .75 of 1% of the average daily net assets of the Class C shares (asset-based sales charge) shall be paid for distribution-related expenses with respect to Class C shares. The service fee (.25 of 1% of average daily net assets) is used to pay for personal service and/or the maintenance of shareholder accounts. The Distributor also receives contingent deferred sales charges from certain redeeming shareholders and, with respect to Class C shares, initial sales charges. The Distributor has contractually agreed to limit its distribution and service (12b-1) related fees payable under the Class B and Class C plans to .825 of 1% and .75 of 1%, of the average daily net assets of the Class B and Class C shares, respectively, for the fiscal year ending February 28, 2003. Fee waivers will increase the Fund's total return.
CLASS B PLAN. For the fiscal year ended February 28, 2002, the Distributor
received $1,107,459 from the Fund under the Class B Plan and collectively spent
approximately $2,200,276 in distributing the Class B shares of the Fund. It is
estimated that of the latter amount, approximately 0.2% ($5,028) was spent on
printing and mailing of prospectuses to other than current shareholders, 49.7%
($1,093,845) was spent on compensation to Pruco Securities Corporation, an
affiliated broker-dealer, (Pruco) for commissions to its representatives and
other expenses, including an allocation on account of overhead and other branch
office distribution-related expenses incurred by it for distribution of Fund
shares; and 50.1% ($1,101,403) on the aggregate of (i) payment of commissions
and account servicing fees to financial advisers (22.8% or $500,074), and
(ii) an allocation on account of overhead and other branch office
distribution-related expenses (27.3% or $601,329). The term "overhead and other
branch office distribution-related expenses" represents (a) the expenses of
operating Prudential Securities' and Pruco's branch offices in connection with
the sale of Fund shares, including lease costs, the salaries and employee
benefits of operations and sales support personnel, utility costs,
communications costs and the costs of stationery and supplies, (b) the costs of
client sales seminars, (c) expenses of mutual fund sales coordinators to promote
the sale of Fund shares and (d) other incidental expenses relating to branch
promotion of Fund sales.
The Distributor also receives the proceeds of contingent deferred sales charges paid by holders of Class B shares upon certain redemptions of Class B shares. See "How to Buy, Sell and Exchange Shares of the Fund--How to Sell Your Shares--Contingent Deferred Sales Charge (CDSC)" in the Prospectus. For the fiscal year ended February 28, 2002, the Distributor received approximately $233,900 in contingent deferred sales charges attributable to the Class B shares.
CLASS C PLAN. For the fiscal year ended February 28, 2002, the Distributor received $100,904 from the Fund under the Class C Plan and spent approximately $188,625 in distributing the Fund's Class C shares. It is estimated that of the latter amount approximately 0.1% ($316) was spent on printing and mailing of prospectuses to other than current shareholders; 4.4% ($8,255) on compensation to Pruco for commissions to its representatives and other expenses, including an allocation on account of overhead and other branch office distribution-related expenses, incurred by it for distribution of Fund shares; and 95.5% ($180,054) on the aggregate of (i) payments of commission and account servicing fees to financial advisors (58.1% or $109,665) and (ii) an allocation of overhead and other branch office distribution-related expenses (37.4% or $70,389).
The Distributor also receives an initial sales charge and the proceeds of contingent deferred sales charges paid by holders of Class C shares upon certain redemptions of Class C shares. For the fiscal year ended February 28, 2002, the Distributor received approximately $13,700 in contingent deferred sales charges attributable to Class C shares. For the fiscal year ended February 28, 2002, the Distributor also received approximately $82,200 in initial sales charges with respect to Class C shares.
Distribution expenses attributable to the sale of Class A, Class B and Class C shares of the Fund are allocated to each such class based upon the ratio of sales of each such class to the sales of Class A, Class B and Class C shares of the Fund other than expenses allocable to a particular class. The distribution fee and sales charge of one class will not be used to subsidize the sale of another class.
The Plans continue in effect from year to year, provided that each such continuance is approved at least annually by a vote of the Board of Directors, including a majority vote of the directors who are not interested persons of the Fund and have no direct or indirect financial interest in the Class A, B or C Plans or in any agreement related to the Plans (Rule 12b-1 Directors), cast in person at a meeting called for the purpose of voting on such continuance. 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 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 (by both Class A and Class B shareholders, voting separately, in the case of material amendments to the Class A Plan), and all material amendments are required to be approved by the Board of Directors in the manner described above. Each Plan will automatically terminate in the event of its assignment. The Fund will not be contractually obligated to pay expenses incurred under any Plan 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 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 the Rule 12b-1 Directors shall be committed to the Rule 12b-1 Directors.
Pursuant to the Distribution Agreement, the Fund has agreed to indemnify the Distributor to the extent permitted by applicable law against certain liabilities under federal securities law.
FEE WAIVERS/SUBSIDIES
PI may from time to time waive all or a portion of its management fee and subsidize all or a portion of the operating expenses of the Fund. In addition, the Distributor has contractually agreed to waive a portion of its distribution fees for Class A, B, and C shares, as described above. Fee waivers and subsidies will increase the Fund's total return.
NASD MAXIMUM SALES CHARGE RULE
Pursuant to rules of the NASD, the Distributor is required to limit aggregate initial sales charges, deferred sales charges and asset-based sales charges to 6.25% of total gross sales of each class of shares. Interest charges on unreimbursed distribution expenses equal to the prime rate plus one percent per annum may be added to the 6.25% limitation. Sales from the reimbursement of dividends and distributions are not included in the calculation of the 6.25% limitation. The annual asset-based sales charge on shares of the Fund may not exceed .75 of 1% per class. The 6.25% limitation applies to each class of the Fund rather than on a per shareholder basis. If aggregate sales charges were to exceed 6.25% of total gross sales of any class, all sales charges on shares of that class would be suspended.
(c) OTHER SERVICE PROVIDERS
State Street Bank and Trust Company, One Heritage Drive, North Quincy, Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and cash and, in that capacity, maintains certain financial and accounting books and records pursuant to an agreement with the Fund. Subcustodians provide custodial services for the Fund's foreign assets held outside the United States.
Prudential Mutual Fund Services LLC (PMFS), 194 Wood Avenue South, Iselin, New Jersey 08830, serves as the transfer and dividend disbursing agent of the Fund. PMFS is an affiliate of PI. PMFS provides customary transfer agency services to the Fund, including the handling of shareholder communications, the processing of shareholder transactions, the maintenance of shareholder account records, the payment of dividends and distributions and related functions. For these services, PMFS receives an annual fee of $10.00 per shareholder account and a new account set-up fee of $2.00 for each manually established 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.
For the fiscal year ended February 28, 2002, the Fund incurred expenses of approximately $1,585,600 for the services of PMFS.
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York 10036, serves as the Fund's independent accountants and in that capacity audits the Fund's annual financial statements.
BROKERAGE ALLOCATION AND OTHER PRACTICES
The Manager is responsible for decisions to buy and sell securities, futures contracts and options on such 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. For purposes of this section, the term "Manager" includes the investment adviser. Broker-dealers may receive brokerage commissions on Fund portfolio transactions, including options, futures and options on futures transactions and the purchase and sale of underlying securities upon the exercise of options. Orders may be directed to any broker or futures commission merchant including, to the extent and in the manner permitted by applicable law, Prudential Securities and its affiliates or one of the investment adviser's affiliates (an affiliated broker).
In the U.S. Government securities market, securities 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 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 its affiliates in any transaction in which Prudential Securities or its affiliates act as principal. Thus, it will not deal in U.S. Government securities with Prudential Securities or its affiliates acting as market maker, and it will not execute a negotiated trade with Prudential or its affiliates if execution involves an affiliated broker acting as principal with respect to any part of the Fund's order. The Fund will not deal with Prudential Securities or an affiliated broker in any transaction in which Prudential Securities or an affiliated broker acts as Principal. Thus, it would not deal in U.S. Government Securities with Prudential Securities or an affiliated broker acting as market maker.
Portfolio securities may not be purchased from any underwriting or selling syndicate of which Prudential Securities or its affiliates, during the existence of the syndicate, is a principal underwriter (as defined in the Investment Company Act), except in accordance with rules of the Commission. 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's overriding objective is to obtain the best possible combination of price and efficient execution. The Manager seeks to offer each transaction at a price and commission, if any, that provides the most favorable total cost or proceeds reasonably attainable in the circumstances. While the Manager generally seeks reasonably competitive spreads or commissions, the Fund will not necessarily be paying the lowest spread or commission available. Within the framework of this policy, the Manager 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 or futures commission merchant in the light of generally prevailing rates. The Manager's policy is to pay higher commissions to brokers and futures commission merchants, other than Prudential Securities, for particular transactions than might be charged if a different broker had been selected, on occasions when, in the Manager's opinion, this policy furthers the objective of obtaining best price and execution. In addition, the Manager is authorized to pay higher commissions on brokerage transactions for the Fund to brokers and futures commission merchants other than Prudential Securities in order to secure research and investment services described above, subject to review by the Fund's Board of Directors from time to time as to the extent and continuation of this practice. The allocation of orders among brokers and futures commission merchants and the commission rates paid are reviewed periodically by the Fund's Board of Directors.
Subject to the above considerations, an affiliated broker may act as a
broker or futures commission merchant for the Fund. In order for an affiliated
broker to effect any portfolio transactions for the Fund, the commissions, fees
or other remuneration received by an affiliated broker must be reasonable and
fair compared to the commissions, fees or other remuneration paid to other firms
in connection with comparable transactions involving similar securities or
futures contracts being purchased or sold on an exchange or board of trade
during a comparable period of time. This standard would allow the affiliated
broker to receive no more than the remuneration which would be expected to be
received by an unaffiliated firm in a commensurate arms-length transaction.
Furthermore, the Board of Directors of the Fund, including a majority of the
Independent Directors has adopted procedures which are reasonably designed to
provide that any commissions, fees or other remuneration paid to the affiliated
broker are consistent with the foregoing standard. In accordance with
Section 11(a) of the Securities Exchange Act of 1934, Prudential Securities may
not retain compensation for effecting transactions on a national securities
exchange for the Fund unless the Fund has expressly authorized the retention of
such compensation. Prudential Securities must furnish to the Fund at least
annually a statement setting forth
the total amount of all compensation retained by Prudential Securities from transactions effected for the Fund during the applicable period. Brokerage and futures transactions with an affiliated broker are also subject to such fiduciary standards as may be imposed upon such an affiliated broker by applicable law.
For the fiscal years ended February 28, 2002, February 28, 2001 and February 29, 2000, the Fund paid no brokerage commissions to any of the Fund's affiliates including Prudential Securities.
The Fund is required to disclose its holdings of securities of its regular brokers and dealers (as defined under Rule 10b-1 of the Investment Company Act) and their parents at February 28, 2002. As of February 28, 2002, the Fund did not hold any securities of any of its regular brokers and dealers.
CAPITAL SHARES, OTHER SECURITIES AND ORGANIZATION
The Fund is authorized to issue 2 billion shares of common stock, $.01 par
value per share, divided into four classes, designated Class A, Class B,
Class C and Class Z common stock. Of the authorized shares of common stock of
the Fund, 500 million shares consist of Class A common stock, 500 million shares
consist of Class B common stock, 500 million shares consist of Class C common
stock and 500 million shares consist of Class Z common stock. Each class of
common stock of the Fund represents an interest in the same assets of the Fund
and is identical in all respects except that (1) each class is subject to
different sales charges and distribution and/or service fees (except Class Z
shares, which are not subject to any sales charges and distribution and/or
service fees), which may affect performance, (2) each class has exclusive voting
rights on any matter submitted to shareholders that relates solely to its
distribution arrangement and has separate voting rights on any matter submitted
to shareholders in which the interests of one class differ from the interests of
any other class, (3) each class has a different exchange privilege, and
(4) only Class B shares have a conversion feature. Class Z shares are offered
exclusively for sale to a limited group of investors. In accordance with the
Fund's Articles of Incorporation, the Board of Directors may authorize the
creation of additional series of common stock and classes within such series,
with such preferences, privileges, limitations and voting and dividend rights as
the Board may determine.
The Board of Directors may increase or decrease the number of authorized shares without the approval of shareholders. Shares of the Fund, when issued, are fully paid, nonassessable, fully transferable and redeemable at the option of the holder. Shares are also redeemable at the option of the Fund under certain circumstances. 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 (with the exception of Class Z shares, which are not subject to any distribution and/or service fees). 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 and to Class Z shareholders, whose shares are not subject to any distribution and/or service fees. The Fund's shares do not have cumulative voting rights for the election of Directors.
The 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 1940 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.
PURCHASE, REDEMPTION AND PRICING OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined net asset value (NAV) per share plus a sales charge which, at the election of the investor, may be imposed either (1) at the time of purchase (Class A shares or Class C shares), or (2) on a deferred basis (Class B or Class C shares). Class Z shares of the Fund are offered to a limited group of investors at net asset value without any sales charges. See "How to Buy, Sell and Exchange Shares of the Fund--How to Buy Shares" in the Prospectus.
Each class represents an interest in the same assets of the Fund and is identical in all respects except that (1) each class is subject to different sales charges and distribution and/or service fees (except for Class Z shares which are not subject to any sales charge or distribution and/or service fees) which may affect performance, (2) each class has exclusive voting rights with respect to any matter submitted to shareholders that relates solely to its arrangement and has separate voting rights on any matter submitted to shareholders in which the interests of one class differ from the interests of any other class, (3) each class has a different exchange privilege, (4) only Class B shares have a conversion feature and (5) Class Z shares are offered exclusively for sale to a limited group of investors. See "Investment Advisory and Other Services--Principal Underwriter, Distributor and Rule 12b-1 Plans" above and "Shareholder Investment Account--Exchange Privilege" below.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you must complete an application and telephone PMFS at (800) 225-1852 (toll-free) to receive an account number. The following information will be requested: your name, address, tax identification number, fund and class election, dividend distribution election, amount being wired and wiring bank. Instructions should then be given by you to your bank to transfer funds by wire to State Street Bank and Trust Company (State Street), Boston, Massachusetts, Custody and Shareholder Services Division, Attention: Prudential Government Income Fund, Inc., specifying on the wire the account number assigned by PMFS and your name and identifying the class in which you are investing (Class A, Class B, Class C or Class Z shares).
If you arrange for receipt by State Street of federal funds prior to the calculation of NAV (once each business day at the close of regular trading on the New York Stock Exchange (NYSE), usually 4:00 p.m. New York time), you may purchase shares of the Fund on that day. In the event that regular trading on the NYSE closes before 4:00 p.m. New York time, you will receive the following day's NAV if your order to purchase is received after the close of regular trading on the NYSE.
In making a subsequent purchase by wire, you should wire State Street directly and should be sure that the wire specifies Prudential Government Income Fund, Inc. Class A, Class B, Class C or Class Z shares and your name and individual account number. It is not necessary to call PMFS to make subsequent purchase orders using federal funds.
ISSUANCE OF FUND SHARES FOR SECURITIES
Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to (1) reorganizations, (2) statutory mergers, or
(3) other acquisitions of portfolio securities that: (a) meet the investment
objectives and policies of the Fund, (b) are liquid and not subject to
restrictions on resale, (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange or
market, and (d) are approved by the Fund's investment adviser.
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the Distributor, Class A shares are sold at a maximum sales charge of 4%, Class C* shares are sold with a 1% sales charge, and Class B* and Class Z shares are sold at NAV. Using the Fund's NAV at February 28, 2002, the maximum offering prices of the Fund's shares are as follows:
CLASS A
Net asset value and redemption price per Class A share.... $9.09
Maximum sales charge (4% of offering price)............... .38
-----
Offering price to public.................................. $9.47
=====
CLASS B
Net asset value, offering price and redemption price per
Class B share*.......................................... $9.09
=====
CLASS C
Net asset value and redemption price per Class C share*... $9.09
Sales Charge (1% of offering price)....................... .09
-----
Offering price to public.................................. $9.18
=====
CLASS Z
Net asset value, offering price and redemption price per
Class Z share........................................... $9.07
=====
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SELECTING A PURCHASE ALTERNATIVE
If you intend to hold your investment in the Fund for less than 4 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 investments for more than 4 years, but less than 5 years, you may consider purchasing Class A shares or Class C shares because: (i) the maximum 4% initial sales charge plus the cumulative annual distribution-related fee on Class A shares; and (ii) the maximum 1% initial sales charge plus the cumulative annual distribution-related fee on Class C shares would be lower than the contingent-deferred sales charge plus the cumulative annual distribution-related fee on Class B shares.
If you intend to hold your investment for longer than 5 years, you should consider purchasing Class A shares over either Class B or Class C shares. This is because the maximum sales charge plus the cumulative annual distribution- related fee on Class A shares would be less than those of the Class B and Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more advantageous for you to purchase Class A shares over either Class B or Class C shares regardless of how long you intend to hold your investment. However, unlike Class B shares, you would not have all of your money invested initially because the sales charge on Class A shares is deducted at the time of purchase.
If you do not qualify for a reduced sales charge of Class A shares and you purchase Class B or Class C shares, you would have to hold your investment for more than 5 years for the higher cumulative annual distribution-related fee on those shares plus, in the case of Class C shares, the 1% initial sales charge to exceed the initial sales charge plus cumulative annual distribution-related fee 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 NAV, the effect of the return on the investment over this period of time or redemptions when the CDSC is applicable.
REDUCTION AND WAIVER OF INITIAL SALES CHARGE--CLASS A SHARES
BENEFIT PLANS. Certain group retirement and savings plans may purchase
Class A shares without the initial sales charge, if they meet the required
minimum for amount of assets, average account balance or number of eligible
employees. For more information about these requirements, call Prudential at
(800) 353-2847.
OTHER WAIVERS. In addition, Class A shares may be purchased at NAV, through the Distributor or the Transfer Agent, by:
-officers of the Prudential mutual funds (including the Fund)
-employees of the Distributor, Prudential Securities, PI and their subsidiaries and members of the families of such persons who maintain an "employee related" account at Prudential Securities or the Transfer Agent
-employees of investment advisers of the Prudential mutual funds provided that purchases at NAV are permitted by such person's employer
-Prudential, employees and special agents of Prudential and its subsidiaries and all persons who have retired directly from active service with Prudential or one of its subsidiaries
-members of the Board of Directors of Prudential
-real estate brokers, agents and employees of real estate brokerage companies affiliated with The Prudential Real Estate Affiliates who maintain an account at Prudential Securities, Pruco or with the Transfer Agent
-registered representatives and employees of brokers who have entered into a selected dealer agreement with the Distributor provided that purchases at NAV are permitted by such person's employer
-investors who have a business relationship with a financial adviser who
joined Prudential Securities from another investment firm, provided that
(1) the purchase is made within 180 days of the commencement of the
financial adviser's employment at Prudential Securities, or within one year
in the case of Benefit Plans, (2) the purchase is
made with proceeds of a redemption of shares of any open-end non-money market fund sponsored by the financial adviser's previous employer (other than a fund which imposes a distribution or service fee of .25 of 1% or less) and (3) the financial adviser served as the client's broker on the previous purchase
-investors in Individual Retirement Accounts, provided the purchase is made with the proceeds of a tax-free rollover of assets from a Benefit Plan for which Prudential provides administrative or recordkeeping services and further provided that such purchase is made within 60 days of receipt of the Benefit Plan distribution
-orders placed by broker-dealers, investment advisers or financial planners who have entered into an agreement with the Distributor, who place trades for their own accounts for the accounts of their clients and who charge a management consulting or other fee for their services (for example, mutual fund "wrap" or asset allocation programs)
-orders placed by clients of broker-dealers, investment advisers or financial planners who place trades for customer accounts if the accounts are linked to the master account of such broker-dealer, investment adviser or financial planner and the broker-dealer, investment adviser or financial planner charges its clients a separate fee for its services (for example, mutual fund "supermarket" programs).
Broker-dealers, investment advisers or financial planners sponsoring fee-based programs (such as mutual fund "wrap" or asset allocation programs and mutual fund "supermarket" programs) may offer their clients more than one class of shares in the Fund in connection with different pricing options for their programs. Investors should consider carefully any separate transaction and other fees charged by these programs in connection with investing in each available share class before selecting a share class.
For an investor to obtain any reduction or waiver of the initial sales charges, at the time of the sale either the Transfer Agent must be notified directly by the investor or the Distributor must be notified by the broker facilitating the transaction that the sale qualifies for the reduced or waived sales charge. The reduction or waiver will be granted subject to confirmation of your entitlement. No initial sales charge is imposed upon Class A shares acquired upon the reinvestment of dividends and distributions.
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or eligible group of related investors purchases Class A shares of the Fund concurrently with Class A shares of other Prudential Mutual Funds, the purchases may be combined to take advantage of the reduced sales charges applicable to larger purchases. See "How to Buy, Sell and Exchange Shares of the Fund--How to Buy Shares--Step 2: Choose a Share Class--Reducing or Waiving Class A's Initial Sales Charge" in the Prospectus.
An eligible group of related Fund investors includes any combination of the following:
-an individual
-the individual's spouse, their children and their parents
-the individual's and spouse's Individual Retirement Account (IRA)
-any company controlled by the individual (a person, entity or group that holds 25% or more of the outstanding voting securities of a corporation will be deemed to control the corporation, and a partnership will be deemed to be controlled by each of its general partners)
-a trust created by the individual, the beneficiaries of which are the individual, his or her spouse, parents or children
-a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account created by the individual or the individual's spouse
-one or more employee benefit plans of a company controlled by an individual.
In addition, an eligible group of related Fund investors may include an employer (or group of related employers) and one or more qualified retirement plans of such employer or employers (an employer controlling, controlled by or under common control with another employer is deemed related to that employer).
The Transfer Agent, Distributor or your broker must be notified at the time of purchase that the investor is entitled to a reduced sales charge. The reduced sales charge will be granted subject to confirmation of the investors holdings. The Combined Purchase and Cumulative Purchase Privilege does not apply to individual participants in any retirement or group plans.
LETTERS OF INTENT. Reduced sales charges are also available to investors (or an eligible group of related investors), who enter into a written Letter of Intent providing for the investment, within a thirteen-month period, of a specific dollar amount in the Fund and other Prudential mutual funds (Letter of Intent). Retirement and group plans no longer qualify to purchase Class A shares at NAV by entering into a Letter of Intent.
For purposes of the Letter of Intent, the value of all shares of the Fund and shares of other Prudential mutual funds (excluding money market funds other than those acquired pursuant to the exchange privilege) which were previously purchased and are still owned are also included in determining the applicable reduction. However, the value of shares held directly with the Transfer Agent or its affiliates, and through your broker, will not be aggregated to determine the reduced sales charge.
A Letter of Intent permits an investor to establish a total investment goal to be achieved by any number of investments over a thirteen-month period. Each investment made during the period will receive the reduced sales charge applicable to the amount represented by the goal, as if it were a single investment. Escrowed Class A shares totaling 5% of the dollar amount of the Letter of Intent will be held by the Transfer Agent in the name of the investor. The effective date of a Letter of Intent may be back-dated up to 90 days, in order that any investments made during this 90-day period, valued at the investor's cost, can be applied to the fulfillment of the Letter of Intent goal.
The Letter of Intent does not obligate the investor to purchase, nor the Fund to sell, the indicated amount. In the event the Letter of Intent goal is not satisfied within the thirteen-month period, the investor is required to pay the difference between the sales charge otherwise applicable to the purchases made during this period and sales charges actually paid. Such payment may be made directly to the Distributor or, if not paid, the Distributor will liquidate sufficient escrowed shares to obtain such difference. Investors electing to purchase Class A shares of the Fund pursuant to a Letter of Intent should carefully read such Letter of Intent.
The Distributor must be notified at the time of purchase that the investor is entitled to a reduced sales charge. The reduced sales charge will be granted subject to confirmation of the investor's holdings. Letters of Intent are not available to individual participants in any retirement or group plans.
CLASS B SHARES
The offering price of Class B shares for investors choosing one of the deferred sales charge alternatives is the NAV next determined following receipt of an order in proper form by the Transfer Agent, your broker or the Distributor plus in the case of Class C shares, an initial sales charge of 1%. Redemptions of Class B shares may be subject to a CDSC. See "Contingent Deferred Sales Charge" below. In connection with these waivers, the Transfer Agent will require you to submit the supporting documentation set forth below.
The Distributor will pay, from its own resources, sales commissions of up to 5% of the purchase price of Class B shares to brokers, financial advisers and other persons who sell Class B shares at the time of sale. This facilitates the ability of the Fund to sell the Class B shares without an initial sales charge being deducted at the time of purchase. The Distributor anticipates that it will recoup its advancement of sales commissions from the combination of the CDSC and the distribution fee.
CLASS C SHARES
The offering price of Class C shares is the next determined NAV plus a 1% sales charge. In connection with the sale of Class C shares, the Distributor will pay, from its own resources, brokers, financial advisers and other persons which distribute Class C shares a sales commission of up to 2% of the purchase price at the time of the sale.
WAIVER OF INITIAL SALES CHARGE--CLASS C SHARES
BENEFIT PLANS. Certain group retirement plans may purchase Class C shares without the initial sales charge. For more information, call Prudential at (800) 353-2847.
INVESTMENTS OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT
COMPANIES. Investors may purchase Class C shares at NAV, without the initial sales charge, with the proceeds from the redemption of shares of any unaffiliated registered investment company which were not held through an account with any Prudential affiliate. Such purchases must be made within 60 days of the redemption. Investors eligible for this waiver include: (i) investors purchasing shares through an account at Prudential Securities; (ii) investors purchasing shares through a COMMAND Account or an Investor Account with Prusec and (iii) investors purchasing shares through other brokers. This waiver is not available to investors who purchase shares directly from the Transfer Agent. You must notify your broker if you are entitled to this waiver and provide it with such supporting documents as it may deem appropriate.
CLASS Z SHARES
BENEFIT PLANS. Certain group retirement plans may purchase Class Z shares if they meet the required minimum for amount of assets, average account balance or number of eligible employees. For more information about these requirements, call Prudential at (800) 353-2847.
MUTUAL FUND PROGRAMS. Class Z shares also can be purchased by participants in any fee-based program or trust program sponsored by Prudential or an affiliate that includes mutual funds as investment options and the Fund as an available option. Class Z shares also can be purchased by investors in certain programs sponsored by broker-dealers, investment advisers and financial planners who have agreements with Prudential Investments Advisory Group relating to:
-mutual fund "wrap" or asset allocation programs, where the sponsor places Fund trades, links its clients' accounts to a master account in the sponsor's name and charges its clients a management, consulting or other fee for its services
-mutual fund "supermarket" programs where the sponsor links its clients' accounts to a master account in the sponsor's name and the sponsor charges a fee for its services.
Broker-dealers, investment advisers or financial planners sponsoring these mutual fund programs may offer their clients more than one class of shares in the Fund in connection with different pricing options for their programs. Investors should consider carefully any separate transaction and other fees charged by these programs in connection with investing in each available share class before selecting a share class.
OTHER TYPES OF INVESTORS. Class Z shares also are available for purchase by the following categories of investors:
-certain participants in the MEDLEY Program (group variable annuity contracts) sponsored by Prudential for whom Class Z shares of the Prudential mutual funds are an available investment option
-current and former Directors/Trustees of the Prudential mutual funds
(including the Fund)
-Prudential, with an investment of $10 million or more.
In connection with the sale of Class Z shares, the Manager, the Distributor or one of their affiliates may pay dealers, financial advisers and other persons which distribute shares a finders' fee from its own resources based on a percentage of the net asset value of shares sold by such persons.
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through Rights of Accumulation, under which an investor or an eligible group of related investors as described above under "Combined Purchase and Cumulative Purchase Privilege," may aggregate the value of their existing holdings of shares of the Fund and shares of other Prudential mutual funds (excluding money market funds other than those acquired pursuant to the exchange privilege) to determine the reduced sales charge. Rights of Accumulation may be applied across the classes of the Prudential mutual funds. The value of shares held directly with the Transfer Agent and through your broker will not be aggregated to determine the reduced sales charge. The value of existing holdings for purposes of determining the reduced sales charge is calculated using the maximum offering price (net asset value plus maximum sales charge) as of the previous business day. See "Risk/Return Summary--Evaluating Performance" in the Prospectus.
The Distributor or the Transfer Agent 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. Rights of accumulation are not available to individual participants in any retirement or group plans.
SALE OF SHARES
You can redeem your shares at any time for cash at the NAV next determined after the redemption request is received in proper form (in accordance with procedures established by the Transfer Agent in connection with investors' accounts) by the Transfer Agent, the Distributor or your broker. In certain cases, however, redemption proceeds will be reduced by the amount of any applicable CDSC, as described below. See "Contingent Deferred Sales Charge" below. If you are redeeming your shares through a broker, your broker must receive your sell order before the Fund computes its NAV for that day (at the close of regular trading on the NYSE, usually 4:00 p.m. New York time) in order to receive that day's NAV. In the event that regular trading on the NYSE closes before 4:00 p.m. New York time, you will receive the following day's NAV if your order to sell is received after the close of regular trading on the NYSE. Your broker will be responsible for furnishing all necessary documentation to the Distributor and may charge you for its services in connection with redeeming shares of the Fund.
If you hold shares of the Fund through Prudential Securities, you must redeem your shares through Prudential Securities. Please contact your Prudential Securities financial adviser.
In order to redeem shares, a written request for redemption signed by you exactly as the account is registered is required. If you hold certificates, the certificates must be received by the Transfer Agent, the Distributor or your broker in order for the redemption request to be processed. If redemption is requested by a corporation, partnership, trust or fiduciary, written evidence of authority acceptable to the Transfer Agent must be submitted before such request will be accepted. All correspondence and documents concerning redemptions should be sent to the Fund in care of its Transfer Agent, Prudential Mutual Fund Services LLC, Attention: Redemption Services, P.O. Box 8149, Philadelphia, PA 19101, to the Distributor, or to your broker.
SIGNATURE GUARANTEE. If the proceeds of the redemption (1) exceed $100,000,
(2) are to be paid to a person other than the record owner, (3) are to be sent
to an address other than the address on the Transfer Agent's records, or (4) are
to be paid to a corporation, partnership, trust or fiduciary and your shares are
held directly with the Transfer Agent, the signature(s) on the redemption
request or stock power must be signature guaranteed by an "eligible guarantor
institution." An "eligible guarantor institution" includes any bank,
broker-dealer, savings association or credit union. The Transfer Agent reserves
the right to request additional information from, and make reasonable inquiries
of, any eligible guarantor institution. In the case of redemptions from a
PruArray Plan, if the proceeds of the redemption are invested in another
investment option of the plan in the name of the record holder and at the same
address as reflected in the Transfer Agent's records, a signature guarantee is
not required.
Payment for shares presented for redemption will be made by check within
seven days after receipt by the Transfer Agent, the Distributor or your broker
of the written request, and certificates, if issued, except as indicated below.
If you hold shares through a broker payment for shares presented for redemption
will be credited to your account at your broker, unless you indicate otherwise.
Such payment may be postponed or the right of redemption suspended at times
(1) when the New York Stock Exchange is closed for other than customary weekends
and holidays, (2) when trading on such Exchange is restricted, (3) when an
emergency exists as a result of which disposal by the Fund of securities owned
by it is not reasonably practicable or it is not reasonably practicable for the
Fund fairly to determine the value of its net assets, or (4) during any other
period when the Securities and Exchange Commission (the Commission), by order,
so permits; provided that applicable rules and regulations of the Commission
shall govern as to whether the conditions prescribed in (2), (3) or (4) exist.
Payment for redemption of recently purchased shares will be delayed until the Fund or its Transfer Agent has been advised that the purchase check has been honored, which may take up to 10 calendar days from the time of receipt of the purchase check by the Transfer Agent. Such delay may be avoided by purchasing shares by wire or by certified or cashier's check.
EXPEDITED REDEMPTION PRIVILEGE. By electing the Expedited Redemption Privilege, you may arrange to have redemption proceeds sent to your bank account. The Expedited Redemption Privilege may be used to redeem shares in an amount of $200 or more, except if any account for which an expedited redemption is requested has a net asset value of less than $200, the entire account will be redeemed. Redemption proceeds in the amount of $1,000 or more will be remitted by wire to your bank account at a domestic commercial bank which is a member of the Federal Reserve System. Redemption proceeds of less than $1,000 will be mailed by check to your designated bank account. Any applicable
contingent deferred sales charge will be deducted from the redemption proceeds. Expedited redemption requests may be made by telephone or letter, must be received by the Fund prior to 4:00 p.m. New York time, to receive a redemption amount based on that day's NAV and are subject to the terms and conditions as set forth in the Prospectus regarding redemption of shares. In the event that regular trading on the NYSE closes before 4:00 p.m., you will receive the following day's NAV if your order to sell is received after the close of regular trading on the NYSE. For more information, see "How to Buy, Sell and Exchange Shares of the Fund--Telephone Redemptions or Exchanges" in the Prospectus. The Expedited Redemption Privilege may be modified or terminated at any time without notice. To receive further information, shareholders should contact Prudential Mutual Fund Services LLC at (800) 225-1852.
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 party by a distribution in kind of securities from the investment portfolio of the Fund, in lieu of cash, in conformity with applicable rules of the Commission. Securities will be readily marketable and will be valued in the same manner as in a regular redemption. If your shares are redeemed in kind, you would incur transaction costs in converting the assets into cash. The Fund, however, has elected to be governed by Rule 18f-1 under the Investment Company Act, under which the Fund is obligated to redeem shares solely in cash up to the lesser of $250,000 or 1% of the NAV of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Board of Directors may redeem all of the shares of any shareholder, other than a shareholder which is an IRA or other tax-deferred retirement plan, whose account has an account value of less than $500 due to a redemption. The Fund will give such shareholders 60 days' prior written notice in which to purchase sufficient additional shares to avoid such redemption. No CDSC will be imposed on any such involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously exercised the repurchase privilege, you may reinvest back into your account any portion or all of the proceeds of such redemption in shares of the same Fund at the NAV next determined after the order is received, which must be within 90 days after the date of the redemption. Any CDSC paid in connection with such redemption will be credited (in shares) to your account. (If less than a full repurchase is made, the credit will be on a PRO RATA basis.) You must notify the Transfer Agent, either directly or through the Distributor or your broker, at the time the repurchase privilege is exercised, to adjust your account for the CDSC you previously paid. Thereafter, any redemptions will be subject to the CDSC applicable at the time of the redemption. See "Contingent Deferred Sales Charge" below.
CONTINGENT DEFERRED SALES CHARGE
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 18 months of purchase will be subject to a 1% CDSC. The CDSC will be deducted from the redemption proceeds and reduces 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 18 months, 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 acquired through reinvestment of dividends or distributions are not subject to a CDSC. The amount of any CDSC will be paid to and retained by the Distributor. If you purchased or hold your shares through a broker, third party administrator or other authorized entity that maintains subaccount recordkeeping, any applicable CDSC that you will pay will be calculated and reported to PMFS by such broker, administrator or other authorized entity.
The amount of the CDSC, if any, will vary depending on the number of years from the time of payment for the purchase of shares until the time of redemption of such shares. Solely for purposes of determining the number of years from the time of any payment for the purchase of shares, all payments during a month will be aggregated and deemed to have been made on the last day of the month. The CDSC will be calculated from the first day of the month after the initial purchase, excluding the time shares were held in a money market fund. See "Shareholder Investment Account--Exchange Privilege" below.
The following table sets forth the rate of the CDSC applicable to redemptions of Class B shares:
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
----------------------------------------------------- -------------------------
First................................................ 5.0%
Second............................................... 4.0%
Third................................................ 3.0%
Fourth............................................... 2.0%
Fifth................................................ 1.0%
Sixth................................................ 1.0%
Seventh.............................................. None
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In determining whether a CDSC is applicable to a redemption, the calculation will be made in a manner that results in the lowest possible rate. It will be assumed that the redemption is made first of amounts representing shares acquired pursuant to the reinvestment of dividends and distributions; then of amounts representing the increase in NAV above the total amount of payments for the purchase of Class B shares made during the preceding six years (five years for Class B shares purchased prior to January 22, 1990) and 18 months for Class C shares; 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 CHARGE--CLASS B SHARES. The CDSC will be waived in the case of a redemption following the death or disability of a shareholder or, in the case of a trust account following the death or disability of the grantor. The waiver is available for total or partial redemptions of shares owned by a person, either individually or in joint tenancy at the time of death or initial determination of disability, provided that the shares were purchased prior to death or disability.
The CDSC will also be waived in the case of a total or partial redemption in connection with certain distributions made without penalty under the Internal Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b) custodial account. For more information, call Prudential at (800) 353-2847.
Finally, the CDSC will be waived to the extent that the proceeds from shares redeemed are invested in Prudential mutual funds, The Guaranteed Investment Account, the Guaranteed Insulated Separate Account, or units of The Stable Value Fund.
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain redemptions effected through the Systematic Withdrawal Plan. On an annual basis, up to 12% of the total dollar amount subject to the CDSC may be redeemed without charge. The Transfer Agent will calculate the total amount available for this waiver annually on the anniversary date of your purchase or, for shares purchased prior to March 1, 1997, on March 1 of the current year. The CDSC will be waived (or reduced) on redemptions until this threshold 12% is reached. The Systematic Withdrawal Plan is not available to participants in certain retirement plans. Please contact PMFS for more details.
In addition, the CDSC will be waived on redemptions of shares held by Directors of the Fund.
You must notify the Fund's Transfer Agent either directly or through your broker, at the time of redemption, that you are entitled to waiver of the CDSC and provide the Transfer Agent with such supporting documentation as it may deem appropriate. The waiver will be granted subject to confirmation of your entitlement.
In connection with these waivers, the Transfer Agent will require you to submit the supporting documentation set forth below.
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.
Disability--An individual will be considered A copy of the Social Security Administration
disabled if he or she is unable to engage in award letter or a letter from a physician on
any substantial gainful activity by reason of the physician's letterhead stating that the
any medically determinable physical or mental shareholder (or, in the case of a trust, the
impairment which can be expected to result in grantor (a copy of the trust agreement
death or to be of long-continued and identifying the grantor will be required as
indefinite duration. well)) is permanently disabled. The letter
must also indicate the date of disability.
Distribution from an IRA or 403(b) Custodial A copy of the distribution form from the
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.
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The Transfer Agent reserves the right to request such additional documents as it may deem appropriate.
QUANTITY DISCOUNT--CLASS B SHARES PURCHASED PRIOR TO AUGUST 1, 1994
The CDSC is reduced on redemptions of Class B shares of the Fund purchased prior to August 1, 1994 if immediately after a purchase of such shares, the aggregate cost of all Class B shares of the Fund owned by you in a single account exceeded $500,000. For example, if you purchased $100,000 of Class B shares of the Fund and the following year purchased an additional $450,000 of Class B shares with the result that the aggregate cost of your Class B shares of the Fund following the second purchase was $550,000, the quantity discount would be available for the second purchase of $450,000 but not for the first purchase of $100,000. The quantity discount will be imposed at the following rates depending on whether the aggregate value exceeded $500,000 or $1 million:
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF DOLLARS INVESTED
OR REDEMPTION PROCEEDS
YEAR SINCE PURCHASE ----------------------------------------------
PAYMENT MADE $500,001 TO $1 MILLION OVER $1 MILLION
----------------------------------- ------------------------ ----------------
First.............................. 3.0% 2.0%
Second............................. 2.0% 1.0%
Third.............................. 1.0% 0 %
Fourth and thereafter.............. 0 % 0 %
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You must notify the Fund's Transfer Agent either directly or through Prudential Securities or Prusec, at the time of redemption, that you are entitled to the reduced CDSC. The reduced CDSC will be granted subject to confirmation of your holdings.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES
BENEFIT PLANS. The CDSC will be waived for redemptions by certain group retirement plans for which Prudential or brokers not affiliated with Prudential provide administrative or recordkeeping services. The CDSC also will be waived for certain redemptions by benefit plans sponsored by Prudential and its affiliates. For more information, call Prudential at (800) 353-2847.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly basis approximately seven years after purchase. Conversions will be effected at relative net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought on each purchase of Class B shares, the number of Class B shares eligible to convert to Class A shares (excluding shares acquired through the automatic reinvestment of dividends and other distributions) (the Eligible Shares) will be determined on each conversion date in accordance with the following formula: (i) the ratio of (a) the amounts paid for Class B shares purchased at least 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 purchased and then held in your account. Each time any Eligible Shares in your account convert to Class A shares, all shares or amounts representing Class B shares then in your account that were acquired through the automatic reinvestment of dividends and other distributions will convert to Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B shares in your account on any conversion date are the result of multiple purchases at different net asset values per share, the number of Eligible Shares calculated as described above will generally be either more or less than the number of shares actually purchased approximately 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 (that is, $1,000 divided by $2,100 (47.62%), multiplied by 200 shares equals 95.24 shares). The Manager reserves the right to modify the formula for determining the number of Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class B shares, the per share NAV of the Class A shares may be higher than that of the Class B shares at the time of conversion. Thus, although the aggregate dollar value will be the same, you may receive fewer Class A shares than Class B shares converted.
For purposes of calculating the applicable holding period for conversions, all payments for Class B shares during a month will be deemed to have been made on the last day of the month, or for Class B shares acquired through exchange, or a series of exchanges, on the last day of the month in which the original payment for purchase of such Class B shares was made. For Class B shares previously exchanged for shares of a money market fund, the time period during which such shares were held in the money market fund will be excluded. For example, Class B shares held in a money market fund for one year would not convert to Class A shares until approximately 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 may be subject to the continuing availability of opinions of counsel or rulings of the Internal Revenue Service (1) that the dividends and other distributions paid on Class A, Class B, Class C and Class Z shares will not constitute "preferential dividends" under the Internal Revenue Code and (2) that the conversion of shares does not constitute a taxable event. The conversion of Class B shares into Class A shares may be suspended if such opinions or rulings are no longer available. If conversions are suspended, Class B shares of the Fund will continue to be subject, possibly indefinitely, to their higher annual distribution and service fee.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of 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 the shareholders the following privileges and plans.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are automatically reinvested in full and fractional shares of the Fund at net asset value per share. An investor may direct the Transfer Agent in writing not less than 5 full
business days prior to the payment date to have subsequent dividends and/or distributions sent in cash rather than reinvested. In the case of recently purchased shares for which registration instructions have not been received by the record date, cash payment will be made directly to the broker. Any shareholder who receives dividends or distributions in cash may subsequently reinvest any such dividend or distribution at NAV by returning the check to the Transfer Agent within 30 days after the payment date. Such reinvestment will be made at the NAV next determined after receipt of the check by the Transfer Agent. Shares purchased with reinvested dividends and/or distributions will not be subject to CDSC upon redemption.
EXCHANGE PRIVILEGE
The Fund makes available to its shareholders the privilege of exchanging their shares of the Fund for shares of certain other Prudential mutual funds, including one or more specified money market funds, subject in each case to the minimum investment requirements of such funds. Shares of such other Prudential mutual funds may also be exchanged for shares of the Fund. All exchanges are made on the basis of the relative NAV next determined after receipt of an order in proper form. An exchange will be treated as a redemption and purchase for tax purposes. Shares may be exchanged for shares of another fund only if shares of such fund may legally be sold under applicable state laws. For retirement and group plans having a limited menu of Prudential mutual funds, the exchange privilege is available for those funds eligible for investment in the particular program.
It is contemplated that the Exchange Privilege may be applicable to new mutual funds whose shares may be distributed by the Distributor.
In order to exchange shares by telephone, you must authorize telephone exchanges on your initial application form or by written notice to the Transfer Agent and hold shares in 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 8:00 p.m., New York time. For your protection and to prevent fraudulent exchanges, your telephone call will be recorded and you will be asked to provide your personal identification number. A written confirmation of the exchange transaction will be sent to you. Neither the Fund nor its agents will be liable for any loss, liability or cost which results from acting upon instructions reasonably believed to be genuine under the foregoing procedures. All exchanges will be made on the basis of the relative NAV of the two funds next determined after the request is received in good order.
If you hold shares through Prudential Securities, you must exchange your shares by contacting your Prudential Securities financial adviser.
If you hold certificates, the certificates must be returned in order for the shares to be exchanged.
You may also exchange shares by mail by writing to Prudential Mutual Fund Services LLC, Attention: Exchange Processing, P.O. Box 8157, Philadelphia, PA 19101.
In periods of severe market or economic conditions the telephone exchange of shares may be difficult to implement and you should make exchanges by mail by writing to Prudential Mutual Fund Services LLC at the address noted above.
CLASS A. Shareholders of the Fund may exchange their Class A shares for Class A shares of certain other Prudential mutual funds 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.
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
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets, Inc. Prudential Tax-Free Money Fund, Inc.
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 Special Money Market Fund, Inc., a money market mutual fund. No CDSC will be payable upon such exchange, but a CDSC may be payable upon the redemption of Class B and Class C shares acquired as a result of the exchange. The applicable sales charge will be that imposed by the fund in which shares were initially purchased and the purchase date will be deemed to be the first day of the month after the initial purchase, rather than the date of the exchange.
Class B and Class C shares of the Fund may also be exchanged for shares of Special Money Market Fund, Inc. 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 excluding 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 exchanged first. In measuring the time period shares are held in a money market fund and "tolled" for purposes of calculating the CDSC holding period, exchanges are deemed to have been made on the last day of the month. Thus, if shares are exchanged into the Fund from a money market fund during the month (and are held in the Fund at the end of the month), the entire month will be included in the CDSC holding period. Conversely, if shares are exchanged into a money market fund prior to the last day of the month (and are held in the money market fund on the last day of the month), the entire month will be excluded from the CDSC holding period. For purposes of calculating the seven year holding period applicable to the Class B conversion feature, the time period during which Class B shares were held in a money market fund will be excluded.
At any time after acquiring shares of other funds participating in the Class B or Class C exchange privilege, a shareholder may again exchange those shares (and any reinvested dividends and distributions) for Class B or Class C shares of the Fund, respectively, without subjecting such shares to any CDSC. Shares of any fund participating in the Class B or Class C exchange privilege that were acquired through reinvestment of dividends or distributions may be exchanged for Class B or Class C, respectively, shares of other funds without being subject to any CDSC.
CLASS Z. Class Z shares may be exchanged for Class Z shares of other Prudential mutual funds.
Additional details about the exchange privilege 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 sixty (60) days' notice, and any fund, including the Fund, or Prudential Securities, has the right to reject any exchange application relating to such Fund's shares.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for shareholders who qualify to purchase Class A shares at NAV and for shareholders who qualify to purchase Class Z shares. Under this exchange privilege, amounts representing any Class B and Class C shares that are not subject to a CDSC held in the account of a shareholder who qualifies to purchase Class A shares of any Prudential mutual fund at NAV will be exchanged for Class A shares on a quarterly basis, unless the shareholder elects otherwise. Similarly, shareholders who qualify to purchase Class Z shares will have their Class B and Class C shares which are not subject to a CDSC and their Class A shares exchanged for Class Z shares on a quarterly basis. Eligibility for this exchange privilege will be calculated on the business day prior to the date of the exchange. Amounts representing Class B or Class C shares which are not subject to a CDSC include the following: (1) amounts representing Class B or Class C shares acquired pursuant to the automatic reinvestment of dividends and distributions, (2) amounts representing the increase in the net asset value 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, Pruco or another broker that they are eligible for this special exchange privilege.
Participants in any fee-based program for which the Fund is an available option will have their Class A shares, if any, exchanged for Class Z shares when they elect to have those assets become a part of the fee-based program. Upon leaving the program (whether voluntarily or not), such Class Z shares (and, to the extent provided for in the program, Class Z shares acquired through participation in the program) will be exchanged for Class A shares at net asset value. Similarly, participants in Prudential Securities' 401(k) Plan for which the Fund's Class Z shares is an available option and who wish to transfer their Class Z shares out of the Prudential Securities 401(k) Plan following separation from service (that is, voluntary or involuntary termination of employment or retirement) will have their Class Z shares exchanged for Class A shares at NAV.
The Prudential Securities Cash Balance Pension Plan may only exchange its Class Z shares for Class Z shares of those Prudential mutual funds which permit investment by the Prudential Securities Cash Balance Pension Plan.
Additional details about the exchange privilege and prospectuses for each of the Prudential mutual funds are available from the Fund's Transfer Agent, the Distributor or your broker. The exchange privilege may be modified, terminated or suspended on sixty 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. See "How to Buy, Sell and Exchange Shares of the Fund--Frequent Trading" in the Prospectus.
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 $22,500 at a private college and around $10,600 at a public university. Assuming these costs increase at a rate of 7% a year, the cost of one year at a private college could reach $44,300 and over $21,000 at a public university in 10 years.(1)
The following chart shows how much you would need in monthly investments to achieve specified lump sums to finance your investment goals.(2)
PERIOD OF MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000 ------------------------------------------------ -------- -------- -------- -------- 25 Years........................................ $ 105 $ 158 $ 210 $ 263 20 Years........................................ 170 255 340 424 15 Years........................................ 289 433 578 722 10 Years........................................ 547 820 1,093 1,366 5 Years........................................ 1,361 2,041 2,721 3,402 See "Automatic Investment Plan (AIP)" below. |
AUTOMATIC INVESTMENT PLAN (AIP)
Under AIP, an investor may arrange to have a fixed amount automatically invested in shares of the Fund by authorizing his or her bank account or Prudential Securities account (including a Prudential Securities COMMAND Account) to be debited to invest specified dollar amounts for subsequent investment into the Fund. The investor's bank must be a member of the Automated Clearing House System.
Further information about this program and an application form can be obtained from the Transfer Agent, the Distributor or your broker.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through the Distributor, the Transfer Agent or your broker. The withdrawal plan provides for monthly, quarterly, semi-annual or annual redemption checks in any amount, except as provided below, up to the value of the shares in the shareholder's account. Withdrawals of Class B or Class C shares may be subject to a CDSC. See "How to Buy, Sell and Exchange Shares of the Fund--How to Sell Your Shares--Contingent Deferred Sales Charge" in the Prospectus.
In the case of shares held through the Transfer Agent all dividends and/or distributions must be automatically reinvested in additional full and fractional shares of the Fund in order for the shareholder to participate in the plan. See "Automatic Reinvestment of Dividends and/or Distributions" above.
The Transfer Agent, the Distributor or your broker acts as an agent for the shareholder in redeeming sufficient full and fractional shares to provide the amount of the systematic withdrawal. The Systematic Withdrawal Plan may be terminated at any time, and the Distributor reserves the right to initiate a fee of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.
Systematic withdrawals should not be considered as dividends, yield or income. If systematic withdrawals continuously exceed reinvested dividends and distributions, the shareholder's original investment will be correspondingly reduced and ultimately exhausted.
Furthermore, each 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 and Class C 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 systematic withdrawal plan, particularly if used in connection with a retirement plan.
TAX-DEFERRED RETIREMENT PLANS
Various tax-deferred retirement plans, including 401(k) plans, self-directed individual retirement accounts and "tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code are available through Prudential Securities. These plans are for use by both self-employed individuals and corporate employers. These plans permit either self-direction of accounts by participants, or a pooled account arrangement. Information regarding the establishment, administration and custodial fees as well as other plan details are available from 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 (or, in the case of a Roth IRA, the avoidance of federal income tax on such income). The following chart represents a comparison of the earnings in a personal savings account with those in an IRA, assuming a $2,000 annual contribution, an 8% rate of return and a 38.6% 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)
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
------------- -------- --------
10 years............ $ 25,283 $ 31,291
15 years............ 44,978 58,649
20 years............ 68,739 98,846
25 years............ 98,936 157,909
30 years............ 137,316 244,692
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MUTUAL FUND PROGRAMS
From time to time, the Fund may be included in a mutual fund program with other Prudential mutual funds. Under such a program, a group of portfolios will be selected and thereafter marketed collectively. Typically, these programs are created with an investment theme, such as pursuit of greater diversification, protection from interest rate movements or access to different management styles. In the event such a program is instituted, there may be a minimum investment requirement for the program as a whole. The Fund may waive or reduce the minimum initial investment requirements in connection with such a program.
The mutual funds in the program may be purchased individually or as a part of a program. Since the allocation of portfolios included in the program may not be appropriate for all investors, investors should consult their Prudential Securities Financial Advisor, Prudential/Pruco Financial Professional, or other broker concerning the appropriate blend of portfolios for them. If investors elect to purchase the individual mutual funds that constitute a program in an investment ratio different from that offered by the program, the standard minimum investment requirements for the individual mutual funds will apply.
NET ASSET VALUE
The price an investor pays for each share is based on the share value. The Fund's share value--known as the net asset value per share or NAV--is determined by subtracting its liabilities from the value of its assets and dividing the remainder by the number of outstanding shares. NAV is calculated separately for each class. The Fund will compute its NAV once each business day at the close of regular trading on the NYSE, usually 4:00 p.m. New York time. The Fund may not compute its NAV on days on which no orders to purchase, sell or exchange shares of the Fund have been received or on days on which changes in the value of the Fund's portfolio securities do not affect materially its NAV. The NYSE is closed on the following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Under the Investment Company Act, the Board of Directors is responsible for determining in good faith the fair value of securities of the Fund. In accordance with procedures adopted by the Board of Directors, the value of each U.S. Government security for which quotations are available will be based on the 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. Options on U.S. Government securities traded on an exchange are valued at the mean between the most recently quoted bid and asked prices on the respective exchange. Futures contracts and options thereon are valued at their last sales prices as of the close of the commodities exchange or board of trade or, if there was no sale on such day, the mean between the most recently quoted bid and asked prices on such exchange or board of trade or, if there was no sale on the applicable commodities exchange or board of trade on such day; at the mean between the most recently quoted bid and asked prices on such exchange or board of trade. 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. Quotations of foreign securities in a foreign currency are converted to U.S. dollar equivalents at the current rate obtained from a recognized bank or dealer, and foreign currency forward contracts are valued at the current cost of covering or offsetting such contracts. Should an extraordinary event, which is likely to affect the value of the security, occur after the close of an exchange on which a portfolio security is traded, such security will be valued at fair value considering factors determined in good faith by the investment adviser under procedures established by and under the general supervision of the Fund's Board of Directors.
Securities or other assets for which reliable market quotations are not readily available or for which the pricing agent or principal market maker does not provide a valuation or methodology or provides a valuation or methodology that, in the judgment of the Subadviser or Manager (or Valuation Committee or Board of Directors) does not represent fair value (Fair Value Securities), are valued by the Valuation Committee or Board of Directors in consultation with the Subadviser or Manager, including, as applicable, their portfolio managers, traders, research and credit analysts, and legal and compliance personnel, on the basis of the following factors: the nature of any restrictions on disposition of the securities; assessment of the general liquidity/illiquidity of the securities; the issuer's financial condition and the markets in which it does business; the cost of the investment; the size of the holding and the capitalization of the issuer; the prices of any
recent transactions or bids/offers for such securities or any comparable securities; any available analyst, media or other reports or information deemed reliable by the Subadviser or Manager regarding the issuer or the markets or industry in which it operates; other analytical data; consistency with valuation of similar securities held by other Prudential mutual funds; and such other factors as may be determined by the Subadviser, Manager, Board of Directors or Valuation Committee to materially affect the value of the security. Fair Value Securities may include, but are not limited to, the following: certain private placements and restricted securities that do not have an active trading market; securities whose trading has been suspended or for which market quotes are no longer available; debt securities that have recently gone into default and for which there is no current market; securities whose prices are stale; securities affected by significant events; and securities that the Subadviser or Manager believe were priced incorrectly. A "significant event" (which includes, but is not limited to, an extraordinary political or market event) is an event that the Subadviser or Manager believes with a reasonably high degree of certainty has caused the closing market prices of the Fund's portfolio securities to no longer reflect their value at the time of the Fund's NAV calculation. On a day that the Manager determines that one or more of the Fund's portfolio securities constitute Fair Value Securities, PI may determine the fair value of these securities without the supervision of the Fund's Valuation Committee if the fair valuation of all such securities results in a change of less than $0.01 to the Fund's NAV and the Manager presents these valuations to the Board of the Fund for its ratification. Short-term debt securities are valued at cost, with interest accrued or discount amortized to the date of maturity, if their original maturity was 60 days or less, unless this is determined by the Directors not to represent fair value. Short-term securities with remaining maturities of more than 60 days, for which market quotations are readily available, are valued at their current market quotations as supplied by an independent pricing agent or principal market maker.
TAXES, DIVIDENDS AND DISTRIBUTIONS
The Fund qualifies and, intends to remain qualified as a regulated
investment company under Subchapter M of the Internal Revenue Code for each
taxable year. Qualification of the Fund as a regulated investment company under
the Internal Revenue Code requires the Fund to, among other things, (a) derive
at least 90% of its gross income from dividends, interest, payments with respect
to certain securities loans and gains from the sale or other disposition of
stocks, securities or foreign currencies or other income (including, but not
limited to, gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock, securities or currencies;
and (b) diversify its holdings so that, at the end of each fiscal quarter,
(i) at least 50% of the market value of the Fund's assets is represented by
cash, U.S. Government securities and other stock or securities limited, in
respect of any one issuer, to an amount not greater than 5% of the value of the
Fund's assets and not more than 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 or
securities of other regulated investment companies).
As a regulated investment company, the Fund will not be subject to federal income tax on its net investment income and capital gains, if any, that it distributes to its shareholders, provided that it distributes at least 90% of its net investment income and short-term capital gains earned in each year. A 4% nondeductible excise tax will be imposed on the Fund to the extent the Fund does not meet certain distribution requirements by the end of each calendar year. The Fund intends to make sufficient distributions to avoid imposition of excise tax.
Distributions of net investment income and net short-term capital gains will be taxable to the shareholder at ordinary income rates regardless of whether the shareholder receives such distributions in additional shares or in cash. Distributions of net capital gains (the excess of net capital gains from the sale of assets held for more than one year over net short-term capital loss), if any, are taxable as capital gains regardless of how long the investor has held his or her Fund shares. For an individual, the maximum federal long-term capital gains rate is generally 20%. However, capital gains of individuals from the sale of shares acquired after December 31, 2000 and held more than 5 years will be eligible for a reduced long-term capital gains rate. The maximum capital gains rate for corporate shareholders is currently the same as the maximum tax rate for ordinary income. Shareholders will be notified annually by the Fund as to the federal income tax status of distributions made by the Fund. Dividends paid by the Fund will not be eligible for the dividends received deduction available to corporations. Distributions and gains from the sale, redemption or exchange of shares of the Fund may be subject to additional state, local and foreign taxes. Shareholders are urged to consult their tax advisers regarding specific questions as to federal, state, local or foreign taxes.
Shareholders electing to receive dividends and distributions in the form of additional shares will have a cost basis for federal income tax purposes in each share so received equal to the NAV of a share of the Fund on the reinvestment date.
Dividends and distributions generally are taxable to shareholders in the year in which they are received; however, dividends declared in October, November or December and paid for the following January will be treated as having been paid on December 31 of such prior year. Under this rule, a shareholder may be taxed in one year on dividends received in the following January.
Any dividends or capital gains distributions paid shortly after a purchase by an investor of the shares of the Fund may have the effect of reducing the per share net asset value of the investor's shares by the per share amount of the dividends or capital gains distributions. Furthermore, such dividends or capital gains distributions, although in effect a return of capital, are subject to federal income taxes. Therefore, prior to purchasing shares of the Fund, the investor should carefully consider the impact of dividends or capital gains distributions, which are expected to be or have been announced.
Distributions of ordinary income and net short-term capital gains paid to a shareholder (including a shareholder acting as a nominee or fiduciary) who is a nonresident alien individual or a foreign entity ("foreign shareholder") are subject to a 30% (or lower treaty rate) withholding tax upon the gross amount of the dividends or distributions unless the dividends or distributions are effectively connected with a U.S. trade or business conducted by the foreign shareholder. Capital gain distributions paid to a foreign shareholder are generally not subject to withholding tax. A foreign shareholder will, however, be required to pay U.S. income tax at regular rates on any dividends and capital gain distributions which are effectively connected with a U.S. trade or business of the foreign shareholder.
Upon a sale or exchange of its shares, a shareholder will realize a taxable gain or loss depending on its basis in the shares. Such gain or loss will be treated as capital gain or loss if the shares are capital assets in the shareholder's hands. In the case of an individual, any such capital gain will be treated as short-term capital gain, taxable at the same rates as ordinary income if the shares were held for not more than one year and capital gain taxable generally at the maximum rate of 20% if such shares were held for more than one year. In the case of a corporation, any such capital gain will be treated as long-term capital gain, taxable at the same rates as ordinary income, if such shares were held for more than one year. Any such loss will be treated as long-term capital loss if such shares were held for more than one year. A loss recognized on the sale or exchange of shares held for six months or less, however, will be treated as long-term capital loss to the extent of any long-term capital gains distribution with respect to such shares.
Any loss realized on a sale, redemption or exchange of shares of the Fund by a shareholder will be disallowed to the extent the shares are replaced within a 61-day period beginning 30 days before and ending 30 days after the disposition of shares. Shares purchased pursuant to the reinvestment of a dividend or distribution will constitute a replacement of shares. Under certain circumstances, a shareholder who acquires shares of the Fund and sells, exchanges or otherwise disposes of such shares within 90 days of acquisition may not be allowed to include 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 Fund may purchase debt securities that contain original issue discount. Original issue discount that accrues in a taxable year is treated as income earned by the Fund and therefore is subject to the distribution requirements of the Internal Revenue Code. Because the original issue discount income earned by the Fund in a taxable year may not be represented by cash income, the Fund may have to dispose of other securities and use the proceeds to make distributions to satisfy the Internal Revenue Code's distribution requirements. Debt securities acquired by the Fund also may be subject to the market discount rules.
Under the Code, gains or losses attributable to fluctuations in exchange rates which occur between the time the Fund accrues interest or other receivables denominated in a foreign currency or determined by reference to the value thereof and the time the Fund actually collects such receivables generally are treated as ordinary income or loss. Similarly on disposition of debt securities denominated in a foreign currency or determined by reference to the value of a foreign currency between the date of acquisition of the debt securities and the date of disposition thereof are also treated as ordinary income or loss.
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.
The Fund has a capital loss carryforward for federal income tax purposes as of February 28, 2002 of approximately $124,966,000, of which $44,881,000 expires in 2003, $718,000 expires in 2004, $17,950,000 expires in 2005, $18,673,000 expires in 2008, and $42,744,000 expires in 2009.
The Fund is treating for federal income tax purposes post-October capital losses of approximately $2,761,000 as having occurred in the following year.
The per share dividends on Class B and Class C shares will 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 dividends on Class A shares will be lower than the per share dividends on Class Z shares. The per share distributions of net capital gains, if any, will be paid in the same amount for Class A, Class B, Class C and Class Z shares.
LISTED OPTIONS AND FUTURES. Exchange-traded futures contracts, listed
options on futures contracts and listed options on U.S. Government securities
constitute "Section 1256 contracts" under the Internal Revenue Code.
Section 1256 contracts are required to be "marked-to-market" at the end of the
Fund's taxable year; that is, treated as having been sold at their fair market
value on the last business day of the Fund's taxable year. Sixty percent of any
gain or loss recognized as a result of such "deemed sale" will be treated as
long-term capital gain or loss and the remainder will be treated as short-term
capital gain or loss.
If the Fund positions in U.S. Government securities and a Section 1256 contract form a straddle, the Fund is considered to hold a "mixed straddle". The Fund may elect to make a straddle-by-straddle identification of mixed straddles. By electing to identify its mixed straddles, the Fund can avoid the application of certain rules which could, in some circumstances, cause deferral or disallowance of losses, conversion of long-term capital gains into short-term capital gains, or conversion of short-term capital losses into long-term capital losses. In the case of such an election, the Fund would be subject to the following rules.
If the Fund owns a U.S. Government security and acquires an offsetting
Section 1256 contract in a transaction which the Fund elects to identify as a
mixed straddle, the acquisition of the offsetting position will result in
recognition of the unrealized gain or loss on the U.S. Government security. This
recognition of unrealized gain or loss will be taken into account in determining
the amount of income available for the Fund's quarterly distributions, and can
result in an amount which is greater or less than the Fund's net realized gains
being available for such distributions. If an amount which is less than the
Fund's net realized gains is available for distribution, the Fund may elect to
distribute more than such available amount, up to the full amount of such net
realized gains.
The net capital gain or loss will be treated as 60% long-term and 40%
short-term capital gain or loss if attributable to the positions in
Section 1256 contract, or all short-term capital gain or loss if attributable to
non-Section 1256 position.
If the Fund does not elect to identify a mixed straddle, no recognition of gain or loss on the U.S. Government securities in the Fund's portfolio will result when the mixed straddle is entered into. However, any gains or losses realized on the straddle will be governed by a number of tax rules which might, under certain circumstances, defer or disallow the losses in whole or in part, convert long-term gains into short-term gains, convert short-term losses into long-term losses, or convert capital gains into ordinary income. A deferral or disallowance of recognition of a realized loss may result in the Fund being required to distribute an amount greater than the Fund's net realized gains.
The Fund may also elect under Section 1256(d) of the Internal Revenue Code not to apply provisions of Section 1256 to Section 1256 contracts which are part of a mixed straddle. In the case of such an election, the taxation of options and futures on U.S. Government securities will be governed by provisions of the Internal Revenue Code dealing with taxation of straddles generally.
OTC OPTIONS. Non-listed options on U.S. Government securities (OTC options) are not Section 1256 contracts. If an OTC option written by the Fund on U.S. Government securities expires, the amount of the premium will be treated as short-term capital gain. If the option is terminated through a closing transaction, the Fund will generally recognize a short-term capital gain or loss, depending on whether the premium income is greater or less than the amount paid by the Fund in the closing transaction. If U.S. Government securities are delivered by the Fund upon exercise of a written call option, or sold to the Fund upon exercise of a written put option, the premium received when the option was written will be treated as an
addition to the proceeds received in the case of the call option, or a decrease in the cost basis of the security received in the case of a put option. The gain or loss realized on the exercise of a written call option will be long-term or short-term depending upon the holding period of the U.S. Government security delivered.
The premium paid for a purchased put or call option is a capital expenditure, and loss will be realized upon the expiration, and gain or loss will be realized upon the sale of, a put or call option. The characterization of the gain or loss as short-term or long-term will depend upon the holding period of the option. If U.S. Government securities are purchased by the Fund upon exercise of a purchased call option, or delivered by the Fund upon exercise of a purchased put option, the premium paid when the option was purchased will be treated as an addition to the basis of the securities purchased in the case of a call option, or as a decrease in the proceeds received for the securities delivered in the case of a put option.
Losses realized with respect to straddles which include a purchased put option, can, under certain circumstances, be subject to a number of tax rules which might defer or disallow the losses in whole or in part, convert long-term gains into short-term gains, convert short-term losses into long-term losses, or convert capital gains into ordinary income. As noted above, a deferral or disallowance of recognition of realized loss can result in the Fund being required to distribute an amount greater than the Fund's net realized gains.
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, Class C and Class Z shares. The yield will be computed by dividing the Fund's net investment income per share earned during this 30-day period by the net asset value per share on the last day of this period.
Yield is calculated according to the following formula:
a - b
YIELD = 2[( ------- +1)TO THE POWER OF 6 - 1]
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
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The yields for the 30-day period ended February 28, 2002 with the waiver of distribution and service (12b-1) fees and/or expense subsidization for the Fund's Class A, Class B, Class C and Class Z shares were 4.65%, 4.28%, 4.31% and 5.10%, respectively. The yields for the 30-day period ended February 28, 2002 without waiver of distribution and service (12b-1) fees and/or expense subsidization for the Fund's Class A, Class B, Class C and Class Z shares were 4.65%, 4.28%, 4.31%, and 5.10%, respectively.
Yield fluctuates and an annualized yield quotation is not a representation by the Fund as to what an investment in the Fund will actually yield for any given period. Actual yields will depend upon not only changes in interest rates generally during the period in which the investment in the Fund is held, but also on any realized or unrealized gains and losses and changes in the Fund's expenses.
AVERAGE ANNUAL TOTAL RETURN. The Fund may from time to time also advertise its average annual total return. Average annual total return is determined separately for Class A, Class B and Class C shares. See "Risk/Return Summary--Evaluating Performance" in the Prospectus.
Average annual total return is computed according to the following formula:
P(1+T)TO THE POWER OF n = ERV
Where: P = a hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1000 investment made at the beginning of the 1-, 5- or 10-year periods at the end of the 1-, 5- or 10-year periods (or fractional portion thereof).
Average annual total return assumes reinvestment of all distributions and takes into account any applicable initial or contingent deferred sales charges but does not take into account any federal or state income taxes that may be payable upon redemption.
Below are the average annual total returns for the Fund's share classes for the periods ended February 28, 2002.
WITH WAIVER AND/OR EXPENSE SUBSIDY ONE YEAR FIVE YEARS TEN YEARS SINCE INCEPTION ---------------------- -------------- -------------- --------------- ----------------- Class A............... 3.06% 6.23% 6.30% 7.07%(1-22-90) Class B............... 1.62% 6.27% 6.02% 7.29%(4-22-85) Class C............... 4.65% 6.29% N/A 6.45%(8-1-94) Class Z............... 7.61% 7.30% N/A 6.60%(3-4-96) |
WITHOUT WAIVER AND/OR EXPENSE SUBSIDY ONE YEAR FIVE YEARS TEN YEARS SINCE INCEPTION ---------------------- -------------- -------------- --------------- ----------------- Class A............... 7.36% 7.10% 6.74% 7.43%(1-22-90) Class B............... 6.62% 6.42% 6.02% 7.21%(4-22-85) Class C............... 6.71% 6.51% N/A 6.59%(8-1-94) Class Z............... 7.61% 7.30% N/A 6.60%(3-4-96) |
AVERAGE ANNUAL TOTAL RETURN (AFTER TAXES ON DISTRIBUTIONS AND AFTER TAXES ON DISTRIBUTIONS AND REDEMPTION).
Average annual total return (after taxes on distributions and after taxes on distributions and redemption) takes into account any applicable initial or contingent deferred sales charges and takes into account federal income taxes that may be payable upon receiving distributions and following redemption. Federal income taxes are calculated using the highest marginal income tax rates in effect on the reinvestment date.
Average annual total return (after taxes on distributions) is computed according to the following formula:
P(1+T)TO THE POWER OF n = ATV TO THE BASE OF D
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return (after taxes on distributions,
or after taxes on distributions and redemption, as
applicable).
n = number of years.
ATV TO = ending value of a hypothetical $1,000 payment made at the
THE BASE beginning of the 1-, 5- or 10-year periods at the end of the
OF D 1-, 5- or 10-year periods (or fractional portion thereof),
after taxes on fund distributions but not after taxes on
redemption.
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The average annual total returns (after taxes on distributions) for the one-year, five-year, ten-year and since-inception periods are set forth in the following table.
AVERAGE ANNUAL TOTAL RETURNS (AFTER TAXES ON DISTRIBUTION)
ONE YEAR FIVE YEARS TEN YEARS SINCE INCEPTION
-------------- -------------- -------------- -----------------
WITH WAIVER AND/OR
EXPENSE SUBSIDY
Class A............... .90% 3.70% 3.66% 4.44%(1-22-90)
Class B............... (.38)% 3.97% 3.65% 4.70%(4-22-85)
Class C............... 2.63% 3.98% N/A 4.04%(8-1-94)
Class Z............... 5.26% 4.66% N/A 3.94%(3-4-96)
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ONE YEAR FIVE YEARS TEN YEARS SINCE INCEPTION
-------------- -------------- -------------- -----------------
WITHOUT WAIVER AND/OR
EXPENSE SUBSIDY
Class A............... .90% 3.70% 3.66% 4.44%(1-22-90)
Class B............... (.38)% 3.97% 3.65% 4.63%(4-22-85)
Class C............... 2.63% 3.98% N/A 4.04%(8-1-94)
Class Z............... 5.26% 4.66% N/A 3.94%(3-4-96)
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Average annual total return (after taxes on distributions and redemption) is computed according to the following formula:
P(1+T)TO THE POWER OF n = ATV TO THE BASE OF DR
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return (after taxes on distributions,
or after taxes on distributions and redemption, as
applicable).
n = number of years.
ATV TO = ending value of a hypothetical $1,000 payment made at the
THE BASE beginning of the 1-, 5- or 10-year periods at the end of the
OF DR 1-, 5- or 10-year periods (or fractional portion thereof),
after taxes on fund distributions and redemptions.
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The average annual total returns (after taxes on distributions and redemption) for the one-year, five-year, ten-year and since inception periods ended February 28, 2002 are set forth in the following table.
AVERAGE ANNUAL TOTAL RETURNS (AFTER TAXES ON DISTRIBUTIONS AND REDEMPTIONS)
ONE YEAR FIVE YEARS TEN YEARS SINCE INCEPTION
-------------- -------------- -------------- -----------------
WITH WAIVER AND/OR
EXPENSE SUBSIDY
Class A............... 1.81% 3.69% 3.72% 4.48%(1-22-90)
Class B............... .93% 3.86% 3.65% 4.76%(4-22-85)
Class C............... 2.79% 3.87% N/A 3.95%(8-1-94)
Class Z............... 4.59% 4.51% N/A 3.92%(3-4-96)
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ONE YEAR FIVE YEARS TEN YEARS SINCE INCEPTION
-------------- -------------- -------------- -----------------
WITHOUT WAIVER AND/OR
EXPENSE SUBSIDY
Class A............... 1.81% 3.69% 3.72% 4.48%(1-22-90)
Class B............... .93% 3.86% 3.65% 4.69%(4-22-85)
Class C............... 2.79% 3.87% N/A 3.95%(8-1-94)
Class Z............... 4.59% 4.51% N/A 3.92%(3-4-96)
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AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total return. Aggregate total return is determined separately for Class A, Class B, Class C and Class Z shares. See "Risk/Return Summary--Evaluating Performance" in the Prospectus.
Aggregate total return represents the cumulative change in the value of an investment in the Fund and is computed by the following formula:
Where: P = a hypothetical initial payment of $1000.
ERV = ending redeemable value of a hypothetical $1000 payment made at the beginning of the 1-, 5-or 10-year periods at the end of the 1-, 5- or 10-year periods (or fractional portion thereof).
Aggregate total return does not take into account any federal or state income taxes that may be payable upon redemption or any applicable initial or contingent deferred sales charges.
Below are the aggregate total returns for the Fund's share classes for the periods ended February 28, 2002.
WITH WAIVER AND/OR EXPENSE SUBSIDY 1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION ---------------------- --------------- --------------- --------------- ----------------- Class A............... 7.36% 40.91% 91.96% 138.13%(1-22-90) Class B............... 6.62% 36.52% 79.37% 227.43%(4-22-85) Class C............... 6.71% 37.04% N/A 62.21%(8-1-94) Class Z............... 7.61% 42.24% N/A 46.71%(3-4-96) |
WITHOUT WAIVER AND/OR EXPENSE SUBSIDY 1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION ---------------------- -------------- -------------- --------------- ----------------- Class A............... 7.36% 40.91% 91.96% 138.13%(1-22-90) Class B............... 6.62% 36.52% 79.37% 223.47%(4-22-85) Class C............... 6.71% 37.04% N/A 62.21%(8-1-94) Class Z............... 7.61% 42.24% N/A 46.71%(3-4-96) |
ADVERTISING. Advertising materials for the Fund may include biographical information relating to its portfolio manager(s), and may include or refer to commentary by the Fund's manager(s) concerning investment style, investment discipline, asset growth, current or past business experience, business capabilities, political, economic or financial conditions and other matters of general interest to investors. Advertising materials for the Fund also may include mention of The Prudential Insurance Company of America, its affiliates and subsidiaries, and reference the assets, products and services of those entities.
From time to time, advertising materials for the Fund may include information concerning retirement and investing for retirement, may refer to the approximate number of Fund shareholders and may refer to Lipper rankings or Morningstar ratings, other related analyses supporting those ratings, other industry publications, business periodicals and market indices. In addition, advertising materials may reference studies or analyses performed by the Manager or its affiliates. Advertising materials for sector funds, funds that focus on market capitalizations, index funds and international/global funds may discuss the potential benefits and risks of that investment style. Advertising materials for fixed income funds may discuss the benefits and risks of investing in the bond market including discussions of credit quality, duration and maturity.
The Fund also may include comparative performance information in advertising or marketing the Fund's shares. Such performance information may include data from Lipper Analytical Services, Inc., Morningstar Publications, Inc., other industry publications, business periodicals and market indexes.
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)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PERFORMANCE
COMPARISON OF DIFFERENT
TYPES OF INVESTMENTS
OVER THE LONG TERM
(12/31/1926 - 12/31/2001)
Common Stocks 10.7% Long-Term Gov't. Bonds 5.3% Inflation 3.1% |
(1)Source: Ibbotson Associates. Used with permission. All rights reserved. Common stock returns are based on the Standard & Poor's 500 Composite Stock Price Index, a market-weighted, unmanaged index of 500 common stocks in a variety of industry sectors. It is a commonly used indicator of broad stock price movements. This chart is for illustrative purposes only, and is not intended to represent the performance of any particular investment or fund. Investors cannot invest directly in an index. Past performance is not a guarantee of future results.
FINANCIAL STATEMENTS
The Fund's financial statements for the fiscal year ended February 28, 2002, incorporated into this SAI by reference to the Fund's 2002 annual report to shareholders (File No. 811-3712), have been so incorporated in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on authority of said firm as experts in auditing and accounting. You may obtain a copy of the Fund's annual report at no charge by request to the Fund by calling (800) 225-1852, or by writing to the Fund at Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077.
APPENDIX I--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data obtained from statistical services, reports and other services believed by the Manager to be reliable. The information has not been independently verified by the Manager.
This chart shows the long-term performance of various asset classes and the rate of inflation.
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
VALUE OF $1.00 INVESTED ON
1/1/1926 THROUGH 12/31/2001
Small Stocks Common Stocks Long-Term Bonds Treasury Bills Inflation
1926
1936
1946
1956
1966
1976
1986
1996
2001 $7,860.05 $2,279.13 $50.66 $17.20 $9.87
|
Source: Ibbotson Associates. Used with permission. All rights reserved. This chart is for illustrative purposes only and is not indicative of the past, present, or future performance of any asset class or any Prudential mutual fund.
Generally, stock returns are attributable to capital appreciation and the reinvestment of distributions. Bond returns are attributable mainly to the reinvestment of distributions. Also, stock prices are usually more volatile than bond prices over the long-term.
Small stock returns for 1926-1989 are those of stocks comprising the 5th quintile of the New York Stock Exchange. Thereafter, returns are those of the Dimensional Fund Advisors (DFA) Small Company Fund. Common stock returns are based on the S&P Composite Index, a market-weighted, unmanaged index of 500 stocks (currently) in a variety of industries. It is often used as a broad measure of stock market performance.
Long-term government bond returns are represented by a portfolio that contains only one bond with a maturity of roughly 20 years. At the beginning of each year a new bond with a then-current coupon replaces the old bond. Treasury bill returns are for a one-month bill. Treasuries are guaranteed by the government as to the timely payment of principal and interest; equities are not. Inflation is measured by the consumer price index (CPI).
IMPACT OF INFLATION. The "real" rate of investment return is that which exceeds the rate of inflation, the percentage change in the value of consumer goods and the general cost of living. A common goal of long-term investors is to outpace the erosive impact of inflation on investment returns.
Set forth below is historical performance data relating to various sectors of the fixed-income securities markets. The chart shows the historical total returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds, U.S. high yield bonds and world government bonds on an annual basis from 1990 through 2001. The total returns of the indices include accrued interest, plus the price changes (gains or losses) of the underlying securities during the period mentioned. The data is provided to illustrate the varying historical total returns and investors should not consider this performance data as an indication of the future performance of the Fund or of any sector in which the Fund invests.
All information relies on data obtained from statistical services, reports and other services believed by the Manager to be reliable. Such information has not been verified. The figures do not reflect the operating expenses and fees of a mutual fund. See "Risk/Return Summary--Fees and Expenses" in the Prospectus. The net effect of the deduction of the operating expenses of a mutual fund on these historical total returns, including the compounded effect over time, could be substantial.
HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS
YEAR 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 --------------------------------------------------------------------------------------------------------------------------- U.S. GOVERNMENT TREASURY BONDS(1) 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7% 9.6% 10.0% (2.56)% 13.52% 7.23% --------------------------------------------------------------------------------------------------------------------------- U. S. GOVERNMENT MORTGAGE SECURITIES(2) 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4% 9.5% 7.0% 1.86% 11.16% 8.22% --------------------------------------------------------------------------------------------------------------------------- U.S. INVESTMENT GRADE CORPORATE BONDS(3) 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3% 10.2% 8.6% (1.96)% 9.39% 10.40% --------------------------------------------------------------------------------------------------------------------------- U.S. HIGH YIELD CORPORATE BONDS(4) (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4% 12.8% 1.6% 2.39% (5.86)% 5.28% --------------------------------------------------------------------------------------------------------------------------- WORLD GOVERNMENT BONDS(5) 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3)% 5.3% (5.07)% (2.63)% (3.54)% --------------------------------------------------------------------------------------------------------------------------- DIFFERENCE BETWEEN HIGHEST AND LOWEST RETURN PERCENT 24.9% 30.9% 11.0% 10.3% 9.9% 5.5% 8.7% 17.1% 8.4% 7.46% 19.10% 13.94% |
(1)LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over 150 public issues of the U.S. Treasury having maturities of at least one year.
(2)LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the Government National Mortgage Association (GNMA), Federal National Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
(3)LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate, nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated issues and include debt issued or guaranteed by foreign sovereign governments, municipalities, governmental agencies or international agencies. All bonds in the index have maturities of at least one year. Source: Lipper Inc.
(4)LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over 750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch Investors Service). All bonds in the index have maturities of at least one year.
(5)SALOMON SMITH BARNEY WORLD GOVERNMENT INDEX (NON U.S.) includes over 800 bonds issued by various foreign governments or agencies, excluding those in the U.S., but including those in Japan, Germany, France, the U.K., Canada, Italy, Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All bonds in the index have maturities of at least one year.
This chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.
LONG TERM U.S. TREASURY BOND YIELD IN PERCENT (1926-2001)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
Source: Ibbotson Associates. Used with permission. All rights reserved. The chart illustrates the historical yield of the long-term U.S. Treasury Bond from 1926-2001. Yields represent that of an annually renewed one-bond portfolio with a remaining maturity of approximately 20 years. This chart is for illustrative purposes and should not be construed to represent the yields of any Prudential mutual fund.
This chart illustrates the performance of major world stock markets for the period from December 31, 1985 through December 31, 2001. It does not represent the performance of any Prudential mutual fund.
AVERAGE ANNUAL TOTAL RETURNS OF MAJOR WORLD STOCK MARKETS
(12/31/1985 - 12/31/2001) (IN U.S. DOLLARS)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
Sweden 15.51% Spain 15.26% Hong Kong 14.96% Netherland 14.03% Belgium 13.78% France 13.20% USA 13.14% U.K. 12.28% Switzerland 12.21% Europe 11.92% Denmark 11.88% Australia 9.54% Germany 8.63% Canada 8.45% Italy 7.70% Norway 6.82% Austria 4.95% Japan 3.84% |
Source: Morgan Stanley Capital International (MSCI) and Lipper Inc. as of 12/31/01. Used with permission. Morgan Stanley Country indexes are unmanaged indexes which include those stocks making up the largest two-thirds of each country's total stock market capitalization. Returns reflect the reinvestment of all distributions. This chart is for illustrative purposes only and is not indicative of the past, present or future performance of any specific investment. Investors cannot invest directly in stock indexes.
This chart shows the growth of a hypothetical $10,000 investment made in the stocks representing the S&P 500 Stock Index with and without reinvested dividends.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
CAPITAL APPRECIATION CAPITAL APPRECIATION
AND REINVESTING DIVIDENDS ONLY
1976
1980
1984
1988
1992
1996
2001 $251,725 $106,850
|
WORLD STOCK MARKET CAPITALIZATION BY REGION
WORLD TOTAL: 15.9 TRILLION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
U.S. 45.4% Europe 33.2% Pacific Basin 18.4% Canada 3.0% |
Source: Morgan Stanley Capital International, December 31, 2001. Used with permission. This chart represents the capitalization of major world stock markets as measured by the Morgan Stanley Capital International (MSCI) World Index. The total market capitalization is based on the value of approximately 1600 companies in 22 countries (representing approximately 60% of the aggregate market value of the stock exchanges). This chart is for illustrative purposes and does not represent the allocation of any Prudential mutual fund.
APPENDIX II--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk and providing balance. Asset allocation among different types of securities within an overall investment portfolio helps to reduce risk and to potentially provide stable returns, while enabling investors to work toward their financial goal(s). Asset allocation is also a strategy to gain exposure to better performing asset classes while maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing "balance" to an overall portfolio and potentially achieving more stable returns. Owning a portfolio of securities mitigates the individual risks (and returns) of any one security. Additionally, diversification among types of securities reduces the risks (and general returns) of any one type of security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As interest rates fluctuate, the value of a bond (or a bond portfolio) will increase or decrease. Longer-term bonds are generally more sensitive to changes in interest rates. When interest rates fall, bond prices generally rise. Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond portfolio) to interest rate changes. It measures the weighted average maturity of a bond's (or a bond portfolio's) cash flows, I.E., principal and interest rate payments. Duration is expressed as a measure of time in years--the longer the duration of a bond (or a bond portfolio), the greater the impact of interest rate changes on the bond's (or the bond portfolio's) price. Duration differs from effective maturity in that duration takes into account call provisions, coupon rates and other factors. Duration measures interest rate risk only and not other risks such as credit risk and, in the case of non-U.S. dollar denominated securities, currency risk. Effective maturity measures the final maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing--buying securities when prices are low and selling them when prices are relatively higher may not work for many investors because it is impossible to predict with certainty how the price of a security will fluctuate. However, owning a security for a long period of time may help investors offset short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment returns. Compounding is the effect of continuous investment on long-term investment results, by which the proceeds of capital appreciation (and income distributions, if elected) are reinvested to contribute to the overall growth of assets. The long-term investment results of compounding may be greater than that of an equivalent initial investment in which the proceeds of capital appreciation and income distributions are taken in cash.
STANDARD DEVIATION
Standard deviation is an absolute (non-relative) measure of volatility which, for a mutual fund, depicts how widely the returns varied over a certain period of time. When a fund has a high standard deviation, its range of performance has been very wide, implying greater volatility potential. Standard deviation is only one of several measures of a fund's volatility.
II-1
APPENDIX III
INFORMATION RELATING TO PORTFOLIO SECURITIES
The following chart shows where the Fund fits in the Prudential Fund Family in terms of the duration of its portfolio securities.
[CHART]
The Fund may provide lower yield and total return than Prudential's High Yield and Total Return Bond funds, but with higher overall quality.
Currently, the Fund is maintaining an intermediate-term duration. This is subject to change.
III-1
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS.
(a) (1) Articles of Restatement. Incorporated by reference to Exhibit 1
to Post-Effective Amendment No. 22 to Registration Statement on
Form N-1A (File No. 2-82976) filed via EDGAR on April 30, 1996.
(2) Articles Supplementary. Incorporated by reference to Exhibit
(a)(3) to Post-Effective Amendment No. 27 to the Registration
Statement on Form N-1A (File No. 2-82976) filed via EDGAR on May 14,
1999.
(b) Amended and Restated By-laws of the Registrant. Incorporated by
reference to Exhibit (b) to Post-Effective Amendment No. 28 to the
Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR on May 4, 2000.
(c) Instruments defining rights of holders of securities being offered.
Incorporated by reference to Exhibit 4 to Post-Effective Amendment
No. 15 to Registration Statement on Form N-1A (File No. 2-82976)
filed via EDGAR on May 5, 1994.
(d) (1) Management Agreement dated as of July 1,1988 between the
Registrant and Prudential Mutual Fund Management, Inc. Incorporated
by reference to Exhibit 5(a) to Post-Effective Amendment No. 24 to
the Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR on May 2, 1997.
(2) Subadvisory Agreement dated as of July 1,1988 between Prudential
Mutual Fund Management, Inc. and The Prudential Investment
Corporation. Incorporated by reference to Exhibit 5(b) to
Post-Effective Amendment No. 24 to the Registration Statement on Form
N-1A (File No. 2-82976) filed via EDGAR on May 2, 1997.
(3) Amendment to Subadvisory Agreement dated as of November 18, 1999,
between Prudential Investments Fund Management LLC and The Prudential
Investment Corporation. Incorporated by reference to Exhibit (d)(3)
to Post-Effective Amendment No. 28 to the Registration Statement on
Form N-1A (File No. 2-82976) filed via EDGAR on May 4, 2000.
(e) (1) Distribution Agreement dated as of June 1, 1998 with Prudential
Investment Management Services LLC. Incorporated by reference to
Exhibit 7(b) to the Registration Statement on Form N-14 (File
No. 333-64907) filed via EDGAR on October 30, 1998.
(2) Selected Dealer Agreement. Incorporated by reference to
Exhibit 7(a) to the Registration Statement on Form N-14 (File No.
333-64907) filed via EDGAR on October 30, 1998.
(g) (1) Revised Custodian Agreement between the Registrant and State
Street Bank and Trust Company. Incorporated by reference to Exhibit
8(a) to Post-Effective Amendment No. 24 to the Registration Statement
on Form N-1A (File No. 2-82976) filed via EDGAR on May 2, 1997.
(2) Special Custody Agreement among the Registrant, State Street Bank
and Trust Company, and Goldman, Sachs & Co. Incorporated by reference
to Exhibit 8(b) to Post-Effective Amendment No. 24 to the
Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR on May 2, 1997.
(3) Customer Agreement between the Registrant and Goldman, Sachs &
Co. Incorporated by reference to Exhibit 8(c) to Post-Effective
Amendment No. 24 to the Registration Statement on Form N-1A (File
No. 2-82976) filed via EDGAR on May 2, 1997.
(4) Form of Amendment to Revised Custodian Agreement. Incorporated by
reference to Exhibit 8(d) to Post-Effective Amendment No. 19 to the
Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR on November 3, 1995.
(5) Amendment to Custodian Contract/Agreement dated as of
February 22, 1999 by and between the Registrant and State Street Bank
and Trust Company. Incorporated by reference to Exhibit (g)(5) to
Post-Effective Amendment No. 28 to the Registration Statement on
Form N-1A (File No. 2-82976) filed via EDGAR on May 4, 2000.
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(6) Amendment to Custodian Contract/Agreement dated as of July 17,
2001 by and between the Registrant and State Street Bank and Trust
Company.*
(7) Amendment to Custodian Contract/Agreement dated as of
January 17, 2002 by and between the Registrant and State Street Bank
and Trust Company.*
(h) (1) Transfer Agency Agreement dated as of January 1, 1988 between the
Registrant and Prudential Mutual Fund Services, Inc. Incorporated by
reference to Exhibit 9 to Post-Effective Amendment No. 24 to the
Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR on May 2, 1997.
(2) Amendment to Transfer Agency and Service Agreement dated as of
August 24, 1999 by and between the Registrant and Prudential Mutual
Fund Services LLC (successor to Prudential Mutual Fund Services,
Inc.). Incorporated by reference to Exhibit (h)(2) to Post-Effective
Amendment No. 28 to the Registration Statement on Form N-1A (File
No. 2-82976) filed via EDGAR on May 4, 2000.
(i) Opinion and Consent of Counsel.*
(j) Consent of Independent Accountants.*
(l) Purchase Agreement. Incorporated by reference to Exhibit 13 to
Post-Effective Amendment No. 24 to the Registration Statement on Form
N-1A (File No. 2-82976) filed via EDGAR on May 2, 1997.
(m) (1) Amended and Restated Distribution and Service Plan for Class A
shares. Incorporated by reference to Exhibit 15(a) to the
Registration Statement on Form N-14 (File No. 333-64907) filed via
EDGAR on September 30, 1998.
(2) Distribution and Service Plan for Class B shares.*
(3) Amended and Restated Distribution and Service Plan for Class C
shares. Incorporated by reference to Exhibit 15(c) to the
Registration Statement on Form N-14 (File No. 333-64907) filed via
EDGAR on September 30, 1998.
(n) Amended Rule 18f-3 Plan. Incorporated by reference to Exhibit (o) to
Post-Effective Amendment No. 27 to the Registration Statement on Form
N-1A (File No. 2-82976) filed via EDGAR on May 14, 1999.
(p) (1) Code of Ethics of Registrant.*
(2) Code of Ethics of Prudential Investment Management, Inc.,
Prudential Investments LLC and Prudential Investment Management
Services, LLC.*
(q) Power of Attorney.*
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ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 25. INDEMNIFICATION.
As permitted by Section 17(h) and (i) of the Investment Company Act of 1940, as amended (the 1940 Act), and pursuant to Article VII of the Fund's By-Laws (Exhibit (b) to the Registration Statement), present and former officers, directors, employees and agents of the Registrant shall be indemnified by the Registrant against judgments, fines, settlements and expenses to the fullest extent authorized and in the manner permitted, by applicable federal and state law. Section 2-418 of Maryland General Corporation Law permits indemnification of directors who acted in good faith and reasonably believed that the conduct was in the best interests of the Registrant. As permitted by Section 17(i) of the 1940 Act, pursuant to Section 10 of the Distribution Agreement (Exhibit (e)(1) to the Registration Statement), in certain cases the Distributor of the Registrant may be indemnified against liabilities which it may incur, except liabilities arising from bad faith, gross negligence in the performance of its duties, willful misfeasance or reckless disregard of duties.
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (Securities Act), may be permitted to directors, officers and controlling persons of the Registrant pursuant to foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange Commission (the 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. Pursuant and subject to the provisions of Article VII of the Registrant's By-Laws, the Registrant shall indemnify each present and former director, officer, employee, and agent of the Registrant against, or advance the expenses of any such person for, the amount of any deductible provided in any liability insurance policy maintained by the Registrant.
Section 10 of the Management Agreement (Exhibit (d)(1) to the Registration Statement) and Section 4 of the Subadvisory Agreement (Exhibit (d)(2) to the Registration Statement) limit the liability of Prudential Investments LLC (PI) (formerly known as Prudential Investments Fund Management LLC) and Prudential Investment Management, Inc. (PIM) (as a successor to The Prudential Investment Corporation), 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. Section 10 of the Management Agreement also holds PIFM liable for losses resulting from a breach of fiduciary duty with respect to the receipt of compensation for services.
The Registrant hereby undertakes that it will apply the indemnification provisions of its By-Laws and the Distribution Agreement in a manner consistent with Release No. 11330 of the Commission under the 1940 Act so long as the interpretation of Sections 17(h) and 17(i) of such Act remain in effect and are consistently applied.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.
(a) Prudential Investments LLC (PI)
See "How the Fund is Managed--Manager" in the Prospectus constituting
Part A of this Registration Statement and "Investment Advisory and Other
Services" in the Statement of Additional Information constituting Part B of this Registration Statement.
The business and other connections of the officers of PI are listed in Schedules A and D of Form ADV of PI as currently on file with the Commission, the text of which is hereby incorporated by reference (File No. 801-31104).
The business and other connections of PI's directors and principal executive officers are set forth below. Except as otherwise indicated, the address of each person is Gateway Center Three, 100 Mulberry Street, Newark, NJ 07102-4077.
NAME AND ADDRESS POSITION WITH PI PRINCIPAL OCCUPATIONS
---------------- -------------------- ---------------------
David R. Odenath, Jr. Officer in Charge, Officer in Charge, President, Chief Executive Officer and
President, Chief Chief Operating Officer, PI; Senior Vice President, The
Executive Officer Prudential Insurance Company of America (Prudential)
and Chief Operating
Officer
Catherine A. Brauer Executive Vice Executive Vice President, PI
President
Robert F. Gunia Executive Vice Executive Vice President and Chief Administrative Officer,
President and Chief PI; Vice President, Prudential; President, PIMS
Administrative
Officer
William V. Healey Executive Vice Executive Vice President, Chief Legal Officer and Secretary,
President, Chief PI; Vice President and Associate General Counsel,
Legal Officer and Prudential; Senior Vice President, Chief Legal Officer and
Secretary Secretary, PIMS
Marc S. Levine Executive Vice Executive Vice President, PI
President
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NAME AND ADDRESS POSITION WITH PI PRINCIPAL OCCUPATIONS
---------------- -------------------- ---------------------
Stephen Pelletier Executive Vice Executive Vice President, PI
President
Judy A. Rice Executive Vice Executive Vice President, PI
President
Ajay Sawhney Executive Vice Executive Vice President, PI
President
Lynn M. Waldvogel Executive Vice Executive Vice President, PI
President
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(b) Prudential Investment Management, Inc. (PIM)
See "How the Fund is Managed--Manager" in the Prospectus constituting
Part A of this Registration Statement and "Investment Advisory and Other
Services" in the Statement of Additional Information constituting Part B of this Registration Statement.
The business and other connections of PIM's directors and executive officers are as set forth below. Except as otherwise indicated, the address of each person is Prudential Plaza, 751 Broad Street, Newark, NJ 07102.
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
---------------- -------------------- ---------------------
John R. Strangfeld, Jr. Chairman of the Chief Executive Officer, Prudential Securities Incorporated;
Board, President, Executive Vice President, Prudential; President, Prudential
Chief Executive Global Asset Management Group of Prudential; Chairman of
Officer and Director the Board, President, Chief Executive Officer and Director,
PIM
Bernard Winograd Senior Vice Chief Executive Officer, Prudential Real Estate Investors;
President and Senior Vice President and Director, PIM
Director
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ITEM 27. PRINCIPAL UNDERWRITERS.
(a) Prudential Investment Management Services LLC (PIMS)
PIMS is distributor for: Cash Accumulation Trust, COMMAND Money Fund, COMMAND Government Fund, COMMAND Tax-Free Fund, Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth Equity Fund), Prudential California Municipal Fund, Prudential Equity Fund, Inc., Prudential Prudential Europe Growth Fund, Inc., Prudential's Gibraltar Fund, Inc., Prudential Global Total Return Fund, Inc., Prudential Government Income Fund, Inc., Prudential Government Securities Trust, Prudential High Yield Fund, Inc., Prudential Index Series Fund, Prudential Institutional Liquidity Portfolio, Inc., Prudential MoneyMart Assets, Inc., Prudential Municipal Bond Fund, Prudential Municipal Series Fund, Prudential National Municipals Fund, Inc., Prudential National Resources Fund, Inc., Prudential Pacific Growth Fund, Inc., Prudential Real Estate Securities Fund, Prudential Sector Funds, Inc., Prudential Short-Term Corporate Bond Fund, Inc., Prudential Small Company Fund, Inc., Strategic Partners Asset Allocation Funds, Strategic Partners Opportunity Funds, Strategic Partners Style Specific Funds, Prudential Tax-Free Money Fund, Inc., Prudential Tax-Managed Funds, Prudential Total Return Bond Fund, Inc., Prudential 20/20 Focus Fund, Prudential U.S. Emerging Growth Fund, Inc., Prudential Value Fund, Prudential World Fund, Inc., The Prudential Investment Portfolios, Inc., and The Target Portfolio Trust.
PIMS is also distributor of the following unit investment trusts: Separate Accounts: The Prudential Variable Contract Account-2, The Prudential Variable Contract Account-10, The Prudential Variable Contract Account-11, The Prudential Variable Contract Account-24, The Prudential Variable Contract GI-2, The Prudential Discovery Select Group Variable Contract Account, The Pruco Life Flexible Premium Variable Annuity Account, The Prudential Individual Variable Contract Account and The Prudential Qualified Individual Variable Contract Account.
(b) Information concerning the directors and officers of PIMS is set forth below.
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
------- ------------- -------------
Stuart A. Abrams.................... Senior Vice President and Chief Compliance Officer None
213 Washington Street
Newark, NJ 07102
Margaret Deverell................... Vice President and Chief Financial Officer None
213 Washington Street
Newark, NJ 07102
Robert F. Gunia..................... President Vice President and Director
William V. Healey................... Senior Vice President, Secretary and Chief Legal Officer Assistant Secretary
Bernard B. Winograd................. Executive Vice President None
|
(1) The address of each person named is 751 Broad Street, Newark, NJ 07102-4077 unless otherwise indicated.
(c) Registrant has no principal underwriter who is not an affiliated person of the Registrant.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the Rules thereunder are maintained at the
offices of State Street Bank and Trust Company, One Heritage Drive, North
Quincy, Massachusetts 02171, Prudential Investment Management, Inc., Prudential
Plaza, 751 Broad Street, Newark, New Jersey 07102, the Registrant, Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102, and Prudential
Mutual Fund Services LLC, 194 Wood Avenue South, Iselin, New Jersey 08830.
Documents required by Rules 31a-1(b)(5), (6), (7), (9), (10) and (11)
and 31a-1(f) and Rules 31a-1(b)(4) and (11) and 31a-1(d) will be kept at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077 and the
remaining accounts, books and other documents required by such other pertinent
provisions of Section 31(a) and the Rules promulgated thereunder will be kept by
State Street Bank and Trust Company and Prudential Mutual Fund Services LLC.
ITEM 29. MANAGEMENT SERVICES.
Other than as set forth under the captions "How the Fund is Managed--Manager," "--Investment Adviser" and "--Distributor" in the Prospectus and the captions "Investment Advisory and Other Services--Manager and Investment Adviser" and "--Principal Underwriter, Distributor and Rule 12b-1 Plans" in the Statement of Additional Information, constituting Parts A and B, respectively, of this Post-Effective Amendment to the Registration Statement, Registrant is not a party to any management-related service contract.
ITEM 30. UNDERTAKINGS.
Registrant makes the following undertaking:
(a) 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.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets all of the requirements for effectiveness of this Post-Effective Amendment to the Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Post-Effective Amendment to the Registration Statement to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Newark, and State of New Jersey, on the 29th day of April, 2002.
PRUDENTIAL GOVERNMENT INCOME FUND, INC. By: * ---------------------------------------- DAVID R. ODENATH, JR., PRESIDENT |
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment to the Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
* Director
------------------------------------
EUGENE C. DORSEY
* Director
------------------------------------
DELAYNE D. GOLD
* Vice President and Director
------------------------------------
ROBERT F. GUNIA
* Director
------------------------------------
THOMAS T. MOONEY
* Director
------------------------------------
STEPHEN P. MUNN
* President and Director
------------------------------------
DAVID R. ODENATH, JR.
* Director
------------------------------------
RICHARD A. REDEKER
* Vice President and Director
------------------------------------
JUDY A. RICE
* Director
------------------------------------
NANCY HAYS TEETERS
* Director
------------------------------------
LOUIS A. WEIL, III
* Treasurer and Principal Financial
------------------------------------ and Accounting Officer
GRACE C. TORRES
|
/s/ DEBORAH A. DOCS April 29, 2002 ------------------------------------ DEBORAH A. DOCS (ATTORNEY-IN-FACT) |
EXHIBIT INDEX
(g)(6) Amendment to Custodian Contract/Agreement dated as of July 17,
2001 by and between the Registrant and State Street Bank and
Trust Company.
(g)(7) Amendment to Custodian Contract/Agreement dated as of
January 17, 2002 by and between the Registrant and State Street
Bank and Trust Company.
(i) Opinion and Consent of Counsel.
(j) Consent of Independent Accountants.
(m)(2) Distribution and Service Plan for Class B Shares.
(p)(1) Code of Ethics of Registrant.
(p)(2) Code of Ethics of Prudential Investment Management, Inc.,
Prudential Investments LLC and Prudential Investment Management
Services, LLC.
(q) Power of Attorney.
|
AMENDMENT TO CUSTODIAN CONTRACT
This Amendment to the Custodian Contract is made as of July 17, 2001 by and between each of the funds listed on the attached Schedule D (including any series thereof, each, a "Fund") and State Street Bank and Trust Company (the "Custodian"). Capitalized terms used in this Amendment without definition shall have the respective meanings given to such terms in the Custodian Contract referred to below.
WHEREAS, each Fund and the Custodian entered into a Custodian Contract dated as of the dates set for on Schedule D (each contract, as amended and in effect from time to time, a "Contract");
WHEREAS, each Fund may be authorized to issue shares in separate series, with each such series representing interests in a separate portfolio of securities and other assets, and the Fund has made each such series listed on Schedule D subject to the Contract (each such series, together with all other series subsequently established by the Fund and made subject to the Contract in accordance with the terms thereof, shall be referred to as a "Portfolio", and, collectively, the "Portfolios");
WHEREAS, the Fund and the Custodian desire to amend certain provisions of the Contract to reflect revisions to Rule 17f-5 ("Rule 17f-5") and the adoption of Rule 17f-7 ("Rule 17f-7") promulgated under the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Fund and the Custodian desire to amend and restate certain other provisions of the Contract relating to the custody of assets of the Fund and any such Portfolio held outside of the United States.
NOW THEREFORE, in consideration of the foregoing and the mutual covenants and agreements hereinafter contained, the parties hereby agree to amend the Contract, pursuant to the terms thereof, as follows:
I. The amendment to the Contract relating to the 1997 revisions to Rule 17f-5 promulgated under the Investment Company Act of 1940 and dated February 22, 1999 is hereby deleted, and the parties hereto agree that it shall be and is replaced in its entirety by the provisions set forth below.
3. Provisions Relating to Rules 17f-5 and 17f-7
3.1. Definitions. Capitalized terms in this Amendment shall have the following meanings:
"Country Risk" means all factors reasonably related to the systemic risk of holding Foreign Assets in a particular country including, but not limited to, such country's political environment, economic and financial infrastructure (including any Eligible Securities Depository operating in the country), prevailing or developing custody and settlement practices, and laws and regulations applicable to the safekeeping and recovery of Foreign Assets held in custody in that country.
"Eligible Foreign Custodian" has the meaning set forth in section (a)(1) of Rule 17f-5, including a majority-owned or indirect subsidiary of a U.S. Bank (as defined in Rule 17f-5), a bank holding company meeting the requirements of
an Eligible Foreign Custodian (as set forth in Rule 17f-5 or by other appropriate action of the U.S. Securities and Exchange Commission (the "SEC")), or a foreign branch of a Bank (as defined in Section 2(a)(5) of the 1940 Act) meeting the requirements of a custodian under Section 17(f) of the 1940 Act; the term does not include any Eligible Securities Depository. "Eligible Securities Depository" has the meaning set forth in section (b)(1) of Rule 17f-7.
"Foreign Assets" means any of the Funds' and/or Portfolios' investments (including foreign currencies) for which the primary market is outside the United States and such cash and cash equivalents as are reasonably necessary to effect the Funds' and/or Portfolios' transactions in such investments.
"Foreign Custody Manager" has the meaning set forth in section (a)(3) of Rule 17f-5.
3.2. The Custodian as Foreign Custody Manager.
3.2.1 Delegation to the Custodian as Foreign Custody Manager. The Fund, by resolution adopted by its Board of Trustees/Directors (the "Board"), hereby delegates to the Custodian, subject to Section (b) of Rule 17f-5, the responsibilities set forth in this Section 3.2 with respect to Foreign Assets of the Funds and/or Portfolios held outside the United States, and the Custodian hereby accepts such delegation as Foreign Custody Manager with respect to the Funds and/or Portfolios.
3.2.2 Countries Covered. The Foreign Custody Manager shall be responsible for performing the delegated responsibilities defined below only with respect to the countries and custody arrangements for each such country listed on Schedule A to this Contract, which list of countries may be amended from time to time by the Fund with the agreement of the Foreign Custody Manager. The Foreign Custody Manager shall list on Schedule A the Eligible Foreign Custodians selected by the Foreign Custody Manager to maintain the assets of the Funds and/or Portfolios, which list of Eligible Foreign Custodians may be amended from time to time in the sole discretion of the Foreign Custody Manager. The Foreign Custody Manager will provide amended versions of Schedule A in accordance with Section 3.2.5 hereof.
Upon the receipt by the Foreign Custody Manager of Proper Instructions to open an account or to place or maintain Foreign Assets in a country listed on Schedule A, and the fulfillment by the Fund, on behalf of the Portfolios, of the applicable account opening requirements for such country, the Foreign Custody Manager shall be deemed to have been delegated by the Board on behalf of the Portfolios responsibility as Foreign Custody Manager with respect to that country and to have accepted such delegation. Execution of this Amendment by the Fund shall be deemed to be a Proper Instruction to open an account, or to place or maintain Foreign Assets, in each country listed on Schedule A in which the Custodian has previously placed or currently maintains Foreign Assets pursuant to the terms of the Contract. Following the receipt of Proper Instructions directing the Foreign Custody Manager to close the account of a Portfolio with the Eligible Foreign Custodian selected by the Foreign Custody Manager in a designated country, the delegation by the Board on behalf of the Portfolios to the Custodian as Foreign Custody Manager for that country shall be deemed to have been withdrawn and the Custodian shall immediately cease to be the Foreign Custody Manager of the Portfolios with respect to that country. The Foreign Custody Manager may withdraw its acceptance of delegated
responsibilities with respect to a designated country upon written notice to the Fund. Thirty days (or such longer period to which the parties agree in writing) after receipt of any such notice by the Fund, the Custodian shall have no further responsibility in its capacity as Foreign Custody Manager to the Fund with respect to the country as to which the Custodian's acceptance of delegation is withdrawn.
3.2.3 Scope of Delegated Responsibilities:
(a) Selection of Eligible Foreign Custodians. Subject to the provisions of this Section 3.2, the Foreign Custody Manager may place and maintain the Foreign Assets in the care of the Eligible Foreign Custodian selected by the Foreign Custody Manager in each country listed on Schedule A, as amended from time to time. In performing its delegated responsibilities as Foreign Custody Manager to place or maintain Foreign Assets with an Eligible Foreign Custodian, the Foreign Custody Manager shall determine that the Foreign Assets will be subject to reasonable care, based on the standards applicable to custodians in the country in which the Foreign Assets will be held by that Eligible Foreign Custodian, after considering all factors relevant to the safekeeping of such assets, including, without limitation the factors specified in Rule 17f-5(c)(1).
(b) Contracts With Eligible Foreign Custodians. The Foreign Custody Manager shall determine that the contract governing the foreign custody arrangements with each Eligible Foreign Custodian selected by the Foreign Custody Manager will satisfy the requirements of Rule 17f-5(c)(2).
(c) Monitoring. In each case in which the Foreign Custody Manager maintains Foreign Assets with an Eligible Foreign Custodian selected by the Foreign Custody Manager, the Foreign Custody Manager shall establish a system to monitor in accordance with Rule 17f-5(c)(3), (i) the appropriateness of maintaining the Foreign Assets with such Eligible Foreign Custodian and (ii) the contract governing the custody arrangements established by the Foreign Custody Manager with the Eligible Foreign Custodian. In the event the Foreign Custody Manager determines that the custody arrangements with an Eligible Foreign Custodian it has selected are no longer appropriate, the Foreign Custody Manager shall notify the Board and the Fund's duly appointed manager in accordance with Section 3.2.5 hereunder.
3.2.4 Guidelines for the Exercise of Delegated Authority. For purposes of this Section 3.2, the Board shall be deemed to have considered and determined to accept such Country Risk as is incurred by placing and maintaining the Foreign Assets in each country for which the Custodian is serving as Foreign Custody Manager of the Portfolios.
3.2.5 Reporting Requirements. The Foreign Custody Manager shall report
the withdrawal of the Foreign Assets from an Eligible Foreign Custodian and the
placement of such Foreign Assets with another Eligible Foreign Custodian by
providing to the Board and the Fund's duly appointed manager an amended Schedule
A at the end of the calendar quarter in which an amendment to such Schedule has
occurred. The Foreign Custody Manager shall make written reports notifying the
Board and the Fund's duly appointed manager of any other material change in the
foreign custody arrangements of the Funds and/or Portfolios described in this
Section 3.2 after the occurrence of the material change.
3.2.6 Standard of Care as Foreign Custody Manager of the Fund. In performing the responsibilities delegated to it, the Foreign Custody Manager
agrees to exercise reasonable care, prudence and diligence such as a person having responsibility for the safekeeping of assets of management investment companies registered under the 1940 Act would exercise.
3.2.7 Representations with Respect to Rule 17f-5. The Foreign Custody
Manager represents to the Fund that it is a U.S. Bank as defined in section
(a)(7) of Rule 17f-5. The Fund represents to the Custodian that the Board has
determined that it is reasonable for the Board to rely on the Custodian to
perform the responsibilities delegated pursuant to this Contract to the
Custodian as the Foreign Custody Manager of the Portfolios.
3.2.8 Effective Date and Termination of the Custodian as Foreign Custody Manager. The Board's delegation to the Custodian as Foreign Custody Manager of the Portfolios shall be effective as of the date hereof and shall remain in effect until terminated at any time, without penalty, by written notice from the terminating party to the non-terminating party. Termination will become effective thirty (30) days after receipt by the non-terminating party of such notice. The provisions of Section 3.2.2 hereof shall govern the delegation to and termination of the Custodian as Foreign Custody Manager of the Portfolios with respect to designated countries.
3.3 Eligible Securities Depositories.
3.3.1 Analysis and Monitoring. The Custodian shall (a) provide the Board and the Fund's duly appointed manager with an analysis of the custody risks associated with maintaining assets with the Eligible Securities Depositories set forth on Schedule B hereto in accordance with section (a)(1)(i)(A) of Rule 17f-7, and (b) monitor such risks on a continuing basis, and promptly notify the Board and the Fund's duly appointed manager of any material change in such risks in accordance with section (a)(1)(i)(B) of Rule 17f-7. The risk analysis provided by the Custodian may include consideration of the following, as deemed appropriate and relevant by the Custodian: a depository's expertise and market reputation, the quality of its services, its financial strength (including the level of settlement guarantee funds, collateral requirements, lines of credit, or insurance as compared with participants' daily settlement obligations), any insurance or indemnification arrangements, the extent and quality of regulation and independent examination of the depository, its standing in published ratings, its internal controls and other procedures for safeguarding investments, and any related legal protections.
3.3.2 Standard of Care. The Custodian agrees to exercise reasonable care, prudence and diligence in performing the duties set forth in Section 3.3.1.
4. Duties of the Custodian with Respect to Property of the Portfolios Held Outside the United States.
4.1 Definitions. Capitalized terms in this Article 4 shall have the following meanings:
"Foreign Securities System" means an Eligible Securities Depository listed on Schedule B hereto.
"Foreign Sub-Custodian" means a foreign banking institution serving as an Eligible Foreign Custodian.
4.2. Holding Securities. The Custodian shall identify on its books as belonging to the Portfolios the foreign securities held by each Foreign Sub-Custodian or Foreign Securities System. The Custodian may hold foreign securities for all of its customers, including the Portfolios, with any Foreign Sub-Custodian in an account that is identified as belonging to the Custodian for the benefit of its customers, provided however, that (i) the records of the Custodian with respect to foreign securities of the Portfolios which are maintained in such account shall identify those securities as belonging to the Portfolios and (ii), to the extent permitted and customary in the market in which the account is maintained, the Custodian shall require that securities so held by the Foreign Sub-Custodian be held separately from any assets of such Foreign Sub-Custodian or of other customers of such Foreign Sub-Custodian.
4.3. Foreign Securities Systems. Foreign securities shall be maintained in a Foreign Securities System in a designated country through arrangements implemented by the Custodian or a Foreign Sub-Custodian, as applicable, in such country.
4.4. Transactions in Foreign Custody Account.
4.4.1. Delivery of Foreign Assets. The Custodian or a Foreign Sub- Custodian shall release and deliver foreign securities of the Portfolios held by the Custodian or such Foreign Sub-Custodian, or in a Foreign Securities System account, only upon receipt of Proper Instructions, which may be continuing instructions when deemed appropriate by the parties, and only in the following cases:
(i) upon the sale of such foreign securities for the Portfolio in accordance with commercially reasonable market practice in the country where such foreign securities are held or traded, including, without limitation: (A) delivery against expectation of receiving later payment; or (B) in the case of a sale effected through a Foreign Securities System, in accordance with the rules governing the operation of the Foreign Securities System;
(ii) in connection with any repurchase agreement related to foreign securities:
(iii) to the depository agent in connection with tender or other similar offers for foreign securities of the Portfolios;
(iv) to the issuer thereof or its agent when such foreign securities are called, redeemed, retired or otherwise become payable;
(v) to the issuer thereof, or its agent, for transfer into the name of the Custodian (or the name of the respective Foreign Sub- Custodian or of any nominee of the Custodian or such Foreign Sub-Custodian) or for exchange for a different number of bonds, certificates or other evidence representing the same aggregate face amount or number of units;
(vi) to brokers, clearing banks or other clearing agents for examination or trade execution in accordance with market custom; provided that in any such case the Foreign Sub-Custodian shall have no responsibility or liability for any loss arising from the delivery of such securities
prior to receiving payment for such securities except as may arise from the Foreign Sub-Custodian's own negligence or willful misconduct;
(vii) for exchange or conversion pursuant to any plan of merger, consolidation, recapitalization, reorganization or readjustment of the securities of the issuer of such securities, or pursuant to provisions for conversion contained in such securities, or pursuant to any deposit agreement;
(viii) in the case of warrants, rights or similar foreign securities, the surrender thereof in the exercise of such warrants, rights or similar securities or the surrender of interim receipts or temporary securities for definitive securities;
(ix) for delivery as security in connection with any borrowing by the Portfolios requiring a pledge of assets by the Portfolios;
(x) in connection with trading in options and futures contracts, including delivery as original margin and variation margin;
(xi) in connection with the lending of foreign securities; and
(xii) for any other purpose, but only upon receipt of Proper Instructions specifying the foreign securities to be delivered and naming the person or persons to whom delivery of such securities shall be made.
4.4.2. Payment of Portfolio Monies. Upon receipt of Proper Instructions, which may be continuing instructions when deemed appropriate by the parties, the Custodian shall pay out, or direct the respective Foreign Sub-Custodian or the respective Foreign Securities System to pay out, monies of a Portfolio in the following cases only:
(i) upon the purchase of foreign securities for the Portfolio, unless otherwise directed by Proper Instructions, by (A) delivering money to the seller thereof or to a dealer therefor (or an agent for such seller or dealer) against expectation of receiving later delivery of such foreign securities; or (B) in the case of a purchase effected through a Foreign Securities System, in accordance with the rules governing the operation of such Foreign Securities System;
(ii) in connection with the conversion, exchange or surrender of foreign securities of the Portfolio;
(iii) for the payment of any expense or liability of the Portfolio, including but not limited to the following payments: interest, taxes, investment advisory fees, transfer agency fees, fees under this Contract, legal fees, accounting fees, and other operating expenses;
(iv) for the purchase or sale of foreign exchange or foreign exchange contracts for the Portfolio, including transactions executed with or through the Custodian or its Foreign Sub-Custodians;
(v) in connection with trading in options and futures contracts, including delivery as original margin and variation margin;
(vi) for payment of part or all of the dividends received in respect of securities sold short;
(vii) in connection with the borrowing or lending of foreign securities; and
(viii) for any other purpose, but only upon receipt of Proper Instructions specifying the amount of such payment and naming the person or persons to whom such payment is to be made.
4.4.3. Market Conditions. Notwithstanding any provision of this Contract to the contrary, settlement and payment for Foreign Assets received for the account of the Portfolios and delivery of Foreign Assets maintained for the account of the Portfolios may be effected in accordance with the customary established securities trading or processing practices and procedures in the country or market in which the transaction occurs, including, without limitation, delivering Foreign Assets to the purchaser thereof or to a dealer therefor (or an agent for such purchaser or dealer) with the expectation of receiving later payment for such Foreign Assets from such purchaser or dealer.
The Custodian shall provide to the Board and the Fund's duly appointed manager the information with respect to custody and settlement practices in countries in which the Custodian employs a Foreign Sub-Custodian described on Schedule C hereto at the time or times set forth on such Schedule. The Custodian may revise Schedule C from time to time, provided that no such revision shall result in the Board being provided with substantively less information than had been previously provided hereunder.
4.5. Registration of Foreign Securities. The foreign securities maintained in the custody of a Foreign Sub-Custodian (other than bearer securities) shall be registered in the name of the applicable Portfolio or in the name of the Custodian or in the name of any Foreign Sub-Custodian or in the name of any nominee of the foregoing, and the Fund on behalf of such Portfolio agrees to hold any such nominee harmless from any liability as a holder of record of such foreign securities. The Custodian or a Foreign Sub-Custodian shall not be obligated to accept securities on behalf of a Portfolio under the terms of this Contract unless the form of such securities and the manner in which they are delivered are in accordance with reasonable market practice.
4.6 Bank Accounts. The Custodian shall identify on its books as belonging to the Fund cash (including cash denominated in foreign currencies) deposited with the Custodian. Where the Custodian is unable to maintain, or market practice does not facilitate the maintenance of, cash on the books of the Custodian, a bank account or bank accounts shall be opened and maintained outside the United States on behalf of a Portfolio with a Foreign Sub-Custodian. All accounts referred to in this Section shall be subject only to draft or order by the Custodian (or, if applicable, such Foreign Sub Custodian) acting pursuant to the terms of this Amendment to hold cash received by or from or for the account of the Portfolio. Cash maintained on the books of the Custodian (including its branches, subsidiaries and affiliates), regardless of currency denomination, is maintained in bank accounts established under, and subject to the laws of, The Commonwealth of Massachusetts.
4.7. Collection of Income. The Custodian shall use reasonable commercial efforts to collect all income and other payments with respect to the Foreign Assets held hereunder to which the Portfolios shall be entitled and shall credit such income, as collected, to the applicable Portfolio. In the event that extraordinary measures are required to collect such income, the Fund and the custodian shall consult as to such measures and as to the compensation and expenses of the Custodian relating to such measures.
4.8 Shareholder Rights With respect to the foreign securities held pursuant to this Article 4, the Custodian will use reasonable commercial efforts to facilitate the exercise of voting and other shareholder rights, subject always to the laws, regulations and practical constraints that may exist in the country where such securities are issued. The Fund acknowledges that local conditions, including lack of regulation, onerous procedural obligations, lack of notice and other factors may have the effect of severely limiting the ability of the Fund to exercise shareholder rights.
4.9. Communications Relating to Foreign Securities. The Custodian shall transmit promptly to the Fund written information with respect to materials received by the Custodian via the Foreign Sub-Custodians from issuers of the foreign securities being held for the account of the Portfolios (including, without limitation, pendency of calls and maturities of foreign securities and expirations of rights in connection therewith). With respect to tender or exchange offers, the Custodian shall transmit promptly to the Fund written information with respect to materials so received by the Custodian from issuers of the foreign securities whose tender or exchange is sought or from the party (or its agents) making the tender or exchange offer. The Custodian shall not be liable for any untimely exercise of any tender, exchange or other right or power in connection with foreign securities or other property of the Portfolios at any time held by it unless (i) the Custodian or the respective Foreign Sub-Custodian is in actual possession of such foreign securities or property and (ii) the Custodian receives Proper Instructions with regard to the exercise of any such right or power, and both (i) and (ii) occur at least three business days prior to the date on which the Custodian is to take action to exercise such right or power.
4.10. Liability of Foreign Sub-Custodians.
Each agreement pursuant to which the Custodian employs a Foreign Sub-Custodian shall require the Foreign Sub-Custodian to exercise reasonable care in the performance of its duties, and, to the extent possible, to indemnify, and hold harmless, the Custodian from and against any loss, damage, cost, expense, liability or claim arising out of or in connection with the Foreign Sub- Custodian's performance of such obligations. At the Fund's election, the Portfolios shall be entitled to be subrogated to the rights of the Custodian with respect to any claims against a Foreign Sub-Custodian as a consequence of any such loss, damage, cost, expense, liability or claim if and to the extent that the Portfolios have not been made whole for any such loss, damage, cost, expense, liability or claim.
4.11. Tax Law.
The Custodian shall have no responsibility or liability for any obligations now or hereafter imposed on the Fund, the Portfolios or the Custodian as custodian of the Portfolios by the tax law of the United States or of any state or political subdivision thereof. It shall be the responsibility of the Fund to notify the Custodian of the obligations imposed on the Fund with respect to the
Portfolios or the Custodian as custodian of the Portfolios by the tax law of countries other than those mentioned in the above sentence, including responsibility for withholding and other taxes, assessments or other governmental charges, certifications and governmental reporting. The sole responsibility of the Custodian with regard to such tax law shall be to use reasonable efforts to assist the Fund with respect to any claim for exemption or refund under the tax law of countries for which the Fund has provided such information.
4.12. Liability of Custodian.
Except as may arise from the Custodian's own negligence or willful misconduct or the negligence or willful misconduct of a Sub-Custodian, the Custodian shall be without liability to the Fund for any loss, liability, claim or expense resulting from or caused by anything which is part of Country Fisk.
The Custodian shall be liable for the acts or omissions of a Foreign Sub- Custodian to the same extent as set forth with respect to sub-custodians generally in the Contract and, regardless of whether assets are maintained in the custody of a Foreign Sub-Custodian or a Foreign Securities System, the Custodian shall not be liable for any loss, damage, cost, expense, liability or claim resulting from nationalization, expropriation, currency restrictions, or acts of war or terrorism, or any other loss where the Foreign Sub-Custodian has otherwise acted with reasonable care.
11. Except as specifically superseded or modified herein, the terms and provisions of the Contract shall continue to apply with full force and effect. In the event of any conflict between the terms of the Contract prior to this Amendment and this Amendment, the terms of this Amendment shall prevail. If the Custodian is delegated the responsibilities of Foreign Custody Manager pursuant to the terms of Section 3.2.1 hereof, in the event of any conflict between the provisions of Articles 3 and 4 hereof, the provisions of Article 3 shall prevail.
IN WITNESS WHEREOF, each of the parties has caused this Amendment to be executed in its name and behalf by its duly authorized representative as of the date first above written.
WITNESSED BY: STATE STREET BANK and TRUST
COMPANY
/s/ Raelene S. LaPlante /s/ Ronald E. Logue
----------------------- -------------------
Raelene S. LaPlante Ronald E. Logue
V.P. & Associate Counsel Vice Chairman and Chief
Operating Officer
WITNESSED BY: EACH FUND LISTED ON SCHEDULE D
/s/ Jane Dalton /s/ Judy Rice
--------------- -------------
Jane Dalton Judy Rice
Administrative Asst. EVP/Program Management
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SCHEDULE A
STATE STREET
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS
COUNTRY SUBCUSTODIAN
Argentina Citibank, N.A.
Australia Westpac Banking Corporation
Austria Erste Ban der Osterreichischen Sparkassen AG
Bahrain HSBC Bank Middle East
(as delegate of the Hongkong and Shanghai
Banking Corporation Limited)
Bangladesh Standard Chartered Bank
Belgium Fortis Bank nv-sa
Benin via Societe Generale de Banques en Cote
d'Ivoire, Abidjan, Ivory Coast
Bermuda The Bank of Bermuda Limited
Bolivia Citibank, N.A.
Botswana Barclays Bank of Botswana Limited
Brazil Citibank, N.A.
Bulgaria ING Bank N.V.
Burkina Faso via Societe Generale de Banques en Cote
d'Ivoire, Abidjan, Ivory Coast
Canada State Street Trust Company Canada
Chile BankBoston, V.A.
People's Republic of China Hong Kong and Shanghai Banking Corporation
Limited, Shanghai and Shenzhen branches
Colombia Cititrust Colombia S.A. Sociedad Fiduciaria
Costa Rica Banco BCT S.A.
Croatia Privredna Banka Zagreb d.d
Cyprus The Cyprus Popular Bank Ltd.
Czech Republic Ceskoslovenski Obchodni Banka, A.S.
|
Denmark Danske Bank A/S
Ecuador Citibank, N.A.
Egypt HSBC Bank Egypt S.A.E (as delegate of the
Hongkong and Shanghai Banking Corporation
Limited)
Estonia Hansabank
Finland Merita Bank Plc.
France BNP Paribas Securities Services, S.A,
Germany Dresdner Bank AG
Ghana Barclays Bank of Ghana Limited
Greece National Bank of Greece S.A.
Guinea-Bissau via Societe Generale de Banques en Cote
d'Ivoire, Abidjan, Ivory Coast
Hong Kong Standard Chartered Bank
Hungary Citibank Rt. (converting to Bank Austria
Creditanstalt Rt August 10, 2001)
Iceland Icebank Ltd.
India Deutsche Bank AG
Hongkong and Shanghai Banking Corporation
Limited
Indonesia Standard Chartered Bank
Ireland Bank of Ireland
Israel Bank Hapoalim B.M.
Italy BNP Paribas, Italian Branch
Ivory Coast Societe Generale de Banques en Cote d'Ivoire
Jamaica Scotiabank Jamaica Trust and Merchant Bank Ltd.
Japan The Fuji Bank, Limited Sumitomo Mitsui
Banking Corporation
Jordan HSBC Bank Middle East (as delegate of Hongkong
and Shanghai Banking Corporation Limited)
Kazakhstan HSBC Bank Kazakhstan
Kenya Barclays Bank of Kenya Limited
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Republic of Korea Hongkong and Shanghai Banking
Corporation Limited
Latvia A/s Hansabanka
Lebanon HSBC Bank Middle East (as delegate of the
Hongkong and Shanghai Banking Corporation
Limited)
Lithuania Vilniaus Bankas AB
Malaysia Standard Chartered Bank Malaysia Berhad
Mali via Societe Generale de Banques en Cote
d'Ivoire, Abidjan, Ivory Coast
Mauritius Hongkong and Shanghai Banking Corporation
Limited
Mexico Citibank Mexico, S.A.
Morocco Banque Commerciale du Maroc
Namibia Standard Bank Namibia Limited
Netherlands Fortis Bank (Nederland) N.V.
New Zealand Westpac Banking Corporation
Niger via Societe General de Banques en Cote
d'Ivoire, Abidjan, Ivory Coast
Nigeria Stanbic Merchant Bank Nigeria Limited
Norway Christiania Bank og Kreditkasse ASA
Oman HSBC Bank Middle East (as delegate of the
Hongkong and Shanghai Banking Corporation
Limited)
Pakistan Deutsche Bank AG
Palestine HSBC Bank Middle East (as delegate of the
Hongkong and Shanghai Banking Corporation
Limited)
Panama BankBoston, N.A.
Peru Citibank, N.A.
Philippines Standard Chartered Bank
Poland Bank Handlowy w Warszawie S.A.
Portugal Banco Comercial Portugues
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Qatar HSBC Bank Middle East (as delegate of the
Hongkong and Shanghai Banking Corporation
Limited)
Romania ING Bank N.V.
Russia Credit Suisse First Boston AO - Moscow
(as delegate of Credit Suisse First
Boston - Zurich)
Senegal via Societe Generale de Banques en Cote
d'Ivoire, Abidjan, Ivory Coast
Singapore The Development Bank of Singapore Limited
Slovak Republic Ceskoslovenska Obchodni Banka, A.S.
Slovenia Bank Austria Creditanstalt d.d. - Ljubljana
South Africa Standard Bank of South Africa Limited
Spain Banco Santander Central Hispano S.A.
Sri Lanka Hongkong and Shanghai Banking Corporation
Limited
Swaziland Standard Bank Swaziland Limited
Sweden Skandinaviska Enskilda Banken
Switzerland UBS AG
Taiwan - R.O.C. Central Trust of China
Thailand Standard Chartered Bank
Togo via Societe Generale de Banques en Cote
d'Ivoire, Abidjan, Ivory Coast
Trinidad Republic Bank Limited & Tobago
Tunisia Banque Internationale Arabe de Tunisie
Turkey Citibank, N.A.
Ukraine ING Bank Ukraine
United Arab HSBC Bank Middle East Emirates
(as delegate of the Hongkong and Shanghai
Banking Corporation Limited)
United Kingdom State Street Bank and Trust Company,
London Branch
Uruguay BankBoston, N.A.
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Venezuela Citibank, N.A.
Vietnam The Hongkong and Shanghai Banking Corporation
Limited
Zambia Barclays Bank of Zambia Limited
Zimbabwe Barclays Bank of Zimbabwe Limited
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SCHEDULE B
DEPOSITORIES OPERATING IN NETWORK MARKETS
COUNTRY DEPOSITORIES
Argentina Caja de Valores S.A.
Australia Austraclear Limited Reserve Bank Information
and Transfer System
Austria Oesterreichische Kontrollbank AG
(Wertpapiersammelbank Division)
Belgium Caisse Interprofessionnelle de Depots
et de Virements de Titres, S.A.
Banque Nationale de Belgique
Benin Depositaire Central - Banque de Reglement
Brazil Companhia Brasileira de Liquidacao e Custodia
Sistema Especial de Liquidacao e de Custodia
(SELIC)
Central de Custodia e de Liquidacao
Financeira de Titulos Privados (CETIP)
Bulgaria Central Depository AD
Bulgarian National Bank
Burkina Faso Depositaire Central - Banque de Reglement
Canada Canadian Depository for Securities Limited
Chile Deposito Central de Valores SA.
People's Republic Shanghai Securities Central Clearing &
Of China Registration Corporation
Shenzhen Securities Central Clearing Co., Ltd.
Colombia Deposito Centralizado de Valores
Costa Rica Central de Valores S.A.
Croatia Ministry of Finance
National Bank of Croatia
Sredisnja Depozitarna Agencija d.d.
Czech Republic Stredisko cennych papiru
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Czech National Bank
Denmark Vaerdipapircentralen (Danish Securities
Center)
Egypt Misr for Clearing, Settlement, and Depository
Estonia Eesti Vaartpaberite Keskdepositoorium
Finland Finnish Central Securities Depository
France Euroclear France
Germany Clearstream Banking AG, Frankfurt
Greece Bank of Greece, System for Monitoring
Transactions in Securities in Book-Entry
Form
Apothetirion Titlon AE - Central Securities
Depository
Guinea-Bissau Depositaire Central - Banque de Reglement
Hong Kong Central Clearing and Settlement System
Central Moneymarkets Unit
Hungary Kozponti Elszamolohaz es Ertektar (Budapest)
Rt. (KELER)
Iceland Iceland Securities Depository Limited
India National Securities Depository Limited
Central Depository Services India Limited
Reserve Bank of India
Indonesia Bank Indonesia
PT Kustodian Sentral Efek Indonesia
Israel Tel Aviv Stock Exchange Clearing House Ltd.
(TASE Clearinghouse)
Italy Monte Titoli S.p.A.
Ivory Coast Depositaire Central - Banque de Reglement
Jamaica Jamaica Central Securities Depository
Japan Japan Securities Depository Center (JASDEC)
Bank of Japan Net System
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Kazakhstan Central Depository of Securities
Kenya Central Bank of Kenya
Republic of Korea Korea Securities Depository
Latvia Latvian Central Depository
Lebanon Custodian and Clearing Center of Financial
Instruments for Lebanon and the Middle East
(Midclear) S.A.L.
Banque du Liban
Lithuania Central Securities Depository of Lithuania
Malaysia Malaysian Central Depository Sdn. Bhd.
Bank Negara Malaysia, Scripless Securities
Trading and Safekeeping System
Mali Depositaire Central - Banque de Reglement
Mauritius Central Depository and Settlement Co. Ltd.
Bank of Mauritius
Mexico S.D. INDEVAL (Instituto para el Deposito de
Valores)
Morocco Maroclear
Netherlands Nederlands Centraal Instituut voor Giraal
Effectenverkeer B.V. (NECIGEF)
New Zealand New Zealand Central Securities Depository
Limited
Niger Depositaire Central - Banque de Reglement
Nigeria Central Securities Clearing System Limited
Norway Verdipapirsentralen (Norwegian Central
Securities Depository)
Oman Muscat Depository & Securities Registration
Company, SAOC
Pakistan Central Depository Company of Pakistan Limited
State Bank of Pakistan
Palestine Clearing Depository and Settlement, a
department of the Palestine Stock Exchange
Peru Caja de Valores y Liquidaciones, Institucion
de Compensacion y Liquidacion de Valores S.A.
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Philippines Philippine Central Depository, Inc.
Registry of Scripless Securities (ROSS) of the
Bureau of Treasury
Poland National Depository of Securities (Krajowy
Depozyt Papierow Wartoiciowych SA) Central
Treasury Bills Registrar
Portugal Central de Valores Mobiliarios
Qatar Central Clearing and Registration (CCR),
a department of the Doha Securities Market
Romania National Securities Clearing, Settlement
and Depository Company
Bucharest Stock Exchange Registry Division
National Bank of Romania
Russia Vneshtorgbank, Bank for Foreign Trade of the
Russian Federation
Senegal Depositaire Central - Banque de Reglement
Singapore Central Depository (Pte) Limited
Monetary Authority of Singapore
Slovak Republic Stredisko cennych papierov
National Bank of Slovakia
Slovenia Klirinsko Depotna Druzba d.d.
South Africa Central Depository Limited
Share Transactions Totally Electronic
(STRATE) Ltd.
Spain Servicio de Compensacion y Liquidacion
de Valores, S.A.
Banco de Espana, Central de Anotaciones
en Cuenta
SriLanka Central Depository System (Pvt) Limited
Sweden Vardepapperscentralen VPC AB (Swedish
Central Securities Depository)
Switzerland SegaIntersettle AG (SIS)
Taiwan - R.O.C. Taiwan Securities Central Depository Co., Ltd.
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Thailand Thailand Securities Depository Company Limited
Togo Depositaire Central - Banque de Reglernent
Tunisia Societe Tunisienne Interprofessionelle pour
La Compensation et de Depots des Valeurs
Mobiliere
Turkey Takas ve Saklama Bankasi A.S. (TAKASBANK)
Central Bank of Turkey
Ukraine National Bank of Ukraine
Mizhregionalny Fondovy Souz
United Arab Emirates Clearing and Depository System,
a department of the Dubai Financial Market
Venezuela Banco Central de Venezuela
Zambia LuSE Central Shares Depository Limited
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Bank of Zambia
TRANSNATIONAL
Euroclear
Clearstream Banking AG
SCHEDULE C
MARKET INFORMATION
PUBLICATION/TYPE OF INFORMATION BRIEF DESCRIPTION
(SCHEDULED FREQUENCY)
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THE GUIDE TO CUSTODY IN WORLD MARKETS An overview of settlement and safekeeping procedures, custody
(hardcopy annually and regular website updates) practices and foreign investor considerations for the markets in
which State Street offers custodial services.
GLOBAL CUSTODY NETWORK REVIEW Information relating to Foreign Sub-Custodians in State Street's
(annually) Global Custody Network. The Review stands as an integral part of
the materials that State Street provides to its U.S. mutual fund
clients to assist them in complying with SEC Rule 17f-5. The Review
also gives insight into State Street's market expansion and Foreign
Sub-Custodian selection processes, as well as the procedures and
controls used to monitor the financial condition and performance
of our Foreign SubCustodian banks
SECURITIES DEPOSITORY REVIEW Custody risk analyses of the Foreign Securities Depositories
(annually) presently operating in Network markets. This publication is an
integral part of the materials that State Street provides to its
U.S. mutual fund clients to meet informational obligations created
by SEC Rule 17f-7.
GLOBAL LEGAL SURVEY With respect to each market in which State Street offers custodial
(annually) services, opinions relating to whether local law restricts (i)
access of a fund's independent public accountants to books and
records of a Foreign Sub-Custodian or Foreign Securities System,
(ii) a fund's ability to recover in the event of bankruptcy or
insolvency of a foreign Sub-Custodian or Foreign Securities System,
(iii) a fund's ability to recover in the event of a loss by a
Foreign Sub-Custodian or Foreign Securities System, and (iv)
the ability of a foreign investor to convert cash and cash
equivalents to U.S. dollars.
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SUBCUSTODIAN AGREEMENTS Copies of the contracts that State Street has entered into with
(annually) each Foreign Sub-Custodian that maintains U.S. mutual fund assets
in the markets in which State Street offers custodial services.
GLOBAL MARKET BULLETIN Information on changing settlement and custody conditions in
(daily or as necessary) markets where, State Street offers custodial services. Includes
changes in market and tax regulations, depository developments,
dematerialization information, as well as other market changes
that may impact State Street's clients.
Foreign Custody Advisories For those markets where State Street offers custodial services that
(as necessary) exhibit special risks or infrastructures impacting custody, State
Street issues market advisories to highlight those unique market
factors which might impact our ability to offer recognized custody
service levels.
Material Change Notices Informational letters and accompanying materials confirming State
(presently on a quarterly basis or as Street's foreign custody arrangements, including a summary of
otherwise necessary) material changes with Foreign Sub-Custodians that have occurred
during the previous quarter. The notices also identify any material
changes in the custodial risks associated with maintaining assets with
Foreign Securities Depositories.
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SCHEDULE D
FUND NAME EXECUTION DATE DATE OF DECLARATION OF TRUST* ------------------------------------------------------------------------------------------------------------------------------------ CASH ACCUMULATION TRUST 12-Dec-97 27-Apr-84 Liquid Assets Fund National Money Market Fund COMMAND GOVERNMENT FUND 1-Jul-90 18-Aug-81 COMMAND MONEY FUND 1-Jul-90 5-Jun-81 COMMAND TAX-FREE FUND 1-Jul-90 5-Jun-81 DUFF & PHELPS UTILITIES TAX-FREE INCOME FUND, 21-Nov-91 INC. FIRST FINANCIAL FUND, INC. 1-May-86 GLOBAL UTILITY FUND, INC. 21-Dec-89 NICHOLAS-APPLEGATE FUND, INC. 10-Apr-87 Nicholas-Applegate Growth Equity Fund PRUDENTIAL CALIFORNIA MUNICIPAL FUND 1-Aug-90 18-May-84 California Series California Income Series California Money Market Series PRUDENTIAL CORE INVESTMENT FUND 23-Apr-99 25-May-99 Short-Term Bond Series Short-Term Municipal Bond Series National Municipal Money Market Series Taxable Money Market Series Government Money Market Series Treasury Money Market Series PRUDENTIAL DIVERSIFIED FUNDS 2-Sep-98 29-Jul-98 Prudential Diversified Conservative Growth Fund Prudential Diversified Moderate Growth Fund Prudential Diversified High Growth Fund PRUDENTIAL EQUITY FUND, INC. 1-Aug-90 PRUDENTIAL EUROPE GROWTH FUND, INC. 31-May-99 |
PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.(1) 5-Sep-90 PRUDENTIAL GOVERNMENT INCOME FUND, INC.(2) 31-Jul-90 PRUDENTIAL GOVERNMENT SECURITIES TRUST 26-Jul-90 22-Sep-81 Money Market Series Short-Intermediate Term Series US Treasury Money Market Series PRUDENTIAL HIGH YIELD FUND, INC. 26-Jul-90 PRUDENTIAL HIGH YIELD TOTAL RETURN FUND, INC. 30-May-97 PRUDENTIAL INDEX SERIES FUND(3) 24-Sep-97 11-May-92 Prudential Bond Market Index Fund Prudential Europe Index Fund Prudential Pacific Index Fund Prudential Small-Cap Fund Prudential Stock Index Fund PRUDENTIAL INSTITUTIONAL LIQUIDITY PORTFOLIO, 20-Nov-87 INC. Institutional Money Market Series PRUDENTIAL INTERNATIONAL BOND FUND, INC.(4) 16-Jan-96 PRUDENTIAL MONEYMART ASSETS, INC. 25-Jul-90 PRUDENTIAL MUNICIPAL BOND FUND 25-Aug-87 3-Nov-86 High Income Series Insured Series PRUDENTIAL MUNICIPAL SERIES FUND 1-Aug-90 18-May-84 Florida Series New Jersey Series New York Series Pennsylvania Series Connecticut Money Market Series Massachusetts Money Market Series New Jersey Money Market Series |
New York Money Market Series PRUDENTIAL NATIONAL MUNICIPALS FUNDS, INC. 26-Jul-90 PRUDENTIAL NATURAL RESOURCES FUND, INC. 18-Sep-87 PRUDENTIAL PACIFIC GROWTH FUND, INC. 16-Jul-92 PRUDENTIAL REAL ESTATE SECURITIES FUND 18-Feb-98 PRUDENTIAL SECTOR FUNDS, INC.(5) 14-May-99 Prudential Financial Services Fund Prudential Health Sciences Fund Prudential Technology Fund Prudential Utility Fund PRUDENTIAL SHORT-TERM CORPORATE BOND FUND, 25-Jul-89 INC.(6) PRUDENTIAL SMALL COMPANY FUND, INC.(7) 26-Jul-90 SPECIAL MONEY MARKET FUND, INC.(8) 12-Jan-90 PRUDENTIAL TAX-FREE MONEY FUND, INC. 26-Jul-90 PRUDENTIAL TAX-MANAGED FUNDS(9) 8-Dec-98 17-Sep-98 Prudential Tax-Managed Equity Fund PRUDENTIAL TAX-MANAGED SMALL CAP FUND, INC.(10) 1-Aug-97 PRUDENTIAL TOTAL RETURN BOND FUND, INC.(11) 3-Jan-95 PRUDENTIAL 20/20 FOCUS FUND 14-Apr-98 PRUDENTIAL U.S. EMERGING GROWTH FUND, INC. 21-Oct-96 PRUDENTIAL VALUE FUND 6-Jan-87 19-Sep-86 PRUDENTIAL WORLD FUND, INC.(12) 7-Jun-90 Prudential Global Growth Fund(13) Prudential International Value Fund(14) Prudential Jennison |
International Growth Fund STRATEGIC PARTNERS SERIES 1-Mar-00 1-Feb-00 Strategic Partners Focused Growth Fund Strategic Partners Focused Value Fund Strategic Partners New Era Growth Fund TARGET FUNDS 25-Aug-99 8-Jul-99 International Equity Fund Large Capitalization Growth Fund Large Capitalization Value Fund Small Capitalization Growth Fund Small Capitalization Value Fund Total Return Bond Fund THE ASIA PACIFIC FUND, INC. 24-Apr-87 THE HIGH YIELD INCOME FUND, INC. 6-Nov-87 THE HIGH-YIELD PLUS FUND, INC. 15-Mar-88 THE PRUDENTIAL INVESTMENT PORTFOLIOS FUNDS, 27-Oct-95 INC.(15) Prudential Active Balance Fund Prudential Jennison Equity Opportunity Fund(16) Prudential Jennison Growth Fund THE TARGET PORTFOLIO TRUST 9-Nov-92 29-Jul-92 Large Capitalization Growth Portfolio Large Capitalization Value Portfolio Small Capitalization Growth Portfolio Small Capitalization Value Portfolio International Equity Portfolio International Bond Portfolio |
Total Return Bond Portfolio Intermediate-Term Bond Portfolio Mortgage Backed Securities Portfolio US Government Money Market Portfolio |
AMENDMENT TO CUSTODIAN CONTRACT
This Amendment to the Custodian Contract is made as of January 17, 2002, by and between Each of the Parties Indicated on Appendix A (the "Funds") and State Street Bank and Trust Company (the "Custodian"). This Amendment shall only apply to the Funds listed on Schedule 1 (each, a "Fund"), as amended from time to time, attached to this Amendment. Capitalized terms used in this Amendment without definition shall have the respective meanings given to such terms in the Custodian Contract referred to below.
WHEREAS, Each of the Parties Indicated on Appendix A and the Custodian have entered into a Custodian Contract (the "Contract"); and
WHEREAS, each Fund listed on Schedule 1 attached hereto and the Custodian desire to amend certain provisions of the Contract to provide for the custody and handling of interests in Loans (as defined below).
NOW THEREFORE, in consideration of the foregoing and the mutual covenants and agreements hereinafter contained, the parties hereby agree as follows:
I. New Section 20 is hereby added to the Contract, as of the effective date of this Amendment, as set forth below.
SECTION 20. SPECIAL PROVISIONS REGARDING INTERESTS IN LOANS.
The following provisions shall apply with respect to investments, property or assets in the nature of loans, or interests or participations in loans, including without limitation interests in syndicated bank loans and bank loan participations (collectively, "Loans").
SECTION 20.1 SAFEKEEPING. Instruments, certificates, agreements and/or other documents which the Custodian may receive in respect of Loans, if any (collectively "Financing Documents"), from time to time, shall be held by the Custodian at its offices in Boston, Massachusetts.
SECTION 20.2 DUTIES OF THE CUSTODIAN.
1) The Custodian shall accept such Financing Documents, if any, in respect of Loans as may be delivered to it from time to time by a Fund. The Custodian shall be under no obligation to examine the contents or determine the sufficiency of any such Financing Documents or to provide any certification with respect thereto, whether received by the Custodian as original documents, photocopies, by facsimile or otherwise. Without limiting the foregoing, the Custodian is under no duty to examine any such Financing Documents to determine whether necessary steps have been taken or requirements met in respect of the assignment or transfer of the
related Loan or applicable interest or participation therein. The Custodian shall be entitled to assume the genuineness, sufficiency and completeness of any Financing Documents received, and the genuineness and due authority of any signature appearing thereon.
2) Notwithstanding any term of this Contract to the contrary, with
respect to any Loans, (i) the Custodian shall be under no
obligation to determine, and shall have no liability for, the
sufficiency of, or to require delivery of, any instrument,
document or agreement constituting, evidencing or representing
such Loan, other than to receive such Financing Documents, if any,
as may be delivered or caused to be delivered to it by the Fund
(or its investment manager or investment adviser (the "Adviser")
on its behalf), (ii) without limiting the generality of the
foregoing, delivery of any such Loan (including without
limitation, for purposes of Section 2.7 above) may be made to the
Custodian by, and may be represented solely by, delivery to the
Custodian of a facsimile or photocopy of an assignment agreement
(an "Assignment Agreement") or a confirmation or certification
from the Fund (or the Adviser) to the effect that it has acquired
such Loan and/or has received or will receive , and will deliver
to the Custodian, appropriate Financing Documents constituting,
evidencing or representing such Loan (such confirmation or
certification, together with any Assignment Agreement,
collectively, an "Assignment Agreement or Confirmation"), in any
case without delivery of any promissory note, participation
certificate or similar instrument (collectively, an "Instrument"),
(iii) if an original Instrument shall be or shall become available
with respect to any such Loan, it shall be the sole responsibility
of the Fund (or the Adviser acting on its behalf) to make or cause
delivery thereof to the Custodian, and the Custodian shall be
under no obligation at any time or times to determine whether any
such original Instrument has been issued or made available with
respect to such Loan, and shall not be under any obligation to
compel compliance by the Fund to make or cause delivery of such
Instrument to the Custodian, and (iv) any reference to Financing
Documents appearing in Section 20.3(a) shall be deemed to include,
without limitation, any such Instrument and/or Assignment
Agreement or Confirmation.
3) If payments with respect to a Loan ("Loan Payment") are not
received by the Custodian on the date on which they are due, as
reflected in the Payment Schedule (as such term is defined in
Section 20.3 below) of the Loan ("Payment Date"), or in the case
of interest payments, not received either on a scheduled interest
payable date, as reported to the Custodian by the Fund (or the
Adviser, on its behalf) for the Loan (the "Interest Payable
Date"), or in the amount of their accrued interest payable, the
Custodian shall promptly, but in no event later than one business
day after the Payment Date or the Interest Payable Date, give
telephonic notice to the party obligated under the Financing
Documents to make such Loan Payment (the "Obligor") of its failure
to make timely payment, and (2) if
such payment is not received within three business days of its due date, shall notify the Fund (or the Adviser on its behalf) of such Obligor's failure to make the Loan Payment. The Custodian shall have no responsibility with respect to the collection of Loan Payments which are past due, other than the duty to notify the Obligor and the Fund (or the Adviser on its behalf) as provided herein.
4) The Custodian shall have no responsibilities or duties whatsoever under this Contract, with respect to Loans or the Financing Documents, except for such responsibilities as are expressly set forth herein. Without limiting the generality of the foregoing, the Custodian shall have no obligation to preserve any rights against prior parties or to exercise any right or perform any obligation in connection with the Loans or any Financing Documents (including, without limitation, no obligation to take any action in respect of or upon receipt of any consent solicitation, notice of default or similar notice received from any bank agent or Obligor, except that the Custodian shall undertake reasonable efforts to forward any such notice to the Fund or the Adviser). In case any question arises as to its duties hereunder, the Custodian may request instructions from the Fund and shall be entitled at all times to refrain from taking any action unless it has received Proper Instructions from the Fund or the Adviser and the Custodian shall in all events have no liability, risk or cost for any action taken, with respect to a Loan, pursuant to and in compliance with the Proper Instructions of such parties.
5) The Custodian shall be only responsible and accountable for Loan Payments actually received by it and identified as for the account of the Fund; any and all credits and payments credited to the Fund, with respect to Loans, shall be conditional upon clearance and actual receipt by the Custodian of final payment thereon.
6) The Custodian shall promptly, upon the Fund's request, release to the Fund's Adviser or to any party as the Fund or the Adviser may specify, any Financing Documents being held on behalf of the Fund. Without limiting the foregoing, the Custodian shall not be deemed to have or be charged with knowledge of the sale of any Loan, unless and except to the extent it shall have received written notice and instruction from the Fund (or the Adviser on its behalf) with respect thereto, and except to the extent it shall have received the sale proceeds thereof.
7) In no event shall the Custodian be under any obligation or liability to make any advance of its own funds in respect of any Loan.
SECTION 20.3 RESPONSIBILITY OF THE FUND. With respect to each Loan held by the Custodian hereunder in accordance with the provisions hereof, the Fund shall (a) cause the Financing Documents evidencing such Loan to be delivered to the Custodian; (b) include with such Financing Documents an amortization schedule of payments (the
"Payment Schedule") identifying the amount and due dates of scheduled principal
payments, the Interest Payable Date(s) and related payment amount information,
and such other information with respect to the related Loan and Financing
Documents as the Custodian reasonably may require in order to perform its
services hereunder (collectively, "Loan Information"), in such form and format
as the Custodian reasonably may require; (c) take, or cause the Adviser to take,
all actions necessary to acquire good title to such Loan (or the participation
therein, as the case may be), as and to the extent intended to be acquired; and
(d) cause the Custodian to be named as its nominee for payment purposes under
the Financing Documents or otherwise provide for the direct payment of the
Payments to the Custodian. The Custodian shall be entitled to rely upon the Loan
Information provided to it by the Fund (or the Adviser on its behalf) without
any obligation on the part of the Custodian independently to verify,
investigate, recalculate, update or otherwise confirm the accuracy or
completeness thereof; and the Custodian shall have no liability for any delay or
failure on the part of the Fund in providing necessary Loan Information to the
Custodian, or for any inaccuracy therein or incompleteness thereof. With respect
to each such Loan, the Custodian shall be entitled to rely on any information
and notices it may receive from time to time from the related bank agent,
Obligor or similar party with respect to the related Loan, and shall be entitled
to update its records on the basis of such information or notices received,
without any obligation on its part independently to verify, investigate or
recalculate such information.
SECTION 20.4 INSTRUCTIONS; AUTHORITY TO ACT. The certificate of the Secretary or an Assistant Secretary of the Trust, identifying certain individuals to be officers of the Trust or employees of the Adviser of the Fund authorized to sign any such instructions, may be received and accepted as conclusive evidence of the incumbency and authority of such to act and may be considered by the Custodian to be in full force and effect until it receives written notice to the contrary from the Secretary or Assistant Secretary of the Trust. Notwithstanding any other provision of this Contract, the Custodian shall have no responsibility to ensure that any investment by the Trust or any Fund with respect to Loans has been authorized.
SECTION 20.5 ATTACHMENT. In case any portion of the Loans or the Financing Documents shall be attached or levied upon pursuant to an order of court, or the delivery or disbursement thereof shall be stayed or enjoined by an order of court, or any other order, judgment or decree shall be made or entered by any court affecting the property of the Fund or any act of the Custodian relating thereto, the Custodian is hereby expressly authorized in its sole discretion to obey and comply with all orders, judgments or decrees so entered or issued, without the necessity of inquire whether such court had jurisdiction, and, in case the Custodian obeys or complied with any such order, judgment or decree, it shall not be liable to anyone by reason of such compliance.
SECTION 20.6 PAYMENT OF FUND MONIES. Notwithstanding Section 2.7 and
Section 2.8 of the Custodian Contract, upon receipt of Proper Instructions (as
defined in the Custodian Contract), the Custodian shall deliver cash and/or
other assets of the Fund upon purchase of Loans to parties identified in such
Proper Instructions, which delivery may be made without contemporaneous receipt
by the Custodian of cash or other assets,
including Financing Documents, in exchange therefor. Upon such delivery of cash or other assets in accordance with such Proper Instructions, the Custodian shall have no further responsibility or obligation to the Fund as a custodian of the Fund with respect to the cash or assets so delivered. In preparing reports of monies received by or paid out of the Fund or of assets comprising the Fund, the Custodian shall be entitled to rely upon information received from time to time regarding the Loans or Loan Payments and shall not be responsible for the accuracy or completeness of such information included in the Custodian's reports until such assets are received by the Custodian.
II. Except as specifically superseded or modified hereby, the terms and provisions of the Contract shall continue to apply with full force and effect. In the event of any conflict between the terms of the Contract prior to this Amendment and this Amendment, the terms of this Amendment shall prevail.
IN WITNESS WHEREOF, each of the parties has caused this Amendment to be executed in its name and behalf by its duly authorized representative as of the date first above written.
WITNESSED BY: STATE STREET BANK and TRUST COMPANY
/s/ Jean S. Carr By: /s/ Joseph L. Hooley
---------------- --------------------
Name: Joseph L. Hooley
Title: Executive Vice President
WITNESSED BY: EACH OF THE INVESTMENT COMPANIES
LISTED ON SCHEDULE I ATTACHED
/s/ Jonathan D. Shain By: /s/ Judy A. Rice
------------------------------- ----------------
Name: Jonathan D. Shain Name: Judy A. Rice
Title: Secretary of certain Title: Vice President
of the Prudential
mutual funds.
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SCHEDULE 1
to
Amendment to Custodian Contract
Dated January 17, 2002
PRUDENTIAL HIGH YIELD FUND, INC.
6225 Smith Avenue Baltimore, Maryland 21209-3600 MAIN 410.580.3000 FAX 410.580.3001
April 24, 2002
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
Gateway Center Three
100 Mulberry Street
Newark, New Jersey 07102
Re: REGISTRATION STATEMENT ON FORM N-1A
Ladies and Gentlemen:
We have acted as special Maryland counsel to Prudential Government Income Fund, Inc., a Maryland corporation (the "Fund"), in connection with the registration under the Securities Act of 1933, as amended (the "Act"), by the Fund of up to 2,000,000,000 shares of capital stock, par value $.01 per share (the "Shares"), pursuant to a registration statement on Form N-1A, as amended by Amendment Nos. 30 and 33 (File Nos. 2-82976 and 811-3712) (the "Registration Statement"). The Fund is divided into four classes, designated as Class A, Class B, Class C and Class Z. This opinion is being furnished in connection with the filing of the Registration Statement.
In our capacity as special Maryland counsel, we have reviewed originals or copies, certified or otherwise identified to our satisfaction, of the following documents:
(a) The Charter of the Fund certified by the Maryland State Department of Assessments and Taxation (the "MSDAT").
(b) The By-Laws of the Fund.
(c) The Registration Statement.
(d) Resolutions of the Board of Directors of the Fund relating to the authorization of (i) the issuance of the Shares, and (ii) the Registration Statement and the transactions contemplated thereby.
(e) A short-form Good Standing Certificate for the Fund, dated a recent date, issued by the MSDAT.
(f) A Certificate of the Secretary of the Fund, dated as of the date hereof, as to certain factual matters (the "Certificate").
(g) Such other documents as we have considered necessary to the rendering of the opinions expressed below.
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
April 24, 2002
In such examination of the aforesaid documents, we have assumed, without independent investigation, the genuineness of all signatures, the legal capacity of all individuals who have executed any of the aforesaid documents, the authenticity of all documents submitted to us as originals, the conformity with originals of all documents submitted to us as copies (and the authenticity of the originals of such copies), and the accuracy and completeness of all public records reviewed by us. As to factual matters, we have relied on the Certificate and have not independently verified the matters stated therein. Nothing has come to our attention that leads us to believe that any factual representation made in the Certificate is not correct.
Based upon the foregoing, having regard for such legal considerations as we deem relevant, and limited in all respects to applicable Maryland law, we are of the opinion and advise you that:
1. The Fund has been duly incorporated and is validly existing and in good standing under the laws of the State of Maryland.
2. The Shares to be issued pursuant to the Registration Statement have been duly authorized, and, when issued as contemplated in the Registration Statement in an amount not to exceed the number of Shares authorized by the Charter but unissued, will constitute validly issued, fully paid and nonassessable shares.
In addition to the qualifications set forth above, this opinion is subject to the qualification that we express no opinion as to the laws of any jurisdiction other than the State of Maryland. This opinion is limited to the laws, exclusive of the securities or "blue sky" laws and the principles of conflict of laws, of the State of Maryland as currently in effect. We assume no obligation to supplement this opinion if any applicable laws change after the date hereof or if any facts or circumstances come to our attention after the date hereof that might change this opinion.
We hereby consent to the filing of this opinion with the Commission as Exhibit (i) to the Registration Statement. In giving our consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the Commission thereunder. This opinion is limited to the matters set forth herein, and no other opinion should be inferred beyond the matters expressly stated.
Very truly yours,
PIPER RUDNICK LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration Statement on Form N-1A of our report dated April 19, 2002, relating to the financial statements and financial highlights which appear in the February 28, 2002 Annual Report to Shareholders of Prudential Government Income Fund, Inc., which is also incorporated by reference into the Registration Statement. We also consent to the references to us under the headings "Financial Statements", "Other Service Providers" and "Financial Highlights" in such Registration Statement.
PricewaterhouseCoopers LLP
New York, New York
April 26, 2002
Prudential Government Income Fund, Inc.
Amended and Restated
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 Rule 2830 of the Conduct Rules of the National Association of Securities Dealers, Inc. (NASD) has been adopted by Prudential Government Income Fund, Inc. (the Fund) and by Prudential Investment Management Services LLC, 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/Trustees 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/Trustees), 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 and continuation of this Plan will benefit the Fund and its shareholders. Expenditures under this Plan by the Fund for Distribution Activities (defined below) are primarily intended to result in the sale of Class B shares of
the Fund within the meaning of paragraph (a)(2) of Rule 12b-1 promulgated under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or other qualified broker-dealers and their account executives to provide distribution assistance to their customers who are investors in the Fund, to defray the costs and expenses associated with the preparation, printing and distribution of prospectuses and sales literature and other promotional and distribution activities and to provide for the servicing and maintenance of shareholder accounts.
THE PLAN
The material aspects of the Plan are as follows:
1. DISTRIBUTION ACTIVITIES
The Fund shall engage the Distributor to distribute Class B shares of the Fund and to service shareholder accounts using all of the facilities of the Distributor's 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 Prudential Securities Incorporated (Prudential Securities) and Pruco Securities Corporation (Prusec). Services provided and activities undertaken to distribute Class B shares of the Fund are referred to herein as "Distribution Activities."
2. PAYMENT OF SERVICE FEE
The Fund shall 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/Trustees 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 (not including the service fee) of the average daily net assets of the Class B shares of the Fund up to $3 billion, .55 of 1% of the next $1 billion of such assets and .25 of 1% of such assets in excess of $4 billion (asset-based sales charge) 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/Trustees may determine. Amounts payable under the Plan shall be subject to the limitations of Rule 2830 of the NASD Conduct Rules.
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 Board of Directors/Trustees. The allocation of distribution expenses among classes will be subject to the review of the Board of Directors/Trustees. Payments hereunder will be applied to distribution expenses in the
order in which they are incurred, unless otherwise determined by the Board of Directors/Trustees.
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 Prudential Securities or Prusec for performing services under a selected dealer agreement between Prudential Securities or 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 Prudential Securities or 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/Trustees 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/Trustees 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/Trustees 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/Trustees of the Fund and a majority of the Rule 12b-1 Directors/Trustees 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/Trustees, or by vote of a majority of the outstanding voting securities (as defined in the Investment Company Act) of the Class B shares of the Fund.
7. AMENDMENTS
The Plan may not be amended to change the 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 B shares of the Fund. All material amendments of the Plan shall be approved by a majority of the Board of Directors/Trustees of the Fund and a majority of the Rule 12b-1 Directors/Trustees by votes cast in person at a meeting called for the purpose of voting on the Plan.
8. RULE 12b-1 DIRECTORS/TRUSTEES
While the Plan is in effect, the selection and nomination of the Rule 12b-1 Directors/Trustees shall be committed to the discretion of the Rule 12b-1 Directors/Trustees.
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:June 1, 1998
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
(THE FUND)
CODE OF ETHICS ADOPTED PURSUANT TO RULE 17j-1
UNDER THE INVESTMENT COMPANY ACT OF 1940
(THE CODE)
1. PURPOSES
The Code has been adopted by the Board of Directors/Trustees of the Fund, in accordance with Rule 17j-1(c) under the Investment Company Act of 1940 (the Act) and in accordance with the following general principles:
(1) THE DUTY AT ALL TIMES TO PLACE THE INTERESTS OF INVESTMENT COMPANY SHAREHOLDERS FIRST.
Investment company personnel should scrupulously avoid serving their own personal interests ahead of shareholders' interests in any decision relating to their personal investments.
(2) THE REQUIREMENT THAT ALL PERSONAL SECURITIES TRANSACTIONS BE CONDUCTED CONSISTENT WITH THE CODE AND IN SUCH A MANNER AS TO AVOID ANY ACTUAL OR POTENTIAL CONFLICT OF INTEREST OR ANY ABUSE OF AN INDIVIDUAL'S POSITION OF TRUST AND RESPONSIBILITY.
Investment company personnel must not only seek to achieve technical compliance with the Code but should strive to abide by its spirit and the principles articulated herein.
(3) THE FUNDAMENTAL STANDARD THAT INVESTMENT COMPANY PERSONNEL SHOULD NOT TAKE INAPPROPRIATE ADVANTAGE OF THEIR POSITIONS.
Investment company personnel must avoid any situation that might compromise, or call into question, their exercise of fully independent judgment in the interest of shareholders, including, but not limited to the receipt of unusual investment opportunities, perquisites, or gifts of more than a DE MINIMIS value from persons doing or seeking business with the Fund.
Rule 17j-1 under the Act generally proscribes fraudulent or manipulative practices with respect to a purchase or sale of a security held or to be acquired (as such term is defined in Section 2) by an investment company, if effected by an associated person of such company.
The purpose of the Code is to establish procedures consistent with the Act and Rule 17j-1 to give effect to the following general prohibitions as set forth in Rule 17j-1(b) as follows:
(a) It shall be unlawful for any affiliated person of or Principal Underwriter for a registered investment company, or any affiliated person of an investment adviser of or principal underwriter for a registered investment company in connection with the purchase or sale, directly or indirectly, by such person of a security held or to be acquired, by such registered investment company:
(1) To employ any device, scheme or artifice to defraud such registered investment company;
(2) To make to such registered investment company any untrue statement of a material fact or omit to state to such registered investment company a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading;
(3) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any such registered investment company; or
(4) To engage in any manipulative practice with respect to such registered investment company.
2. DEFINITIONS
(a) "Access Person" means any director/trustee, officer, general partner or Advisory Person (including any Investment Personnel, as that term is defined herein) of the Fund, the Manager, the Adviser/
Subadviser, or the Principal Underwriter.
(b) "Adviser/Subadviser" means the Adviser or a Subadviser, if any, of the Fund or both as the context may require.
(c) "Advisory Person" means (i) any employee of the Fund, Manager or Adviser/Subadviser (or of any company in a control relationship to the Fund, Manager or Adviser/Subadviser) who, in connection with his or her regular functions or duties, makes, participates in, or obtains current or pending information regarding the purchase or sale of a security by the Fund, or whose functions relate to the making of any recommendations with respect to such purchases or sales; and (ii) any natural person in a control relationship to the Fund who obtains information concerning recommendations made to the Fund with regard to the purchase or sale of a security.
(d) "Beneficial Ownership" will be interpreted in the same manner as it would be under Securities Exchange Act Rule 16a-1(a)(2) in determining which security holdings of a person are subject to the reporting and short-swing profit provisions of Section 16 of the Securities Exchange Act of 1934 and the rules and regulations thereunder, except that the determination of direct or indirect beneficial ownership will apply to all securities which an Access Person has or acquires (EXHIBIT A).
(e) "Complex" means the group of registered investment companies for which Prudential Investments Fund Management LLC serves as Manager; provided, however, that with respect to Access Persons of a Subadviser (including any unit or subdivision thereof), "Complex" means the group of registered investment companies in the Complex advised by such Subadviser or unit or subdivision thereof. A list of such registered investment companies will be maintained by the Compliance Officer.
(f) "Compliance Officer" means the person or persons (including his or her designees) designated by the Manager, the Adviser/Subadviser, or Principal Underwriter, respectively, as having responsibility for compliance with the requirements of the Code.
(g) "Control" will have the same meaning as that set forth in
Section 2(a)(9) of the Act.
(h) "Disinterested Director/Trustee" means a Director/Trustee of the Fund who is not an "interested person" of the Fund within the meaning
of Section 2(a)(19) of the Act.
An interested Director/Trustee who would not otherwise be deemed to be an Access Person, shall be treated as a Disinterested Director/Trustee for purposes of compliance with the provisions of the Code.
(i) "Initial Public Offering" means an offering of securities registered under the Securities Act of 1933, the issuer of which, immediately before the registration, was not subject to the reporting requirements of sections 13 or 15(d) of the Securities Exchange Act of 1934.
(j) "Investment Personnel" means: (a) Portfolio Managers and other Advisory Persons who provide investment information and/or advice to the Portfolio Manager(s) and/or help execute the Portfolio Manager's(s') investment decisions, including securities analysts and traders; (b) any natural person in a control relationship to the Fund who obtains information concerning recommendations made to the Fund with regard to the purchase or sale of a security; and (c) certain other individuals as designated by the Compliance Officer.
(k) "Manager" means Prudential Investments Fund Management, LLC.
(l) "Mutual Fund Code of Ethics and Personal Securities Trading Committee" or "Committee" means a specified group of Business Unit, Compliance, and Human Resources executives responsible for interpreting and administering the Code, including but not limited to, reviewing violations of the Code and determining any sanctions or other disciplinary actions that may be deemed appropriate. In addition, the Committee may waive and or modify violations and sanctions or other disciplinary actions at its discretion when deemed appropriate by the Committee. The Committee will review such violations in consultation with legal counsel. A list of such Committee members shall be maintained by the Compliance Officer.
(m) "Portfolio Manager" means any Advisory Person who has the direct responsibility and authority to make investment decisions for the Fund.
(n) "Private placement" means a limited offering that is exempt from registration under the Securities Act of 1933 pursuant to section 4(2)
or section 4(6) or pursuant to rule 504, rule 505 or rule 506 under such Securities Act.
(o) "Profits" means any total or partial gain realized from a securities transaction or group of transactions as defined by the Mutual Fund Code of Ethics and Personal Securities Trading Committee ("Committee").
(p) "Security" will have the meaning set forth in Section 2(a)(36)
of the Act, except that it will not include shares of registered open-end
investment companies, direct obligations of the Government of the United
States, short-term debt securities which are "government securities"
within the meaning of Section 2(a)(16) of the Act, bankers' acceptances,
bank certificates of deposit, commercial paper and such other money market
instruments as are designated by the Compliance Officer. For purposes of
the Code, an "equivalent Security" is one that has a substantial economic
relationship to another Security. This would include, among other things,
(1) a Security that is exchangeable for or convertible into another
Security, (2) with respect to an equity Security, a Security having the
same issuer (including a private issue by the same issuer) and any
derivative, option or warrant relating to that Security and (3) with
respect to a fixed-income Security, a Security having the same issuer,
maturity, coupon and rating.
(q) "Security held or to be acquired" means any Security or any equivalent Security which, within the most recent 15 days: (1) is or has been held by the Fund; or (2) is being considered by the Fund or its investment adviser for purchase by the Fund.
3. APPLICABILITY
The Code applies to all Access Persons, except that Access Persons covered by more than one Code of Ethics meeting the requirements of Rule 17j-1 may be governed by the provisions of such other Code of Ethics and report all transactions pursuant to the terms of such other Code of Ethics provided that such Code was reviewed and approved by the Board of Directors/Trustees of the Fund. The Compliance Officer shall ensure that each Access Person subject to this Code receives a copy of the Code.
The Compliance Officer will maintain a list of all Access Persons who are currently, and within the past five years, subject to the Code.
4. PROHIBITED PURCHASES AND SALES
The prohibitions described below will only apply to a transaction in a security in which the designated Access Person has, or by reason of such transaction acquires, any direct or indirect Beneficial Ownership.
A. INITIAL PUBLIC OFFERINGS
No Investment Personnel may acquire any Securities in an initial public offering. For purposes of this restriction, "Initial Public Offerings" shall not include offerings of government and municipal securities.
B. PRIVATE PLACEMENTS
No Investment Personnel may acquire any Securities in a private placement without prior approval.
(i) Prior approval must be obtained in accordance with the preclearance procedure described in Section 6 below. Such approval will take into account, among other factors, whether the investment opportunity should be reserved for the Fund and its shareholders and whether the opportunity is being offered to the Investment Personnel by virtue of his or her position with the Fund. The Adviser/Subadviser shall maintain a record of such prior approval and reason for same, for at least 5 years after the end of the fiscal year in which the approval is granted.
(ii) Investment Personnel who have been authorized to acquire
Securities in a private placement must disclose that investment to the chief investment officer (including his or her designee) of the Adviser/Subadviser (or of any unit or subdivision thereof) or the Compliance Officer when they play a part in any subsequent consideration of an investment by the Fund in the issuer. In such circumstances, the Fund's decision to purchase Securities of the issuer will be subject to an independent review by appropriate personnel with no personal interest in the issuer.
C. BLACKOUT PERIODS
(i) Except as provided in Section 5 below, Access Persons are prohibited from executing a Securities transaction on a day during which any investment company in the Complex has a pending "buy" or "sell" order in the same or an equivalent Security and until such time as that order is executed or withdrawn; provided, however, that this prohibition shall not apply to Disinterested Directors/Trustees except if they have actual knowledge of trading by any fund in the Complex.
This prohibition shall also not apply to Access Persons of the Manager, Principal Underwriter, and Adviser/Subadviser who do not, in the ordinary course of fulfilling his or her official duties, have access to current or pending information regarding the purchase and sale of Securities for the Fund and are not engaged in the day-to-day trading operations of the Fund; provided that Securities investments effected by such Access Persons during the proscribed period are
not effected with knowledge of the purchase or sale of the same or equivalent Securities by any fund in the Complex.
A "pending 'buy' or 'sell' order" exists when a decision to purchase or sell a Security has been made and communicated. However, this prohibition shall not apply to a "pending `buy `or `sell' order" in the same or an equivalent security in a broad based index fund.(1)
(ii) Portfolio Managers are prohibited from buying or selling a Security within seven calendar days before or after a Fund in the same Complex trades in the same or an equivalent Security. Nevertheless, a personal trade by any Investment Personnel shall not prevent a Fund in the same Complex from trading in the same or an equivalent security. However, such a transaction shall be subject to independent review by the Compliance Officer. This prohibition shall not apply to purchases and sales executed in a broad based index fund.
(iii) If trades are effected during the periods proscribed in (i) or
(ii) above, except as provided in (iv) below with respect to (i) above,
Profits realized on such trades will be promptly required to be disgorged
to the Fund or a charitable organization approved by the Committee.
(iv) A transaction by Access Persons (other than Investment Personnel) inadvertently effected during the period proscribed in (i) above will not be considered a violation of the Code and disgorgement will not be required so long as the transaction was effected in accordance with the preclearance procedures
described in Section 6 below and without prior knowledge of trading by any Fund in the Complex in the same or an equivalent Security.
D. SHORT-TERM TRADING PROFITS
Except as provided in Section 5 below, Investment Personnel are prohibited from profiting from a purchase and sale, or sale and purchase, of the same or an equivalent Security within any 60 calendar day period. If trades are effected during the proscribed period, Profits realized on such trades will be promptly required to be disgorged to the Fund or a charitable organization approved by the Committee.
E. SHORT SALES
No Access Person may sell any security short which is owned by any Fund in the Complex. Access Persons may, however make short sales when he/she owns an equivalent amount of the same security. This prohibition does not apply to Disinterested Directors/Trustees.
F. OPTIONS
No Access Person may write a naked call option or buy a naked put option on a security owned by any Fund in the Complex. Access Persons may purchase options on securities not held by any Fund in the Complex, or purchase call options or write put options on securities owned by any Fund in the Complex, subject to preclearance and the same restrictions applicable to other Securities. Access Persons may write covered call options or buy covered put options on a Security owned by any Fund in the Complex at the discretion of the Compliance Officer. This prohibition does not apply to Disinterested Directors/Trustees.
G. INVESTMENT CLUBS
No Access Person may participate in an investment club. This prohibition does not apply to Disinterested Directors/Trustees.
5. EXEMPTED TRANSACTIONS
Subject to preclearance in accordance with Section 6 below with respect to subitems (b), (e), (f), (g) and (i) hereof, the prohibitions of Sections 4(C) and 4(D) will not apply to the following:
(a) Purchases or sales of Securities effected in any account over which the Access Person has no direct or indirect influence or control or in any account of the Access Person which is managed on a discretionary basis by a person other than such Access Person and with respect to which such Access Person does not in fact influence or control such transactions.
(b) Purchases or sales of Securities (or their equivalents) which are not eligible for purchase or sale by any fund in the Complex.
(c) Purchases or sales of Securities which are non-volitional on the part of either the Access Person or any fund in the Complex.
(d) Purchases of Securities which are part of an automatic dividend reinvestment plan.
(e) Purchases effected upon the exercise of rights issued by an issuer PRO RATA to all holders of a class of its Securities, to the extent such rights were acquired from such issuer, and sales of such rights so acquired.
(f) Any equity Securities transaction, or series of related transactions effected over a 30 calendar day period, involving 500 shares or less in the aggregate, if (i) the Access Person has no prior knowledge of activity in such security by any fund in the Complex and (ii) the issuer is
listed on The New York Stock Exchange or has a market capitalization (outstanding shares multiplied by the current price per share) greater than $1 billion (or a corresponding market capitalization in foreign markets).
(g) Any fixed-income Securities transaction, or series of related transactions effected over a 30 calendar day period, involving 100 units ($100,000 principal amount) or less in the aggregate, if the Access Person has no prior knowledge of transactions in such Securities by any fund in the Complex.
(h) Any transaction in index options effected on a broad-based index.(2)
(i) Purchases or sales of Securities which receive the prior approval of the Compliance Officer (such person having no personal interest in such purchases or sales), based on a determination that no abuse is involved and that such purchases and sales are not likely to have any economic impact on any fund in the Complex or on its ability to purchase or sell Securities of the same class or other Securities of the same issuer.
(j) Purchases or sales of Unit Investment Trusts.
6. PRECLEARANCE
Access Persons (other than Disinterested Directors/Trustees) must preclear all personal Securities investments with the exception of those identified in subparts (a), (c), (d), (h) and (j) of Section 5 above.
All requests for preclearance must be submitted to the Compliance Officer for approval. All approved orders must be executed by the close of business on the day in which preclearance is granted; provided, however that approved orders for Securities traded in foreign markets may be executed within two (2) business days from the date preclearance is granted. If any order is not timely executed, a request for preclearance
must be resubmitted.
7. REPORTING
(a) Disinterested Directors/Trustees shall report to the Secretary of the Fund the information described in Section 7(b) hereof with respect to transactions in any Security in which such Disinterested Director/Trustee has, or by reason of such transaction acquires, any direct or indirect Beneficial Ownership in the Security ONLY if such Disinterested Director/Trustee, at the time of that transaction knew or, in the ordinary course of fulfilling his or her official duties as a Director/Trustee of the Fund, should have known that, during the 15-day period immediately preceding or subsequent to the date of the transaction in a Security by such Director/Trustee, such Security is or was purchased or sold by the Fund or was being considered for purchase or sale by the Fund, the Manager or Adviser/Subadviser; provided, however, that a Disinterested Director/Trustee is not required to make a report with respect to transactions effected in any account over which such Director/Trustee does not have any direct or indirect influence or control or in any account of the Disinterested Director/Trustee which is managed on a discretionary basis by a person other than such Director/Trustee and with respect to which such Director/Trustee does not in fact influence or control such transactions. The Secretary of the Fund shall maintain such reports and such other records to the extent required by Rule 17j-1 under the Act.
(b) Every report required by Section 7(a) hereof shall be made not later than
ten days after the end of the calendar quarter in which the transaction to which the report relates was effected, and shall contain the following information:
(i) The date of the transaction, the title and the number of shares, and the principal amount of each Security involved;
(ii) The nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition);
(iii) The price at which the transaction was effected;
(iv) The name of the broker, dealer or bank with or through whom the transaction was effected; and
(v) The date that the report is submitted.
(c) Any such report may contain a statement that the report shall not be construed as an admission by the person making such report that he or she has any direct or indirect Beneficial Ownership in the Security to which the report relates.
8. RECORDS OF SECURITIES TRANSACTIONS AND POST-TRADE REVIEW
Access Persons (other than Disinterested Directors/Trustees) are required to direct their brokers to supply, on a timely basis, duplicate copies of confirmations of all personal Securities transactions and copies of periodic statements for all Securities accounts in which such Access Persons have a Beneficial Ownership interest to the Compliance Officer. Such instructions must be made upon becoming an Access Person and promptly as new accounts are established, but no later than ten days after the end of a calendar quarter, with respect to any account established by the Access Person in which any securities were held during the quarter for the direct or indirect beneficial interest of the Access Person. Notification must be made in writing and a
copy of the notification must be submitted to Compliance. This notification will include the broker, dealer or bank with which the account was established and the date the account was established.
Compliance with this Code requirement will be deemed to satisfy the reporting requirements imposed on Access Persons under Rule 17j-1(d), provided, however, that such confirmations and statements contain all the information required by Section 7. b. hereof and are furnished within the time period required by such section.
The Compliance Officer will periodically review the personal investment activity of all Access Persons (including Disinterested Directors/Trustees with respect to Securities transactions reported pursuant to Section 7 above) and holdings reports of all Access Persons.
9. DISCLOSURE OF PERSONAL HOLDINGS
Within ten days after an individual first becomes an Access Person and thereafter on an annual basis, each Access Person (other than Disinterested Directors/Trustees) must disclose all personal Securities holdings. Such disclosure must be made in writing and be as of the date the individual first became an Access Person with respect to the initial report and by January 30 of each year, including holdings information as of December 31, with respect to the annual report. All such reports shall include the following: title, number of shares and principal amount of each security held, name of broker, dealer or bank with whom these securities are held and the date of submission by the Access Person.
10. GIFTS
Access Persons are prohibited from receiving any gift or other thing which would be considered excessive in value from any person or entity that does business with or on behalf of the Fund. Occasional business meals or entertainment (theatrical or sporting events, etc.) are permitted so long as they are not excessive in number or cost.
11. SERVICE AS A DIRECTOR
Investment Personnel are prohibited from serving on the boards of directors of publicly traded companies, absent prior authorization based upon a determination that the board service would be consistent with the interests of the Fund and its shareholders. In the limited instances that such board service is authorized, Investment Personnel will be isolated from those making investment decisions affecting transactions in Securities issued by any publicly traded company on whose board such Investment Personnel serves as a director through the use of "Chinese Wall" or other procedures designed to address the potential conflicts of interest.
12. CERTIFICATION OF COMPLIANCE WITH THE CODE
Access Persons are required to certify annually as follows:
(i) that they have read and understood the Code;
(ii) that they recognize that they are subject to the Code;
(iii) that they have complied with the requirements of the Code; and
(iv) that they have disclosed or reported all personal Securities transactions required to be disclosed or reported pursuant to the requirements of the Code.
13. CODE VIOLATIONS AND SANCTIONS
All violations of the Code will be reviewed by the Committee. The Committee will determine any sanctions or other disciplinary actions that may be deemed appropriate. All material violations and corresponding sanctions and/or disciplinary action will be reported to the Board of Directors/Trustees of the Fund on a quarterly basis. The Board of Directors/Trustees may take action as it deems appropriate, in addition to any action previously taken by the Committee.
14. REVIEW BY THE BOARD OF DIRECTORS/TRUSTEES
The Board of Directors/Trustees will be provided with an annual report which at a minimum:
(i) certifies to the Board that the Fund, Manager, Investment Adviser/Subadviser, and Principal Underwriter has adopted procedures reasonably necessary to prevent its Access persons from violating its Code.
(ii) summarizes existing procedures concerning personal investing and any changes in the procedures made during the preceding year;
(iii) identifies material Code or procedural violations and sanctions imposed in response to those material violations; and
(iv) identifies any recommended changes in existing restrictions or procedures based upon the Fund's experience under the Code, evolving industry practices, or developments in applicable laws and regulations.
The Board will review such report and determine if any further action is required.
EXPLANATORY NOTES TO CODE
1. No comparable Code requirements have been imposed upon Prudential Mutual Fund Services LLC, the Fund's transfer agent, or those of its directors or officers who are not Directors/Trustees or Officers of the Fund since they are deemed not to constitute Access Persons or Advisory Persons as defined in paragraphs (e)(1) and (2) of Rule 17j-1.
EXHIBIT A
DEFINITION OF BENEFICIAL OWNERSHIP
The term "beneficial ownership" of securities would include not only ownership of securities held by an access person for his or her own benefit, whether in bearer form or registered in his or her own name or otherwise, but also ownership of securities held for his or her benefit by other (regardless of whether or how they are registered) such as custodians, brokers, executors, administrators, or trustees (including trusts in which he or she has only a remainder interest), and securities held for his or her account by pledges, securities owned by a partnership in which he or she should regard as a personal holding corporation. Correspondingly, this term would exclude securities held by an access person for the benefit of someone else.
Ordinarily, this term would not include securities held by executors or administrators in estates in which an access person is a legatee or beneficiary unless there is a specific legacy to such person of such securities or such person is the sole legatee or beneficiary and there are other assets in the estate sufficient to pay debts ranking ahead of such legacy, or the securities are held in the estate more than a year after the decedent's death.
Securities held in the name of another should be considered as
"beneficially" owned by an access person where such person enjoys "benefits
substantially equivalent to ownership". The SEC has said that although the final
determination of beneficial ownership is a question to be determined in the
light of the facts of the particular case, generally a person is regarded as the
beneficial owner of securities held in the name of his or her spouse and their
minor children. Absent special circumstances such relationship ordinarily
results in such person obtaining benefits substantially equivalent to ownership,
e.g., application of the income derived from such securities to maintain a
common home, to meet expenses which such person otherwise would meet from other
sources, or the ability to exercise a controlling influence over the purchase,
sale or voting of such securities.
An access person also may be regarded as the beneficial owner of securities held in the name of another person, if by reason of any contact, understanding, relationship, agreement or other arrangement, he obtains therefrom benefits substantially equivalent to those of ownership. Moreover, the fact that the holder is a relative or relative of a spouse and sharing the same home as an access person may in itself indicate that the access person would obtain benefits substantially equivalent to those of ownership from securities held in the name of such relative. Thus, absent countervailing facts, it is expected that securities held by relatives who share the same home as an access person will be treated as being beneficially owned by the access person.
An access person also is regarded as the beneficial owner of securities held in the name of a spouse, minor children or other person, even though he does not obtain therefrom the aforementioned benefits of ownership, if he can vest or revest title in himself at once or at some future time.
PRUDENTIAL INVESTMENT MANAGEMENT, INC.
PRUDENTIAL INVESTMENTS LLC
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
CODE OF ETHICS ADOPTED PURSUANT TO RULE 17j-1
UNDER THE INVESTMENT COMPANY ACT OF 1940
(THE CODE)
1. PURPOSES
The Code has been adopted by the Board of Directors/Trustees or the Duly Appointed Officer-In-Charge of the Prudential Mutual Fund (hereinafter, referred to as the "Fund"), the Manager, the Adviser/Subadviser, and the Principal Underwriter in accordance with Rule 17j-1(c) under the Investment Company Act of 1940 (the Act) and in accordance with the following general principles:
(1) THE DUTY AT ALL TIMES TO PLACE THE INTERESTS OF INVESTMENT COMPANY SHAREHOLDERS FIRST.
Investment company personnel should scrupulously avoid serving their own personal interests ahead of shareholders' interests in any decision relating to their personal investments.
(2) THE REQUIREMENT THAT ALL PERSONAL SECURITIES TRANSACTIONS BE CONDUCTED CONSISTENT WITH THE CODE AND IN SUCH A MANNER AS TO AVOID ANY ACTUAL OR POTENTIAL CONFLICT OF INTEREST OR ANY ABUSE OF AN INDIVIDUAL'S POSITION OF TRUST AND RESPONSIBILITY.
Investment company personnel must not only seek to achieve technical compliance with the Code but should strive to abide by its spirit and the principles articulated herein.
(3) THE FUNDAMENTAL STANDARD THAT INVESTMENT COMPANY PERSONNEL SHOULD NOT TAKE INAPPROPRIATE ADVANTAGE OF THEIR POSITIONS.
Investment company personnel must avoid any situation that
might
compromise, or call into question, their exercise of fully independent judgment in the interest of shareholders, including, but not limited to the receipt of unusual investment opportunities, perquisites, or gifts of more than a DE MINIMIS value from persons doing or seeking business with the Fund.
Rule 17j-1 under the Act generally proscribes fraudulent or manipulative practices with respect to a purchase or sale of a security held or to be acquired (as such term is defined in Section 2) by an investment company, if effected by an associated person of such company.
The purpose of the Code is to establish procedures consistent with the Act and Rule 17j-1 to give effect to the following general prohibitions as set forth in Rule 17j-1(b) as follows:
(a) It shall be unlawful for any affiliated person of or Principal Underwriter for a registered investment company, or any affiliated person of an investment adviser of or principal underwriter for a registered investment company in connection with the purchase or sale, directly or indirectly, by such person of a security held or to be acquired, by such registered investment company:
(1) To employ any device, scheme or artifice to defraud such registered investment company;
(2) To make to such registered investment company any untrue statement of a material fact or omit to state to such registered investment company a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading;
(3) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any such registered investment company; or
(4) To engage in any manipulative practice with respect to such registered investment company.
2. DEFINITIONS
(a) "Access Person" means any director/trustee, officer, general partner or Advisory Person (including any Investment Personnel, as that term is defined herein) of the Fund, the Manager, the Adviser/Subadviser, or the Principal Underwriter.
(b) "Adviser/Subadviser" means the Adviser or a Subadviser, if any, of the Fund or both as the context may require.
(c) "Advisory Person" means (i) any employee of the Fund, Manager or Adviser/Subadviser (or of any company in a control relationship to the Fund, Manager or Adviser/Subadviser) who, in connection with his or her regular functions or duties, makes, participates in, or obtains current or pending information regarding the purchase or sale of a security by the Fund, or whose functions relate to the making of any recommendations with respect to such purchases or sales; and (ii) any natural person in a control relationship to the Fund who obtains information concerning recommendations made to the Fund with regard to the purchase or sale of a security.
(d) "Beneficial Ownership" will be interpreted in the same manner as it would be under Securities Exchange Act Rule 16a-1(a)(2) in determining which security holdings of a person are subject to the reporting and short-swing profit provisions of Section 16 of the Securities Exchange Act of 1934 and the rules and regulations thereunder, except that the determination of direct or indirect beneficial ownership will apply to all securities which an Access Person has or acquires (EXHIBIT A).
(e) "Complex" means the group of registered investment companies for which Prudential Investments Fund Management LLC serves as Manager; provided, however, that with respect to Access Persons of a Subadviser (including any unit or subdivision thereof), "Complex" means the group of registered investment companies in the Complex advised by such Subadviser or unit or subdivision thereof. A list of such registered investment companies will be maintained by the Compliance Officer.
(f) "Compliance Officer" means the person or persons (including his or her designees) designated by the Manager, the
Adviser/Subadviser, or Principal Underwriter, respectively, as having responsibility for compliance with the requirements of the Code.
(g) "Control" will have the same meaning as that set forth in
Section 2(a)(9) of the Act.
(h) "Disinterested Director/Trustee" means a Director/Trustee of the Fund who is not an "interested person" of the Fund within the meaning of Section 2(a)(19) of the Act.
An interested Director/Trustee who would not otherwise be deemed to be an Access Person, shall be treated as a Disinterested Director/Trustee for purposes of compliance with the provisions of the Code.
(i) "Initial Public Offering" means an offering of securities registered under the Securities Act of 1933, the issuer of which, immediately before the registration, was not subject to the reporting requirements of sections 13 or 15(d) of the Securities Exchange Act of 1934.
(j) "Investment Personnel" means: (a) Portfolio Managers and other Advisory Persons who provide investment information and/or advice to the Portfolio Manager(s) and/or help execute the Portfolio Manager's(s') investment decisions, including securities analysts and traders; (b) any natural person in a control relationship to the Fund who obtains information concerning recommendations made to the Fund with regard to the purchase or sale of a security; and (c) certain other individuals as designated by the Compliance Officer.
(k) "Manager" means Prudential Investments Fund Management, LLC.
(l) "Mutual Fund Code of Ethics and Personal Securities Trading Committee" or "Committee" means a specified group of Business Unit, Compliance, and Human Resources executives responsible for interpreting and administering the Code, including but not limited to, reviewing violations of the Code and determining any sanctions or other disciplinary actions that may be deemed appropriate. In addition, the Committee may waive and or modify violations and sanctions or other disciplinary actions at its discretion when deemed appropriate by the Committee. The Committee will review such violations in consultation with legal counsel. A list of such Committee members shall be maintained by
the Compliance Officer.
(m) "Portfolio Manager" means any Advisory Person who has the direct responsibility and authority to make investment decisions for the Fund.
(n) "Private placement" means a limited offering that is exempt from registration under the Securities Act of 1933 pursuant to section 4(2) or section 4(6) or pursuant to rule 504, rule 505 or rule 506 under such Securities Act.
(o) "Profits" means any total or partial gain realized from a securities transaction or group of transactions as defined by the Mutual Fund Code of Ethics and Personal Securities Trading Committee ("Committee").
(p) "Security" will have the meaning set forth in Section 2(a)(36)
of the Act, except that it will not include shares of registered open-end
investment companies, direct obligations of the Government of the United
States, , short-term debt securities which are "government securities"
within the meaning of Section 2(a)(16) of the Act, bankers' acceptances,
bank certificates of deposit, commercial paper and such other money market
instruments as are designated by the Compliance Officer. For purposes of
the Code, an "equivalent Security" is one that has a substantial economic
relationship to another Security. This would include, among other things,
(1) a Security that is exchangeable for or convertible into another
Security, (2) with respect to an equity Security, a Security having the
same issuer (including a private issue by the same issuer) and any
derivative, option or warrant relating to that Security and (3) with
respect to a fixed-income Security, a Security having the same issuer,
maturity, coupon and rating.
(q) "Security held or to be acquired" means any Security or any equivalent Security which, within the most recent 15 days: (1) is or has been held by the Fund; or (2) is being considered by the Fund or its investment adviser for purchase by the Fund.
3. APPLICABILITY
The Code applies to all Access Persons, except that Access Persons covered by more than one Code of Ethics meeting the requirements of Rule 17j-1 may be governed by the provisions of such other Code of Ethics and report all transactions pursuant to
the terms of such other Code of Ethics provided that such Code was reviewed and approved by the Board of Directors/Trustees of the Fund. The Compliance Officer shall ensure that each Access Person subject to this Code receives a copy of the Code. The Compliance Officer will maintain a list of all Access Persons who are currently, and within the past five years, subject to the Code.
4. PROHIBITED PURCHASES AND SALES
The Prohibitions described below will only apply to a transaction in a security in which the designated Access Person has, or by reason of such transaction acquires, any direct or indirect Beneficial Ownership.
A. INITIAL PUBLIC OFFERINGS
No Investment Personnel may acquire any Securities in an initial public offering. For purposes of this restriction, "Initial Public Offerings" shall not include offerings of government and municipal securities.
B. PRIVATE PLACEMENTS
No Investment Personnel may acquire any Securities in a private placement without prior approval.
(i) Prior approval must be obtained in accordance with the preclearance procedure described in Section 6 below. Such approval will take into account, among other factors, whether the investment opportunity should be reserved for the Fund and its shareholders and whether the opportunity is being offered to the Investment Personnel by virtue of his or her position with the Fund. The Adviser/Subadviser shall
maintain a record of such prior approval and reason for same, for at least 5 years after the end of the fiscal year in which the approval is granted.
(ii) Investment Personnel who have been authorized to acquire Securities in a private placement must disclose that investment to the chief investment officer (including his or her designee) of the Adviser/Subadviser (or of any unit or subdivision thereof) or the Compliance Officer when they play a part in any subsequent consideration of an investment by the Fund in the issuer. In such circumstances, the Fund's decision to purchase Securities of the issuer will be subject to an independent review by appropriate personnel with no personal interest in the issuer.
C. BLACKOUT PERIODS
(i) Except as provided in Section 5 below, Access Persons are prohibited from executing a Securities transaction on a day during which any investment company in the Complex has a pending "buy" or "sell" order in the same or an equivalent Security and until such time as that order is executed or withdrawn; provided, however, that this prohibition shall not apply to Disinterested Directors/Trustees except if they have actual knowledge of trading by any fund in the Complex.
This prohibition shall also not apply to Access Persons of the Manager, Principal Underwriter, and Adviser/Subadviser who do not, in the ordinary course
of fulfilling his or her official duties, have access to current or pending information regarding the purchase and sale of Securities for the Fund and are not engaged in the day-to-day trading operations of the Fund; provided that Securities investments effected by such Access Persons during the proscribed period are not effected with knowledge of the purchase or sale of the same or equivalent Securities by any fund in the Complex.
A "pending 'buy' or 'sell' order" exists when a decision to purchase or sell a Security has been made and communicated. However, this prohibition shall not apply to a "pending `buy `or `sell' order" in the same or an equivalent security in a broad based index fund.(1)
(ii) Portfolio Managers are prohibited from buying or selling a Security within seven calendar days before or after a Fund in the same Complex trades in the same or an equivalent Security. Nevertheless, a personal trade by any Investment Personnel shall not prevent a Fund in the same Complex from trading in the same or an equivalent security. However, such a transaction shall be subject to independent review by the Compliance Officer. This prohibition shall not apply to purchases and sales executed in a broad based index fund.
(iii) If trades are effected during the periods proscribed in (i) or
(ii) above, except as provided in (iv) below with respect to (i) above,
Profits realized on such trades will be promptly required to be disgorged
to the Fund or a charitable organization approved by the Committee.
(iv) A transaction by Access Persons (other than Investment Personnel) inadvertently effected during the period proscribed in (i) above will not be considered a violation of the Code and disgorgement will not be required so long as the transaction was effected in accordance with the preclearance procedures described in Section 6 below and without prior knowledge of trading by any Fund in the Complex in the same or an equivalent Security.
D. SHORT-TERM TRADING PROFITS
Except as provided in Section 5 below, Investment Personnel are prohibited from profiting from a purchase and sale, or sale and purchase, of the same or an equivalent Security within any 60 calendar day period. If trades are effected during the proscribed period, Profits realized on such trades will be promptly required to be disgorged to the Fund or a charitable organization approved by the Committee.
E. SHORT SALES
No Access Person may sell any security short which is owned by any Fund in the Complex. Access Persons may, however make short sales when he/she owns an equivalent amount of the same security. This prohibition does not apply to Disinterested Directors/Trustees.
F. OPTIONS
No Access Person may write a naked call option or buy a naked put option on a security owned by any Fund in the Complex. Access Persons may purchase options on securities not held by any Fund in the Complex, or purchase call options or write put options on securities owned by any Fund in the Complex, subject to preclearance and
the same restrictions applicable to other Securities. Access Persons may write covered call options or buy covered put options on a Security owned by any Fund in the Complex at the discretion of the Compliance Officer. This prohibition does not apply to Disinterested Directors/Trustees.
G. INVESTMENT CLUBS
No Access Person may participate in an investment club. This prohibition does not apply to Disinterested Directors/Trustees.
5. EXEMPTED TRANSACTIONS
Subject to preclearance in accordance with Section 6 below with respect to subitems (b), (e), (f), (g) and (i) hereof, the prohibitions of Sections 4(C) and 4(D) will not apply to the following:
(a) Purchases or sales of Securities effected in any account over which the Access Person has no direct or indirect influence or control or in any account of the Access Person which is managed on a discretionary basis by a person other than such Access Person and with respect to which such Access Person does not in fact influence or control such transactions.
(b) Purchases or sales of Securities (or their equivalents) which are not eligible for purchase or sale by any fund in the Complex.
(c) Purchases or sales of Securities which are non-volitional on the part of either the Access Person or any fund in the Complex.
(d) Purchases of Securities which are part of an automatic dividend reinvestment plan.
(e) Purchases effected upon the exercise of rights issued by an issuer PRO RATA to all holders of a class of its Securities, to the extent such rights were acquired from such issuer, and sales of such rights so acquired.
(f) Any equity Securities transaction, or series of related
transactions effected over a 30 calendar day period, involving 500 shares or less in the aggregate, if (i) the Access Person has no prior knowledge of activity in such security by any fund in the Complex and (ii) the issuer is listed on The New York Stock Exchange or has a market capitalization (outstanding shares multiplied by the current price per share) greater than $1 billion (or a corresponding market capitalization in foreign markets).
(g) Any fixed-income Securities transaction, or series of related transactions effected over a 30 calendar day period, involving 100 units ($100,000 principal amount) or less in the aggregate, if the Access Person has no prior knowledge of transactions in such Securities by any fund in the Complex.
(h) Any transaction in index options effected on a broad-based index.(2)
(i) Purchases or sales of Securities which receive the prior approval of the Compliance Officer (such person having no personal interest in such purchases or sales), based on a determination that no abuse is involved and that such purchases and sales are not likely to have any economic impact on any fund in the Complex or on its ability to purchase or sell Securities of the same class or other Securities of the same issuer.
(j) Purchases or sales of Unit Investment Trusts.
6. PRECLEARANCE
Access Persons (other than Disinterested Directors/Trustees) must preclear all personal Securities investments with the exception of those identified in subparts (a), (c), (d), (h) and (j) of Section 5 above.
All requests for preclearance must be submitted to the Compliance Officer for approval. All approved orders must be executed by the close of business on the day in which preclearance is granted; provided, however that approved orders for Securities traded in foreign markets may be executed within two (2) business days from the date
preclearance is granted. If any order is not timely executed, a request for preclearance must be resubmitted.
7. REPORTING
(a) Disinterested Directors/Trustees shall report to the Secretary of the Fund or the Compliance Officer the information described in Section 7(b) hereof with respect to transactions in any Security in which such Disinterested Director/Trustee has, or by reason of such transaction acquires, any direct or indirect Beneficial Ownership in the Security ONLY if such Disinterested Director/Trustee, at the time of that transaction knew or, in the ordinary course of fulfilling his or her official duties as a Director/Trustee of the Fund, should have known that, during the 15-day period immediately preceding or subsequent to the date of the transaction in a Security by such Director/Trustee, such Security is or was purchased or sold by the Fund or was being considered for purchase or sale by the Fund, the Manager or Adviser/Subadviser; provided, however, that a Disinterested Director/Trustee is not required to make a report with respect to transactions effected in any account over which such Director/Trustee does not have any direct or indirect influence or control or in any account of the Disinterested Director/Trustee which is managed on a discretionary basis by a person other than such Director/Trustee and with respect to which such Director/Trustee does not in fact influence or control such transactions. The Secretary of the Fund or the Compliance Officer shall maintain such reports and such other records to the extent required by Rule 17j-1 under the Act.
(b) Every report required by Section 7(a) hereof shall be made not later than ten days after the end of the calendar quarter in which the transaction to which the report relates was effected, and shall contain the following information:
(i) The date of the transaction, the title and the number of shares, and the principal amount of each Security involved;
(ii) The nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition);
(iii) The price at which the transaction was effected;
(iv) The name of the broker, dealer or bank with or through whom the transaction was effected; and
(v) The date that the report is submitted.
(c) Any such report may contain a statement that the report shall not be construed as an admission by the person making such report that he or she has any direct or indirect Beneficial Ownership in the Security to which the report relates.
8. RECORDS OF SECURITIES TRANSACTIONS AND POST-TRADE REVIEW
Access Persons (other than Disinterested Directors/Trustees) are required to direct their brokers to supply, on a timely basis, duplicate copies of confirmations of all personal Securities transactions and copies of periodic statements for all Securities accounts in which such Access Persons have a Beneficial Ownership interest to the Compliance Officer. Such instructions must be made upon becoming an Access Person and promptly as new accounts are established, but no later than ten days after the end of a calendar quarter, with respect to any account established by the Access Person in which any securities were held during the quarter for the direct or indirect beneficial interest of the Access Person. Notification must be made in writing and a
copy of the notification must be submitted to Compliance. This notification will include the broker, dealer or bank with which the account was established and the date the account was established.
Compliance with this Code requirement will be deemed to satisfy the reporting requirements imposed on Access Persons under Rule 17j-1(d), provided, however, that such confirmations and statements contain all the information required by Section 7. b. hereof and are furnished within the time period required by such section.
The Compliance Officer will periodically review the personal investment activity of all Access Persons (including Disinterested Directors/Trustees with respect to Securities transactions reported pursuant to Section 7 above) and holdings reports of all Access Persons.
9. DISCLOSURE OF PERSONAL HOLDINGS
Within ten days after an individual first becomes an Access Person and thereafter on an annual basis, each Access Person (other than Disinterested Directors/Trustees) must disclose all personal Securities holdings. Such disclosure must be made in writing and be as of the date the individual first became an Access Person with respect to the initial report and by January 30 of each year, including holdings information as of December 31, with respect to the annual report. All such reports shall include the following: title, number of shares and principal amount of each security held, name of broker, dealer or bank with whom these securities are held and the date of submission by the Access Person.
10. GIFTS
Access Persons are prohibited from receiving any gift or other thing which would be considered excessive in value from any person or entity that does business with or on behalf of the Fund. Occasional business meals or entertainment (theatrical or sporting events, etc.) are permitted so long as they are not excessive in number or cost.
11. SERVICE AS A DIRECTOR
Investment Personnel are prohibited from serving on the boards of directors of publicly traded companies, absent prior authorization based upon a determination that the board service would be consistent with the interests of the Fund and its shareholders. In the limited instances that such board service is authorized, Investment Personnel will be isolated from those making investment decisions affecting transactions in Securities issued by any publicly traded company on whose board such Investment Personnel serves as a director through the use of "Chinese Wall" or other procedures designed to address the potential conflicts of interest.
12. CERTIFICATION OF COMPLIANCE WITH THE CODE
Access Persons are required to certify annually as follows:
(i) that they have read and understood the Code;
(ii) that they recognize that they are subject to the Code;
(iii) that they have complied with the requirements of the Code; and
(iv) that they have disclosed or reported all personal Securities transactions required to be disclosed or reported pursuant to the requirements of the Code.
13. CODE VIOLATIONS AND SANCTIONS
All violations of the Code will be reviewed by the Committee. The Committee will determine any sanctions or other disciplinary actions that may be deemed appropriate. All material violations and corresponding sanctions and/or disciplinary action will be reported to the Board of Directors/Trustees of the Fund on a quarterly basis. The Board of Directors/Trustees may take action as it deems appropriate, in addition to any action previously taken by the Committee..
14. REVIEW BY THE BOARD OF DIRECTORS/TRUSTEES
The Board of Directors/Trustees will be provided with an annual report which at a minimum:
(i) certifies to the Board that the Fund, Manager, Investment Adviser/Subadviser, and Principal Underwriter has adopted procedures reasonably necessary to prevent its Access persons from violating its Code.
(ii) summarizes existing procedures concerning personal investing and any changes in the procedures made during the preceding year;
(iii) identifies material Code or procedural violations and sanctions imposed in response to those material violations; and
(iv) identifies any recommended changes in existing restrictions or procedures based upon the Fund's experience under the Code, evolving industry practices, or developments in applicable laws and regulations.
The Board will review such report and determine if any further action is required.
EXPLANATORY NOTES TO CODE
1. No comparable Code requirements have been imposed upon Prudential Mutual Fund Services LLC, the Fund's transfer agent, or those of its directors or officers who are not Directors/Trustees or Officers of the Fund since they are deemed not to constitute Access Persons or Advisory Persons as defined in paragraphs (e)(1) and (2) of Rule 17j-1.
EXHIBIT A
DEFINITION OF BENEFICIAL OWNERSHIP
The term "beneficial ownership" of securities would include not only ownership of securities held by an access person for his or her own benefit, whether in bearer form or registered in his or her own name or otherwise, but also ownership of securities held for his or her benefit by other (regardless of whether or how they are registered) such as custodians, brokers, executors, administrators, or trustees (including trusts in which he or she has only a remainder interest), and securities held for his or her account by pledges, securities owned by a partnership in which he or she should regard as a personal holding corporation. Correspondingly, this term would exclude securities held by an access person for the benefit of someone else.
Ordinarily, this term would not include securities held by executors or administrators in estates in which an access person is a legatee or beneficiary unless there is a specific legacy to such person of such securities or such person is the sole legatee or beneficiary and there are other assets in the estate sufficient to pay debts ranking ahead of such legacy, or the securities are held in the estate more than a year after the decedent's death.
Securities held in the name of another should be considered as
"beneficially" owned by an access person where such person enjoys "benefits
substantially equivalent to ownership". The SEC has said that although the final
determination of beneficial ownership is a question to be determined in the
light of the facts of the particular case, generally a person is regarded as the
beneficial owner of securities held in the name of his or her spouse and their
minor children. Absent special circumstances such relationship ordinarily
results in such person obtaining benefits substantially equivalent to ownership,
e.g., application of the income derived from such securities to maintain a
common home, to meet expenses which such person otherwise would meet from other
sources, or the ability to exercise a controlling influence over the purchase,
sale or voting of such securities.
An access person also may be regarded as the beneficial owner of securities held in the name of another person, if by reason of any contact, understanding, relationship, agreement or other arrangement, he obtains therefrom benefits substantially equivalent to those of ownership. Moreover, the fact that the holder is a relative or relative of a spouse and sharing the same home as an access person may in itself indicate that the access person would obtain benefits substantially equivalent to those of ownership from securities held in the name of such relative. Thus, absent countervailing facts, it is expected that securities held by relatives who share the same home as an access person will be treated as being beneficially owned by the access person.
An access person also is regarded as the beneficial owner of securities held in the name of a spouse, minor children or other person, even though he does not obtain therefrom the aforementioned benefits of ownership, if he can vest or revest title in himself at once or at some future time.
POWER OF ATTORNEY
The undersigned Directors and officers of Prudential Government Income Fund, Inc. hereby constitute, appoint and authorize Deborah A. Docs and William V. Healey or either of them, as true and lawful agent and attorney-in-fact, to sign on his or her behalf in the capacities indicated, any Registration Statement or amendment thereto (including post-effective amendments), and to file the same, with all exhibits thereto, with the Securities and Exchange Commission. The undersigned do hereby give to said agent and attorney-in-fact full power and authority to act in these premises, including, but not limited to, the power to appoint a substitute or substitutes to act hereunder with the same power and authority as said agent and attorney-in-fact would have if personally acting. The undersigned do hereby approve, ratify and confirm all that said agent and attorney-in-fact, or any substitute or substitutes, may do by virtue hereof.
/s/ EUGENE C. DORSEY /s/ DAVID R. ODENATH, JR.
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Eugene C. Dorsey, Director David R. Odenath, Jr., President and
Director
/s/ DELAYNE DEDRICK GOLD /s/ RICHARD A. REDEKER
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Delayne Dedrick Gold, Director Richard A. Redeker, Director
/s/ ROBERT F. GUNIA /s/ JUDY A. RICE
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Robert F. Gunia, Vice President Judy A. Rice, Vice President and
and Director Director
/s/ THOMAS T. MOONEY /s/ NANCY H. TEETERS
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Thomas T. Mooney, Director Nancy H. Teeters, Director
/s/ STEPHEN P. MUNN /s/ LOUIS A. WEIL, III
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Stephen P. Munn, Director Louis A. Weil, III, Director
/s/ GRACE C. TORRES
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Grace C. Torres, Treasurer and
Principal Financial and Accounting
Officer
Dated: November 29, 2001
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