AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 1, 1997
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 24 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 27 /X/
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
(Exact name of registrant as specified in charter)
GATEWAY CENTER THREE,
NEWARK, NEW JERSEY 07102
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201) 367-7530
S. JANE ROSE, ESQ.
GATEWAY CENTER THREE,
NEWARK, NEW JERSEY 07102
(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 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of Rule
485.
If appropriate, check the following box:
/ / This post-effective amendment designates a new
effective date for a previously filed
post-effective amendment.
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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED PER UNIT OFFERING PRICE* REGISTRATION FEE
Shares of Common Stock, par value
$.01 per share...................... 15,949,378 $8.63 N/A $0
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*The total number of shares redeemed during the fiscal year ended February 28, 1997 amounted to 59,820,764 shares. Of this number, no shares have been used for reduction pursuant to paragraph (a) of Rule 24e-2 in all previous filings of post-effective amendments during the current year, and 43,871,386 shares have been used for reduction pursuant to paragraph (c) of Rule 24f-2 in all previous filings during the current year. 15,949,378 ($140,985,138) of the redeemed shares for the fiscal year ended February 28, 1997 are being used for the reductions in the post-effective amendment being filed herein.
PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940, REGISTRANT HAS PREVIOUSLY REGISTERED AN INDEFINITE NUMBER OF SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE. THE REGISTRANT FILED A NOTICE UNDER SUCH RULE FOR ITS FISCAL YEAR ENDED FEBRUARY 28, 1997 ON APRIL 29, 1997.
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
N-1A ITEM NO. LOCATION
- ---------------------------------------------------------------------------- ------------------------------------
PART A
Item 1. Cover Page....................................................... Cover Page
Item 2. Synopsis......................................................... Fund Expenses; Fund Highlights
Item 3. Condensed Financial Information.................................. Fund Expenses; Financial Highlights
Item 4. General Description of Registrant................................ Cover Page; Fund Highlights; How the
Fund Invests; How the Fund is
Managed; General Information
Item 5. Management of the Fund........................................... Financial Highlights; How the Fund
is Managed; General Information
Item 5A. Management's Discussion of Fund Performance...................... Not Applicable
Item 6. Capital Stock and Other Securities............................... Taxes, Dividends and Distributions;
General Information; Shareholder
Guide
Item 7. Purchase of Securities Being Offered............................. Shareholder Guide; How the Fund
Values its Shares; How the Fund is
Managed
Item 8. Redemption or Repurchase......................................... Shareholder Guide; How the Fund
Values its Shares; General
Information
Item 9. Pending Legal Proceedings........................................ Not Applicable
PART B
Item 10. Cover Page....................................................... Cover Page
Item 11. Table of Contents................................................ Table of Contents
Item 12. General Information and History.................................. General Information
Item 13. Investment Objectives and Policies............................... Investment Objective and Policies;
Investment Restrictions
Item 14. Management of the Fund........................................... Directors and Officers; Manager;
Distributor
Item 15. Control Persons and Principal Holders of Securities.............. Not Applicable
Item 16. Investment Advisory and Other Services........................... Manager; Distributor; Custodian,
Transfer and Dividend Disbursing
Agent and Independent Accountants
Item 17. Brokerage Allocation and Other Practices......................... Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities............................... Not Applicable
Item 19. Purchase, Redemption and Pricing of Securities Being Offered..... Purchase and Redemption of Fund
Shares; Shareholder Investment
Account
Item 20. Tax Status....................................................... Taxes, Dividends and Distributions
Item 21. Underwriters..................................................... Distributor
Item 22. Calculation of Performance Data.................................. Performance Information
Item 23. Financial Statements............................................. Financial Statements
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PART C
Information required to be included in Part C is set forth under the appropriate Item, so numbered, in Part C to this Post-Effective Amendment to the Registration Statement.
[PRUDENTIAL GOVERNMENT INCOME FUND, INC. LOGO]
PROSPECTUS DATED MAY 1, 1997
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, Bonds and other debt securities issued by the U.S. Treasury, and obligations issued or guaranteed by U.S. Government agencies or instrumentalities, and by engaging in various derivative transactions such as the purchase and sale of 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 futures. See "How the Fund Invests--Investment Objective and Policies." There can be no assurance that the Fund's investment objective will be achieved. The Fund's address is Gateway Center Three, Newark, New Jersey 07102, and its telephone number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund that a prospective investor should know before investing. Additional information about the Fund has been filed with the Securities and Exchange Commission (SEC) in a Statement of Additional Information, dated May 1, 1997, which information is incorporated herein by reference (is legally considered a part of this Prospectus) and is available without charge upon request to the Fund at the address or telephone number noted above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained in this Prospectus and is qualified in its entirety by the more detailed information appearing elsewhere herein.
WHAT IS PRUDENTIAL GOVERNMENT INCOME FUND, INC.?
Prudential Government Income Fund, Inc. is a mutual fund. A mutual fund pools the resources of investors by selling its shares to the public and investing the proceeds of such sale in a portfolio of securities designed to achieve its investment objective. Technically, the Fund is an open-end, diversified, management investment company.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is to seek a high current return. The Fund seeks to achieve its objective 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. The Fund may also write covered call options and covered put options and purchase put and call options. There can be no assurance that the Fund's investment objective will be achieved. See "How the Fund Invests--Investment Objective and Policies" at page 9.
WHAT ARE THE FUND'S RISK FACTORS AND SPECIAL CHARACTERISTICS?
The Fund may engage in short selling and use leverage, including reverse repurchase agreements, dollar rolls and bank borrowings, which entail additional risks to the Fund. See "How the Fund Invests--Other Investment Information" at page 16. The Fund may also engage in various hedging and income enhancement strategies, including derivative transactions such as the purchase and sale of put and call options on U.S. Government securities, transactions involving futures contracts on U.S. Government securities and options on such futures contracts and in interest rate swap transactions. See "How the Fund Invests-- Other Investments and Policies" at page 11. As with an investment in any mutual fund, an investment in this Fund can decrease in value and you can lose money.
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM or the Manager) is the Manager of the Fund and is compensated for its services at an annual rate of .50 of 1% of the Fund's average daily net assets up to $3 billion and .35 of 1% of the average daily net assets in excess of $3 billion. As of March 31, 1997, PIFM served as manager or administrator to 62 investment companies, including 40 mutual funds, with aggregate assets of approximately $54.9 billion. The Prudential Investment Corporation (PIC, the Subadviser or the investment adviser) furnishes investment advisory services in connection with the management of the Fund under a Subadvisory Agreement with PIFM. See "How the Fund is Managed--Manager" at page 18.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Securities Incorporated (Prudential Securities or PSI), a major securities underwriter and securities and commodities broker, acts as the Distributor of the Fund's Class A, Class B, Class C and Class Z shares and is paid an annual distribution and service fee which is currently being charged at an annual rate of .15 of 1% of the average daily net assets of the Class A shares, at an annual rate of .825 of 1% of the average daily net assets of the Class B shares and at an annual rate of .75 of 1% of the average daily net assets of the Class C shares. Prudential Securities incurs the expense of distributing the Fund's Class Z shares under a Distribution Agreement with the Fund, none of which is reimbursed or paid for by the Fund. See "How the Fund is Managed--Distributor" at page 19.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000 per class and $5,000 for Class C shares. The minimum subsequent investment is $100 for Class A, Class B and Class C shares. Class Z shares are not subject to any minimum investment requirements. There is no minimum investment requirement for certain retirement and employee savings plans or custodial accounts for the benefit of minors. For purchases made through the Automatic Savings Accumulation Plan, the minimum initial and subsequent investment is $50. See "Shareholder Guide--How to Buy Shares of the Fund" at page 25 and "Shareholder Guide--Shareholder Services" at page 36.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through Prudential Securities, Pruco Securities Corporation (Prusec) or directly from the Fund, through its transfer agent, Prudential Mutual Fund Services LLC. (PMFS or the Transfer Agent) at the net asset value per share (NAV) next determined after receipt of your purchase order by the Transfer Agent or Prudential Securities plus a sales charge which may be imposed either (i) at the time of purchase (Class A shares) or (ii) on a deferred basis (Class B or Class C shares). Class Z shares are offered to a limited group of investors at net asset value without any sales charge. See "How the Fund Values its Shares" at page 22 and "Shareholder Guide--How to Buy Shares of the Fund" at page 25.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers four classes of shares:
- Class A Shares: Sold with an initial sales charge of up to 4% of the
offering price.
- Class B Shares: Sold without an initial sales charge but are subject to
a contingent deferred sales charge or CDSC (declining
from 5% to zero of the lower of the amount invested or
the redemption proceeds) which will be imposed on
certain redemptions made within six years of purchase.
Although Class B shares are subject to higher ongoing
distribution-related expenses than Class A shares,
Class B shares will automatically convert to Class A
shares (which are subject to lower ongoing
distribution-related expenses) approximately seven
years after purchase.
- Class C Shares: Sold without an initial sales charge and for one year
after purchase, are subject to a 1% CDSC on
redemptions. Like Class B shares, Class C shares are
subject to higher ongoing distribution-related expenses
than Class A shares but do not convert to another
class.
- Class Z Shares: Sold without either an initial or contingent deferred
sales charge to a limited group of investors. Class Z
shares are not subject to any ongoing service or
distribution expenses.
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See "Shareholder Guide--Alternative Purchase Plan" at page 26.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after Prudential Securities or the Transfer Agent receives your sell order. However, the proceeds of redemptions of Class B and Class C shares may be subject to a CDSC. See "Shareholder Guide--How to Sell Your Shares" at page 30.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to declare daily and pay monthly dividends of net investment income and make distributions of any net capital gains at least annually. Dividends and distributions will be automatically reinvested in additional shares of the Fund at NAV without a sales charge unless you request that they be paid to you in cash. See "Taxes, Dividends and Distributions" at page 23.
FUND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES+ CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- ------------------------- ------------------- --------------
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)..... 4% None None None
Maximum Sales Load Imposed on Reinvested
Dividends............................... None None None None
Maximum Deferred Sales Load (as a
percentage of original purchase price or
redemption proceeds, whichever is
lower).................................. None 5% during the first year, 1% on redemptions None
decreasing by 1% annually made within one
to 1% in the fifth and year of purchase
sixth years and 0% in the
seventh year*
Redemption Fees.......................... None None None None
Exchange Fee............................. None None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets) CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- ------------------------- ------------------- --------------
Management Fees.......................... .50% .50% .50% .50%
12b-1 Fees (After Reduction)............. .15%++ .825%++ .75%++ None
Other Expenses........................... .25% .25% .25% .25%
----- ----- ----- -----
Total Fund Operating Expenses (After
Reduction).............................. .90% 1.575% 1.50% .75%
----- ----- ----- -----
----- ----- ----- -----
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EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- ---------
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period:
Class A................................................ $ 49 $ 68 $ 88 $ 146
Class B................................................ $ 66 $ 80 $ 96 $ 161
Class C................................................ $ 25 $ 47 $ 82 $ 179
Class Z................................................ $ 8 $ 24 $ 42 $ 93
You would pay the following expenses on the same
investment, assuming no redemption:
Class A................................................ $ 49 $ 68 $ 88 $ 146
Class B................................................ $ 16 $ 50 $ 86 $ 161
Class C................................................ $ 15 $ 47 $ 82 $ 179
Class Z................................................ $ 8 $ 24 $ 42 $ 93
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THE ABOVE EXAMPLE IS BASED ON DATA FOR THE FUND'S FISCAL YEAR ENDED FEBRUARY 28, 1997. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion
Feature--Class B Shares."
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-based
sales charges on shares of the Fund may not exceed 6.25% of total gross
sales, subject to certain exclusions. This 6.25% limitation is imposed on
each class of the Fund rather than on a per shareholder basis. Therefore,
long-term shareholders of the Fund may pay more in total sales charges than
the economic equivalent of 6.25% of such shareholders' investment in such
shares. See "How the Fund is Managed--Distributor."
++ Although the Class A, Class B and Class C Distribution and Service Plans
provide that the Fund may pay a distribution fee of up to .30 of 1% per
annum of the average daily net assets of the Class A shares, up to 1% per
annum of the average daily net assets of the Class B shares up to $3
billion, .80 of 1% of the next $1 billion, and .50 of 1% of assets in
excess of $4 billion, and up to .825 of 1% of the Class C shares, the
Distributor has agreed to limit its distribution fees with respect to Class
A shares of the Fund to no more than .15 of 1% of the average daily net
assets of the Class A shares, to no more than .825 of 1% of the average
daily net assets of the Class B shares and to no more than .75 of 1% of the
average daily net assets of the Class C shares for the fiscal year ending
February 28, 1998. Total Fund Operating Expenses without such limitations
would be 1.05% for Class A shares, 1.75% for Class B shares and 1.575% for
Class C shares. See "How the Fund is Managed--Distributor."
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE PERIODS INDICATED)
(CLASS A SHARES)
The following financial highlights for the Class A shares with respect to each of the five years in the period ended February 28, 1997, have been audited by Deloitte & Touche LLP, independent auditors, whose report thereon was unqualified. This information should be read in conjunction with the financial statements and the notes thereto, which appear in the Statement of Additional Information. The financial highlights contain selected data for a Class A share of common stock outstanding, total return, ratios to average net assets and other supplemental data for the periods indicated. The information has been determined based on data contained in the financial statements. Further performance information is contained in the annual report, which may be obtained without charge. See "Shareholder Guide--Shareholder Services--Reports to Shareholders."
JANUARY 22,
1990(A)
YEARS ENDED FEBRUARY 28/29, THROUGH
-------------------------------------------------------------------- FEBRUARY 28,
1997 1996 1995 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- -------- -------- --------------
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 9.04 $ 8.59 $ 9.13 $ 9.40 $ 9.17 $ 9.02 $ 9.00 $ 9.17
-------- -------- -------- -------- -------- -------- -------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income......... 0.60 0.60 0.59 0.61 0.66 0.68 0.69 0.06
Net realized and unrealized
gain (loss) on investment
transactions................. (0.28) 0.45 (0.54) (0.25) 0.35 0.37 0.26 (0.11)
-------- -------- -------- -------- -------- -------- -------- ------
Total from investment
operations............... 0.32 1.05 0.05 0.36 1.01 1.05 0.95 (0.05)
-------- -------- -------- -------- -------- -------- -------- ------
LESS DISTRIBUTIONS
Dividends from net investment
income....................... (0.60) (0.60) (0.59) (0.61) (0.66) (0.68) (0.69) (0.06)
Distributions in excess of
accumulated gains............ -- -- -- (0.02) -- -- -- --
Distributions from paid-in
capital in excess of par..... -- -- -- -- (0.12) (0.22) (0.24) (0.06)
-------- -------- -------- -------- -------- -------- -------- ------
Total distributions....... (0.60) (0.60) (0.59) (0.63) (0.78) (0.90) (0.93) (0.12)
-------- -------- -------- -------- -------- -------- -------- ------
Net asset value, end of
period....................... $ 8.76 $ 9.04 $ 8.59 $ 9.13 $ 9.40 $ 9.17 $ 9.02 $ 9.00
-------- -------- -------- -------- -------- -------- -------- ------
-------- -------- -------- -------- -------- -------- -------- ------
TOTAL RETURN(B):.............. 3.70% 12.41% .83% 3.90% 11.55% 12.18% 11.21% (0.54)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $860,319 $945,038 $871,145 $51,673 $61,297 $33,181 $28,971 $1,961
Average net assets (000)...... $884,862 $909,169 $ 95,560 $55,921 $46,812 $29,534 $23,428 $ 501
Ratios to average net assets:
Expenses, including
distribution fees........ 0.90% 0.91% 0.98% 0.84% 0.84% 0.86% 0.85% 0.92%(c)
Expenses, excluding
distribution fees........ 0.75% 0.76% 0.83% 0.69% 0.69% 0.71% 0.70% 0.76%(c)
Net investment income..... 6.78% 6.65% 7.45% 6.48% 7.17% 7.51% 7.76% 9.11%(c)
Portfolio turnover rate....... 107% 123% 206% 80% 36% 187% 213% 329%
-------------
(a) Commencement of offering of Class A shares.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Annualized.
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FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE YEARS INDICATED)
(CLASS B SHARES)
The following financial highlights for the Class B shares with respect to each of the five years in the period ended February 28, 1997, have been audited by Deloitte & Touche LLP, independent auditors, whose report thereon was unqualified. This information should be read in conjunction with the financial statements and the notes thereto, which appear in the Statement of Additional Information. The financial highlights contain selected data for a Class B share of common stock outstanding, total return, ratios to average net assets and other supplemental data for the years indicated. This information has been determined based on data contained in the financial statements. Further performance information is contained in the annual report, which may be obtained without charge. See "Shareholder Guide--Shareholder Services--Reports to Shareholders."
YEARS ENDED FEBRUARY 28/29,
------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
year............... $9.04 $ 8.60 $ 9.13 $ 9.40 $ 9.17 $ 9.02 $ 9.00 $ 9.09 $ 9.85 $ 10.59
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income............. 0.54 0.54 0.53 0.53 0.58 0.60 0.62 0.68 0.69 0.67
Net realized and
unrealized gain
(loss) on
investment
transactions....... (0.27) 0.44 (0.53) (0.25) 0.35 0.37 0.26 0.15 (0.49) (0.40)
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total from
investment
operations..... 0.27 0.98 -- 0.28 0.93 0.97 0.88 0.83 0.20 0.27
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from net
investment
income............. (0.54) (0.54) (0.53) (0.53) (0.58) (0.60) (0.62) (0.68) (0.69) (0.67)
Distributions from
net realized
gains.............. -- -- -- -- -- -- -- -- -- (0.24)
Distributions in
excess of
accumulated
gains.............. -- -- -- (0.02) -- -- -- -- -- --
Distributions from
paid-in capital in
excess of par...... -- -- -- -- (0.12) (0.22) (0.24) (0.24) (0.27) (0.10)
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total
distributions... (0.54) (0.54) (0.53) (0.55) (0.70) (0.82) (0.86) (0.92) (0.96) (1.01)
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Net asset value, end
of year............ $8.77 $ 9.04 $ 8.60 $ 9.13 $ 9.40 $ 9.17 $ 9.02 $ 9.00 $ 9.09 $ 9.85
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL RETURN:(A).... 3.12% 11.54% .24% 3.03% 10.61% 11.27% 10.35% 10.49% 2.32% 3.36%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
year (000)......... $461,988 $641,946 $ 705,732 $2,202,555 $2,680,259 $2,724,428 $3,127,587 $3,760,003 $3,814,945 $3,995,721
Average net assets
(000).............. $543,796 $647,515 $1,735,413 $2,487,990 $2,670,924 $2,903,704 $3,432,948 $3,814,455 $3,984,300 $3,796,998
Ratios to average
net assets:
Expenses,
including
distribution
fees........... 1.57% 1.58% 1.66% 1.68% 1.69% 1.71% 1.67% 1.49% 1.35% 1.60%
Expenses,
excluding
distribution
fees........... 0.75% 0.76% 0.80% 0.69% 0.69% 0.71% 0.70% 0.64% 0.63% 0.65%
Net investment
income......... 6.11% 5.99% 6.17% 5.64% 6.32% 6.66% 6.94% 7.46% 7.61% 6.69%
Portfolio turnover
rate............... 107% 123% 206% 80% 36% 187% 213% 329% 278% 147%
-------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions.
|
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE PERIODS INDICATED)
(CLASS C SHARES)
The following financial highlights for the Class C shares have been audited by Deloitte & Touche LLP, independent auditors, whose report thereon was unqualified. This information should be read in conjunction with the financial statements and the notes thereto, which appear in the Statement of Additional Information. The financial highlights contain selected data for a Class C share of common stock outstanding, total return, ratios to average net assets and other supplemental data for the periods indicated. This information has been determined based on data contained in the financial statements. Further performance information is contained in the annual report, which may be obtained without charge. See "Shareholder Guide--Shareholder Services--Reports to Shareholders."
YEARS ENDED
FEBRUARY 28, AUGUST 1, 1994(A)
-------------- THROUGH
1997 1996 FEBRUARY 28, 1995
------ ------ -----------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $9.04 $ 8.60 $ 8.69
------ ------ -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income....................................... 0.54 0.54 0.31
Net realized and unrealized gain (loss) on investment
transactions............................................... (0.27) 0.44 (0.09)
------ ------ -------
Total from investment operations........................ 0.27 0.98 0.22
------ ------ -------
LESS DISTRIBUTIONS
Dividends from net investment income........................ (0.54) (0.54) (0.31)
------ ------ -------
Net asset value, end of period.............................. $8.77 $ 9.04 $ 8.60
------ ------ -------
------ ------ -------
TOTAL RETURN(B):............................................ 3.20 % 11.63% 2.75%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............................. $2,569 $1,799 $204
Average net assets (000).................................... $2,440 $765 $111
Ratios to average net assets:
Expenses, including distribution fees................... 1.50 % 1.51% 1.63%(c)
Expenses, excluding distribution fees................... 0.75 % 0.76% 0.88%(c)
Net investment income................................... 6.19 % 5.99% 6.71%(c)
Portfolio turnover rate..................................... 107 % 123% 206%
-------------
(a) Commencement of offering of Class C shares.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of the period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Annualized.
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FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
(CLASS Z SHARES)
The following financial highlights for the Class Z shares have been audited by Deloitte & Touche LLP, independent auditors, whose report thereon was unqualified. This information should be read in conjunction with the financial statements and the notes thereto, which appear in the Statement of Additional Information. The financial highlights contain selected data for a Class Z share of common stock outstanding, total return, ratios to average net assets and other supplemental data for the period indicated. This information has been determined based on data contained in the financial statements. Further performance information is contained in the annual report, which may be obtained without charge. See "Shareholder Guide--Shareholder Services--Reports to Shareholders."
MARCH 1, 1996(A)
THROUGH
FEBRUARY 28, 1997
-----------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 9.13
-------
INCOME FROM INVESTMENT OPERATIONS
Net investment income....................................... 0.61
Net realized and unrealized gain (loss) on investment
transactions............................................... (0.37)
-------
Total from investment operations........................ 0.24
-------
LESS DISTRIBUTIONS
Dividends from net investment income........................ (0.61)
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Net asset value, end of period.............................. $ 8.76
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TOTAL RETURN(B):............................................ 3.16%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............................. $73,411
Average net assets (000).................................... $39,551
Ratios to average net assets:
Expenses, including distribution fees................... 0.75%
Expenses, excluding distribution fees................... 0.75%
Net investment income................................... 6.76%
Portfolio turnover rate..................................... 107%
-------------
(a) Commencement of offering of Class Z shares. PMF is the successor to
Prudential Mutual Fund Management, Inc., which transferred its assets to PMF
in September 1996, as investment adviser to the Fund.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of the period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
|
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
THE FUND'S INVESTMENT OBJECTIVE IS TO SEEK 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, 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 CALL OPTIONS AND
COVERED PUT OPTIONS AND PURCHASING PUT AND CALL OPTIONS. 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. SEE "INVESTMENT OBJECTIVE AND POLICIES--U.S.
GOVERNMENT SECURITIES--MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT
INSTRUMENTALITIES" IN THE STATEMENT OF ADDITIONAL INFORMATION. THE FUND HAS NO
LIMITATIONS WITH RESPECT TO THE MATURITIES OF PORTFOLIO SECURITIES IN WHICH IT
MAY INVEST. 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. AT LEAST 65% OF THE TOTAL ASSETS OF THE FUND WILL BE INVESTED IN U.S.
GOVERNMENT SECURITIES. THERE CAN BE NO ASSURANCE THAT THE FUND'S INVESTMENT
OBJECTIVE WILL BE ACHIEVED. See "Investment Objective and Policies" in the
Statement of Additional Information.
As with an investment in any mutual fund, an investment in this Fund can decrease in value and you can lose money.
THE FUND'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE FUND'S OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED (THE INVESTMENT COMPANY ACT). FUND POLICIES THAT ARE NOT FUNDAMENTAL MAY BE MODIFIED BY THE BOARD OF DIRECTORS.
The Fund's net asset value will vary with changes in the values of the Fund's portfolio securities, which values will generally vary inversely with changes in interest rates. 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.
U.S. GOVERNMENT SECURITIES
U.S. TREASURY SECURITIES
THE FUND WILL INVEST IN U.S. TREASURY SECURITIES, INCLUDING BILLS, NOTES, BONDS AND OTHER DEBT SECURITIES ISSUED BY THE U.S. TREASURY. These instruments are direct obligations of the U.S. Government and, as such, are backed by the "full faith and credit" of the United States. They differ primarily in their interest rates, the lengths of their maturities and the dates of their issuances.
SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES
THE FUND WILL INVEST IN SECURITIES ISSUED BY AGENCIES OF THE U.S. GOVERNMENT OR INSTRUMENTALITIES OF THE U.S. GOVERNMENT. These obligations, including those which are guaranteed by federal agencies or instrumentalities, may or may not be backed by the "full faith and credit" of the United States. Obligations of the Government National Mortgage Association (GNMA), the Farmers Home Administration and the Export-Import Bank are backed by the full faith and credit of the United States.
In the case of securities not backed by the full faith and credit of the United States, the Fund must look principally to the agency issuing or guaranteeing the obligation for ultimate repayment and may not be able to assert a claim against the United States if the agency or instrumentality does not meet its commitments. Securities in which the Fund may invest which are not backed by the full faith and credit of the United States include obligations such as those issued by the Tennessee Valley Authority, the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and the United States Postal Service, each of which has the right to borrow from the United States Treasury to meet its obligations, and obligations of the Federal Farm Credit Bank and the Federal Home Loan Bank, the obligations of which may only be satisfied by the individual credit of the issuing agency. GNMA, FNMA and FHLMC investments may include collateralized mortgage obligations. See "Other Investments and Policies".
OBLIGATIONS ISSUED OR GUARANTEED AS TO PRINCIPAL AND INTEREST BY THE UNITED STATES GOVERNMENT MAY BE ACQUIRED BY THE FUND IN THE FORM OF CUSTODIAL RECEIPTS THAT EVIDENCE OWNERSHIP OF FUTURE INTEREST PAYMENTS, PRINCIPAL PAYMENTS OR BOTH ON CERTAIN UNITED STATES TREASURY NOTES OR BONDS. Such notes and bonds are held in custody by a bank on behalf of the owners. These custodial receipts are commonly referred to as Treasury strips.
MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES
THE FUND WILL INVEST IN MORTGAGE-BACKED SECURITIES, INCLUDING THOSE REPRESENTING AN UNDIVIDED OWNERSHIP INTEREST IN A POOL OF MORTGAGES, E.G., GNMA, FNMA AND FHLMC CERTIFICATES. The U.S. Government or the issuing agency guarantees the payment of interest and principal of these securities. However, the guarantees do not extend to the securities' yield or value, which are likely to vary inversely with fluctuations in interest rates, nor do the guarantees extend to the yield or value of the Fund's shares. See "Investment Objective and Policies--U.S. Government Securities--Mortgage-Related Securities Issued by U.S. Government Instrumentalities" in the Statement of Additional Information. These certificates are in most cases "pass-through" instruments, through which the holder receives a share of all interest and principal payments from the mortgages underlying the certificate, net of certain fees. Because the prepayment characteristics of the underlying mortgages vary, it is not possible to predict accurately the average life of a particular issue of pass-through certificates. Mortgage-backed securities are often subject to more rapid repayment than their stated maturity date would indicate as a result of the pass-through of prepayments of principal on the underlying mortgage obligations. During periods of declining interest rates, prepayment of mortgages underlying mortgage-backed securities can be expected to accelerate. 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 must be reinvested in securities which have lower yields than the prepaid mortgages. Moreover, prepayments of mortgages which underlie securities purchased at a premium could result in capital losses.
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. This 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.
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.
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 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.
OTHER INVESTMENTS AND POLICIES
AT LEAST 65% OF THE TOTAL ASSETS OF THE FUND WILL BE INVESTED IN U.S. GOVERNMENT SECURITIES, AS DESCRIBED ABOVE. 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. See "Repurchase Agreements" and "When-Issued and Delayed Delivery Securities".
UP TO 35% OF THE TOTAL 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 "Transactions in Futures Contracts on U.S. Government Securities and Options Thereon".
THE FUND IS PERMITTED TO INVEST UP TO 20% OF ITS TOTAL ASSETS IN HIGH QUALITY MONEY MARKET INSTRUMENTS, INCLUDING COMMERCIAL PAPER OF DOMESTIC CORPORATIONS AND CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND OTHER OBLIGATIONS OF DOMESTIC AND FOREIGN BANKS. 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 (such as Moody's Investors Service (Moody's) or Standard & Poor's Ratings Group (S&P)) or, if unrated, will be of equivalent quality in the judgment of the Fund's investment adviser.
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 TOTAL 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.
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.
THE FUND IS PERMITTED TO INVEST IN ADJUSTABLE RATE DEBT SECURITIES, including 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. 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. In periods of rising interest rates, changes in the coupon will lag behind changes in the market rate resulting in a lower net asset value until the coupon resets to market rates.
THE FUND MAY INVEST IN DEBT OBLIGATIONS RATED AT LEAST A BY S&P OR MOODY'S OR, IF UNRATED, DEEMED TO BE OF COMPARABLE CREDIT QUALITY BY THE FUND'S INVESTMENT ADVISER. These debt securities may have adjustable or fixed rates of interest and in certain instances may be secured by assets of the issuer. Adjustable rate corporate debt securities may have features similar to those of adjustable rate mortgage-backed securities, but corporate debt securities, unlike mortgage-backed securities, are not subject to prepayment risk other than through contractual call provisions which generally impose a penalty for prepayment. Fixed rate debt securities may also be subject to call provisions.
THE FUND MAY ALSO PURCHASE COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS) AND REAL ESTATE MORTGAGE INVESTMENT CONDUITS (REMICS). A CMO is a security issued by a corporation or a U.S. Government 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. CMOs are partitioned into several classes with a ranked
priority by which the classes of obligations are redeemed. The Fund may invest in privately-issued CMOs which are collateralized by mortgage-backed securities issued or guaranteed by GNMA, FHLMC or FNMA or issued by any other agency or instrumentality of the U.S. Government. The Fund may also invest in privately-issued CMOs collateralized by whole loans or private mortgage pass-through securities and balloon payment mortgage-backed securities. The Fund will invest in CMOs rated at least A by S&P or Moody's or, if unrated, deemed to be of comparable credit quality by the Fund's investment adviser. A REMIC may be issued by a trust, partnership, corporation, association, or a segregated pool of mortgages, or an agency of the U.S. Government and, in each case, must qualify and elect treatment as such under the Tax Reform Act of 1986. A REMIC must consist of one or more classes of "regular interests," some of which may be adjustable rate, and a single class of "residual interests." To qualify as a REMIC, substantially all the assets of the entity must be in assets directly or indirectly secured, principally by real property. The Fund does not intend to invest in residual interests and will only invest in REMICs rated at least A by S&P or Moody's or, if unrated, deemed to be of comparable credit quality by the Fund's investment adviser. CMOs and REMICs issued by an agency or instrumentality of the U.S. Government are considered U.S. Government securities for purposes of this Prospectus. In reliance on rules and interpretations of the SEC, the Fund's investments in certain qualifying CMOs and REMICs are not subject to the limitation of the Investment Company Act on acquiring interests in other investment companies. See "Investment Objective and Policies--Collateralized Mortgage Obligations" in the Statement of Additional Information.
THE FUND MAY ALSO INVEST UP TO 20% OF ITS TOTAL ASSETS IN ASSET-BACKED SECURITIES. Through the use of trusts and special purpose subsidiaries, various types of assets, primarily home equity loans and 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. 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.
OPTIONS TRANSACTIONS
PURCHASING OPTIONS
THE FUND MAY PURCHASE PUT AND CALL OPTIONS ON U.S. GOVERNMENT SECURITIES. The Fund may purchase a put option in an effort to protect the value of a security which it owns against a substantial decline in market value (protective puts), if the Fund's investment adviser believes that a defensive posture is warranted for a portion of the portfolio. The Fund may also purchase a put option to cover a put option it has written or to close an existing option position.
The Fund may wish to protect certain portfolio securities against a decline in market value at a time when put options on those particular securities are not available for purchase. The Fund may therefore purchase a put option on securities other than those it wishes to protect even though it does not hold such other securities in its portfolio. While changes in the value of the put option should generally offset changes in the value of the securities being hedged, the correlation between the two values may not be as close in these transactions as in transactions in which the Fund purchases a put option on an underlying security it owns.
THE FUND MAY PURCHASE CALL OPTIONS ON DEBT SECURITIES IT INTENDS TO ACQUIRE IN ORDER TO HEDGE AGAINST AN ANTICIPATED MARKET APPRECIATION IN THE PRICE OF THE UNDERLYING SECURITIES AT LIMITED RISK AND WITH A LIMITED CASH OUTLAY. If the market price does rise as anticipated, the Fund will benefit from that rise but only to the extent that the rise exceeds the premiums paid. If the anticipated rise does not occur or if it does not exceed the premium, the Fund will bear the expense of the option premiums and transaction costs without gaining an offsetting benefit. The Fund may also purchase a call option to close an existing option position.
WRITING COVERED OPTIONS
THE FUND MAY WRITE (I.E., SELL) COVERED PUT AND CALL OPTIONS ON U.S. GOVERNMENT SECURITIES. When the Fund writes an option, it receives a premium which it retains whether or not the option is exercised. The Fund's principal reason for writing options is to attempt to realize, through the receipt of premiums, a greater current return than would be realized on the underlying securities alone.
THE PURCHASER OF A CALL OPTION HAS THE RIGHT, FOR A SPECIFIED PERIOD OF TIME, TO PURCHASE THE SECURITIES SUBJECT TO THE OPTION AT A SPECIFIED PRICE (THE EXERCISE PRICE). By writing a call option, the Fund becomes obligated during the term of the option, upon exercise of the option, to sell the underlying securities to the purchaser against receipt of the exercise price. When the Fund writes a call option, the Fund loses the potential for gain on the underlying securities during the period that the option is open.
CONVERSELY, THE PURCHASER OF A PUT OPTION HAS THE RIGHT, FOR A SPECIFIED PERIOD OF TIME, TO SELL THE SECURITIES SUBJECT TO THE OPTION TO THE WRITER OF THE PUT AT A SPECIFIED EXERCISE PRICE. By writing a put option, the Fund becomes obligated during the term of the option to purchase the securities underlying the option at the exercise price, upon exercise of the option. The Fund might, therefore, be obligated to purchase the underlying securities for more than their current market price.
THE FUND MAY ALSO WRITE STRADDLES (I.E., A COMBINATION OF A CALL AND A PUT WRITTEN ON THE SAME SECURITY AT THE SAME STRIKE PRICE). In such cases, the same issue of the security is considered "cover" for both the put and the call and the Fund will also segregate or deposit cash, U.S. Government securities or liquid unencumbered assets, marked to market daily equivalent to the amount, if any, by which the put is "in the money." 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).
An exchange-traded option position may be closed out only on an exchange which provides a secondary market for an option of the same series. Although the Fund will generally purchase or write only those exchange-traded options for which there appears to be an active secondary market, there is no assurance that a liquid secondary market on an exchange will exist for any particular option at any particular time. If a secondary market does not exist, it might not be possible to effect a closing transaction in a particular option. If the Fund, as a covered call option writer, is unable to effect a closing purchase transaction, it will not be able to sell the underlying securities until the option expires or is exercised or it otherwise covers the position.
The Fund will not purchase a put or call option on U.S. Government securities if, as a result of such purchase, more than 20% of its total assets would be invested in premiums for such options and on options on futures contracts on U.S. Government securities. The Fund's ability to purchase put and call options may be limited by the requirements of the Internal Revenue Code of 1986, as amended (the Internal Revenue Code) for qualification as a regulated investment company. See "Taxes, Dividends and Distributions--Listed Options and Futures" in the Statement of Additional Information.
OTHER CONSIDERATIONS
ALL OPTIONS PURCHASED OR SOLD BY THE FUND WILL BE TRADED ON A U.S. SECURITIES EXCHANGE OR WILL BE PURCHASED OR SOLD BY A PRIMARY GOVERNMENT SECURITIES DEALER RECOGNIZED BY THE FEDERAL RESERVE BANK OF NEW YORK (OTC OPTIONS). While exchange-traded options are in effect guaranteed by The Options Clearing Corporation, the Fund relies on the dealer from whom it purchases an OTC option to perform if the option is exercised. The Fund's investment adviser monitors the creditworthiness of dealers with whom the Fund enters into OTC option transactions under the general supervision of the Fund's Board of Directors. The Fund's ability to enter into options contracts may be limited by the requirements of the Internal Revenue Code for qualification as a regulated investment company. See the Statement of Additional Information for additional information on options transactions.
TRANSACTIONS IN FUTURES CONTRACTS ON U.S. GOVERNMENT SECURITIES AND OPTIONS THEREON
THE FUND MAY PURCHASE AND SELL FUTURES CONTRACTS ON U.S. GOVERNMENT SECURITIES (FUTURES CONTRACTS) THAT ARE TRADED ON U.S. COMMODITY EXCHANGES. A futures contract on a U.S. Government security, other than GNMA's which are cash settled, is an agreement to purchase or sell an agreed amount of such securities at a set price for delivery on an agreed future date. The Fund may purchase a futures contract as a hedge against an anticipated decline in interest rates, and resulting increase in market price, in securities the Fund intends to acquire. The Fund may sell a futures contract as a hedge against an anticipated increase in interest rates, and resulting decline in market price, in securities the Fund owns.
THE FUND MAY ALSO PURCHASE AND WRITE (I.E., SELL) "COVERED" CALL AND PUT OPTIONS ON FUTURES CONTRACTS ON U.S. GOVERNMENT SECURITIES THAT ARE TRADED ON U.S. COMMODITY EXCHANGES. THE FUND WILL WRITE OPTIONS ON FUTURES CONTRACTS FOR HEDGING PURPOSES, AS WELL AS TO REALIZE THROUGH THE RECEIPT OF PREMIUM INCOME, A GREATER RETURN THAN WOULD BE REALIZED ON THE FUND'S PORTFOLIO SECURITIES ALONE. An option on a futures contract gives the purchaser the right, 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.
THE FUND MAY ALSO FROM TIME TO TIME PURCHASE EURODOLLAR INSTRUMENTS TRADED ON THE CHICAGO MERCANTILE EXCHANGE. Eurodollar instruments are essentially U.S. dollar-denominated futures contracts or options thereon which are linked to the London Interbank Offered Rate (LIBOR). Eurodollar futures contracts enable purchasers to obtain a fixed rate for the lending of funds and sellers to obtain a fixed rate for borrowings. The Fund intends to use Eurodollar futures contracts and options thereon to hedge against changes in LIBOR, to which many interest rate swaps are linked. The use of these instruments is subject to the same limitations and risks as those applicable to the use of interest rate futures contracts and options thereon.
THE FUND MAY ALSO ENTER INTO CLOSING TRANSACTIONS WITH RESPECT TO FUTURES CONTRACTS AND OPTIONS THEREON TO TERMINATE EXISTING POSITIONS. The Fund's ability to enter into transactions in futures contracts and options thereon may be limited by the Internal Revenue Code's requirements for qualification as a regulated investment company. In addition, the Fund may not purchase or sell futures contracts or related options for other than bona fide hedging purposes if immediately thereafter the sum of the amount of initial margin deposits on the Fund's existing futures and options on futures and for premiums paid for such related options would 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 the Fund has entered into; provided, however, that in the case of an option that is in-the-money at the time of purchase, the in-the-money amount may be excluded in computing such 5% limitation.
CHARACTERISTICS AND PURPOSES OF INTEREST RATE FUTURES
THE FUND WILL PURCHASE AND SELL FUTURES CONTRACTS PRIMARILY TO HEDGE ITS ACTUAL OR ANTICIPATED HOLDINGS OF U.S. GOVERNMENT SECURITIES. There is generally an inverse relationship between interest rates and bond prices. Generally, when interest rates increase, bond prices will decline; when interest rates decline, bond prices will increase. For example, if the Fund holds cash reserves or short-term debt securities at a time that interest rates are expected to decline, the Fund might purchase futures contracts as a hedge against anticipated increases in the price of the U.S. Government securities that the Fund intends to acquire (an anticipatory hedge).
CHARACTERISTICS AND PURPOSES OF OPTIONS ON FUTURES CONTRACTS ON U.S. GOVERNMENT SECURITIES When an option on a futures contract is exercised, the writer of the option delivers the futures position as well as the accumulated balance in the writer's futures margin account, which represents the amount by which the market price of the futures contract, at exercise,
exceeds, in the case of a call, or is less than, in the case of a put, the exercise price of the option on the futures contract. The Fund will be required to deposit initial and variation margin with respect to options on futures contracts written by it.
The Fund will purchase put options on futures contracts primarily to hedge its portfolio of U.S. Government securities against the risk of rising interest rates, and the consequent decline in the prices of U.S. Government securities it owns. The Fund will purchase call options on futures contracts to hedge the Fund's portfolio against a possible market advance at a time when the Fund is not fully invested in U.S. Government securities (other than Treasury Bills).
The Fund also will write call options on futures contracts as a hedge against a modest decline in prices of debt securities held in the Fund's portfolio and to earn additional income. If the futures price at expiration of the option is below the exercise price, the Fund will retain the full amount of the option premium thereby partially hedging against any decline that may have occurred in the Fund's holdings of debt securities. If the futures price when the option is exercised is above the exercise price, however, the Fund will incur a loss, which may be wholly or partially offset by the increase of the value of the securities in the Fund's portfolio which were being hedged.
Writing a put option on a futures contract serves as a partial hedge against an increase in the value of debt securities the Fund intends to acquire. If the futures price at expiration of the option is above the exercise price, the Fund will retain the full amount of the option premium thereby partially hedging against any increase that may have occurred in the price of the debt securities the Fund intends to acquire. If the futures price when the option is exercised is below the exercise price, however, the Fund will incur a loss, which may be wholly or partially offset by the decrease of the price of the securities the Fund intends to acquire. The Fund will also write options on futures contracts in whole or in part to enhance its current return through the receipt of premium income.
See "Investment Objective and Policies--Futures Contracts on U.S. Government Securities" in the Statement of Additional Information.
RISK CONSIDERATIONS
CERTAIN RISKS ARE INHERENT IN THE FUND'S USE OF FUTURES CONTRACTS AND OPTIONS ON FUTURES. One such risk arises because the correlation between movements in the price of futures and movements in the price of debt securities that are the subject of the hedge will not be perfect. Another risk is that the movements in the price of futures or options on futures may not move inversely with changes in interest rates. If the Fund has sold futures contracts to hedge securities held by the Fund and the value of the futures position declines more than the price of such securities increases, the Fund will realize a loss on the futures contracts which is not completely offset by the appreciation in the price of the hedged securities. Similarly, if the Fund has written a call on a futures contract and the value of the call increases by more than the increase in the value of the securities held as cover, the Fund may realize a loss on the call which is not completely offset by the appreciation in the price of the securities held as cover and the premium received for writing the call.
REPURCHASE AGREEMENTS
The Fund may on occasion enter into repurchase agreements, whereby the seller agrees to repurchase a security from the Fund at a mutually agreed-upon time and price. The repurchase date is usually within a day or two of the original purchase date 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 security. The Fund's repurchase agreements will at all times be fully collateralized in an amount at least equal to the resale price. The instruments held as collateral are valued daily, and if the value of 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 participates in a joint repurchase account with other investment companies managed by PIFM pursuant to an order of the SEC. See "Investment Objective and Policies--Repurchase Agreements" in the Statement of Additional Information.
SECURITIES LENDING
The Fund may lend its portfolio securities to brokers or dealers, banks or other recognized institutional borrowers of securities, provided that the borrower at all times maintains cash or equivalent collateral or secures a letter of credit in favor of the Fund in an amount equal to at least 100% of the market value of the securities loaned. During the time portfolio securities are on loan, the borrower will pay the Fund an amount equivalent to any dividend or interest paid on such securities and the Fund may invest the cash collateral and earn additional income, or it may receive an agreed-upon amount of interest income from the borrower. As a matter of fundamental policy, the Fund cannot lend more than 30% of the value of its total assets.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
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 Fund's Custodian will maintain, in a segregated account of the Fund, cash, U.S. Government securities, equity securities or other liquid, unencumbered 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 of delivery of the securities the value may be more or less than the purchase price and an increase in the percentage of the Fund's assets committed to the purchase of securities on a when-issued or delayed delivery basis may increase the volatility of the Fund's net asset value.
OTHER INVESTMENT INFORMATION
The Fund is permitted to use the following investment techniques, although it does not anticipate that any of them will constitute a significant component of its investment program.
ZERO COUPON BONDS
The Fund may invest up to 5% of its total 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 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 reinvest 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.
SHORT SALES AGAINST-THE-BOX
The Fund may make short sales against-the-box for the purpose of deferring realization of gain or loss for federal income tax purposes. A short sale "against-the-box" is a short sale in which the Fund owns an equal amount of the securities sold short or securities convertible into or exchangeable, without payment of any further consideration, for securities of the same issue as, and equal in amount to, the securities sold short. 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.
BORROWING
The Fund may borrow money in an amount up to 20% of the value of its total assets (not including the amount of such borrowings) 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.
ILLIQUID SECURITIES
The Fund may hold up to 15% of its net assets in illiquid securities including repurchase agreements which have a maturity of longer than seven days, securities with legal or contractual restrictions on resale (restricted securities) and securities that are not readily marketable. Restricted securities eligible for resale pursuant to Rule 144A under the Securities Act of 1933, as amended (the Securities Act), and privately placed commercial paper that have a readily available market are not considered illiquid for purposes of this limitation. The investment adviser will monitor the liquidity of such restricted securities under the supervision of the Board of Directors. Investing in Rule 144A securities could, however, have the effect of increasing the level of Fund illiquidity to the extent that qualified institutional buyers become, for a limited time, uninterested in purchasing these securities. Repurchase agreements subject to demand are deemed to have a maturity equal to the applicable notice period.
When the Fund enters into interest rate swaps on other than a net basis, the entire amount of the Fund's obligations, if any, with respect to such interest rate swaps will be treated as illiquid. To the extent that the Fund enters into interest rate swaps on a net basis, the net amount of the excess, if any, of the Fund's obligations over its entitlements with respect to each interest rate swap will be treated as illiquid.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
Reverse repurchase agreements involve sales by the Fund of portfolio assets concurrently with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. During the reverse repurchase agreement period, the Fund continues to receive principal and interest payments on these securities.
The Fund may enter into dollar rolls in which the Fund sells securities for delivery in the current month and simultaneously contracts to repurchase substantially similar (same type and coupon) securities on a specified future date from the same party. During the roll period, the Fund forgoes principal and interest paid on the securities. The Fund is compensated by the difference between the current sales price and the forward price for the future purchase (often referred to as the "drop") as well as by the interest earned on the cash proceeds of the initial sale. A "covered roll" is a specific type of dollar roll for which there is an offsetting cash position or a cash equivalent security position which matures on or before the forward settlement date of the dollar roll transaction.
The Fund will establish a segregated account with its custodian in which it will maintain cash, U.S. Government securities, equity securities or other liquid, unencumbered assets, marked-to-market daily, equal in value to its obligations in respect of reverse repurchase agreements and dollar rolls. Reverse repurchase agreements and dollar rolls involve the risk that the market value of the securities retained by the Fund may decline below the price of the securities the Fund has sold but is obligated to repurchase under the agreement. In the event the buyer of securities under a dollar roll files for bankruptcy or becomes insolvent, the Fund's use of the proceeds of the agreement may be restricted pending a determination by the other party, or its trustee or receiver, whether to enforce the Fund's obligation to repurchase the securities.
Reverse repurchase agreements and dollar rolls are speculative techniques involving leverage and are considered borrowings by the Fund for purposes of the percentage limitations applicable to borrowings. See "Borrowing" above.
INTEREST RATE TRANSACTIONS
The Fund may enter into interest rate swaps. Interest rate swaps involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, E.G., an exchange of floating rate payments for fixed rate payments. The Fund
expects to enter into these transactions primarily to preserve a return or spread on a particular investment or portion of its portfolio or to protect against any increase in the price of securities the Fund anticipates purchasing at a later date. The Fund intends to use these transactions as a hedge and not as a speculative investment. See "Investment Objective and Policies--Interest Rate Transactions" in the Statement of Additional Information.
PORTFOLIO TURNOVER AND BROKERAGE
Based on its experience in managing similar investment products, the investment adviser expects that, under normal circumstances, if the Fund writes substantial numbers of options, and those options are exercised, the Fund's portfolio turnover rate may be as high as 250% or higher. Such a rate would significantly exceed that of a fund invested exclusively in U.S. Government securities. See "Investment Objective and Policies--Options Transactions" in the Statement of Additional Information. While the Fund will pay commissions in connection with its options and futures transactions, U.S. Government securities are generally traded on a "net" basis with dealers acting as principal for their own accounts without a stated commission. Nevertheless, high portfolio turnover may involve correspondingly greater brokerage commissions and other transaction costs, which will be borne directly by the Fund. See "Portfolio Transactions and Brokerage" in the Statement of Additional Information.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its investment objective, constitute fundamental policies. Fundamental policies cannot be changed without the approval of the holders of a majority of the Fund's outstanding voting securities, as defined in the Investment Company Act. See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS A BOARD OF DIRECTORS WHICH, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDES UPON MATTERS OF GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT ADVISORY SERVICES.
For the fiscal year ended February 28, 1997, the total expenses as a percentage of average net assets for the Fund's Class A, Class B, Class C and Class Z shares were 0.90%, 1.57%, 1.50% and 0.75%, respectively. See "Financial Highlights."
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), FORMERLY, PRUDENTIAL MUTUAL FUND MANAGEMENT LLC (PMF), GATEWAY CENTER THREE, NEWARK, NEW JERSEY 07102, IS THE MANAGER OF THE FUND AND IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1% OF THE FUND'S AVERAGE DAILY NET ASSETS UP TO $3 BILLION AND .35 OF 1% OF THE AVERAGE DAILY NET ASSETS IN EXCESS OF $3 BILLION. PIFM is organized in New York as a limited liability company. It is the successor to Prudential Mutual Fund Management, Inc., which transferred its assets to PMF in September 1996. For the fiscal year ended February 28, 1997, the Fund paid management fees to PMF of .50% of the Fund's average daily net assets. See "Manager" in the Statement of Additional Information.
As of March 31, 1997, PIFM served as the manager to 40 open-end investment companies, constituting all of the Prudential Mutual Funds, and as manager or administrator to 22 closed-end investment companies with aggregate assets of approximately $54.9 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM MANAGES THE INVESTMENT
OPERATIONS OF THE FUND AND ALSO ADMINISTERS THE FUND'S CORPORATE AFFAIRS. See
"Manager" in the Statement of Additional Information.
UNDER THE SUBADVISORY AGREEMENT BETWEEN PIFM AND THE PRUDENTIAL INVESTMENT CORPORATION (PIC, THE SUBADVISER OR THE INVESTMENT ADVISER), PIC FURNISHES INVESTMENT ADVISORY SERVICES IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PIFM FOR ITS REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. PIFM continues to have responsibility for all investment advisory services pursuant to the Management Agreement and supervises PIC's performance of such services.
The current portfolio managers of the Fund are Barbara L. Kenworthy and Sharon Fera. Ms. Kenworthy is a Managing Director and Senior Portfolio Manager and Ms. Fera is a Vice President and Portfolio Manager of Prudential Investments, a business group of PIC. Ms. Kenworthy has managed the Fund's portfolio since July 1994. Ms. Kenworthy joined Prudential Investments in July 1994, having previously been employed by the Dreyfus Corporation (from June 1985 to June 1994), where she served as President and Portfolio Manager for several Dreyfus fixed-income funds. Ms. Kenworthy also serves as the portfolio manager of Prudential Diversified Bond Fund, Inc. and Prudential Mortgage Income Fund, Inc. and has 20 years of investment management experience in both U.S. and foreign securities and investment grade and high yield quality bonds. Ms. Kenworthy actively manages the fund's portfolio according to the investment adviser's interest rate outlook. Consistent with the fund's investment objective and policies, she will, at times, invest in different sectors of the fixed-income markets seeking price discrepancies and more favorable interest rates. The investment adviser conducts extensive analysis of U.S. and overseas markets in an attempt to identify trends in interest rates, supply and demand and economic growth. The portfolio manager then selects the sectors, maturities and individual bonds she believes provide the best value under those conditions. Ms. Kenworthy is assisted by two credit analysis teams, one that specializes in investment grade bonds and one that specializes in high yield bonds. Ms. Fera joined Prudential Investments in May 1996 as a fixed-income portfolio manager. Prior thereto, she was employed by Aetna Life and Casualty (May 1993 to May 1996) as a Portfolio Manager responsible for the fixed-income portion of Aetna's Capital and Surplus Portfolio and as a fixed-income analyst responsible for the Capital Goods and Transportation sectors. Prior to joining Aetna, she was a fixed-income trader at Hartford Life Insurance Company (May 1992 to May 1993) and at Equitable Capital Management Corporation (August 1985 to May 1992). Ms. Fera also serves as the co-manager of Prudential Mortgage Income Fund, Inc. and Prudential Government Securities Trust (Short-Intermediate Term Series).
PIFM and PIC are wholly-owned subsidiaries of The Prudential Insurance Company of America (Prudential) a major diversified insurance and financial services company.
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS A, CLASS B, CLASS C AND CLASS Z SHARES OF THE FUND. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE DISTRIBUTION AGREEMENT), PRUDENTIAL SECURITIES (THE DISTRIBUTOR) INCURS THE EXPENSES OF DISTRIBUTING THE FUND'S CLASS A, CLASS B AND CLASS C SHARES. PRUDENTIAL SECURITIES 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. These expenses include commissions and account servicing fees paid to, or on account of, financial advisers of Prudential Securities and representatives of Pruco Securities Corporation (Prusec), an affiliated broker-dealer, commissions and account servicing fees paid to, or on account of, other broker-dealers or financial institutions (other than national banks) which have entered into agreements with the Distributor, advertising expenses, the cost of printing and mailing prospectuses to potential investors and indirect and overhead costs of Prudential Securities and Prusec associated with the sale of Fund shares, including lease, utility, communications and sales promotion expenses.
Under the Plans, the Fund is obligated to pay distribution and/or service fees to the Distributor as compensation for its distribution and service activities, not as reimbursement for specific expenses incurred. If the Distributor's expenses exceed its
distribution and service fees, the Fund will not be obligated to pay any additional expenses. If the Distributor's expenses are less than such distribution and service fees, it will retain its full fees and realize a profit.
UNDER THE CLASS A PLAN, THE FUND MAY PAY PRUDENTIAL SECURITIES FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES. The Class A Plan provides that (i) up to .25 of 1% of the average daily net assets of the Class A shares may be used to pay for personal service and/or the maintenance of shareholder accounts (service fee) and (ii) total distribution fees (including the service fee of up to .25 of 1%) may not exceed .30 of 1% of the average daily net assets of the Class A shares. Prudential Securities has agreed to limit its distribution-related fees payable under the Class A Plan to .15 of 1% of the average daily net assets of the Class A shares for the fiscal year ending February 28, 1998.
UNDER THE CLASS B PLAN, THE FUND MAY PAY PRUDENTIAL SECURITIES FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B SHARES AT AN ANNUAL RATE OF UP TO 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS B SHARES UP TO $3 BILLION, .80 OF 1% OF THE NEXT $1 BILLION OF SUCH NET ASSETS AND .50 OF 1% OF SUCH NET ASSETS IN EXCESS OF $4 BILLION. The Class B Plan provides for the payment to Prudential Securities of (i) an asset-based sales charge of up to .75 of 1% of the average daily net assets of the Class B shares up to $3 billion, .55 of 1% of the next $1 billion of such net assets and .25 of 1% of such net assets in excess of $4 billion, and (ii) a service fee of up to .25 of 1% of the average daily net assets of the Class B shares. UNDER THE CLASS C PLAN, THE FUND MAY PAY PRUDENTIAL SECURITIES FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO THE CLASS C SHARES AT AN ANNUAL RATE OF UP TO 1% OF AVERAGE DAILY NET ASSETS OF CLASS C SHARES. The Class C Plan provides for the payment to Prudential Securities of (i) an asset-based sales charge of up to .75 of 1% of the average daily net assets of the Class C shares, and (ii) a service fee of up to .25 of 1% of the average daily net assets of the Class C shares. The service fee is used to pay for personal service and/or the maintenance of shareholder accounts. Prudential Securities has agreed to limit its distribution-related fees payable under the Class B Plan to .825 of 1% of the average daily net assets of the Class B shares and under the Class C Plan to .75 of 1% of the average daily net assets of the Class C shares for the fiscal year ending February 28, 1998. Prudential Securities also receives contingent deferred sales charges from certain redeeming shareholders. See "Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges."
Distribution expenses attributable to the sale of Class A, Class B and Class C shares of the Fund will be 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.
Each Plan provides that it shall continue in effect from year to year provided that a majority of the Board of Directors of the Fund, including a majority of the Directors who are not "interested persons" of the Fund (as defined in the Investment Company Act) and who have no direct or indirect financial interest in the operation of the Plan or any agreement related to the Plan (the Rule 12b-1 Directors), vote annually to continue the Plan. Each Plan may be terminated at any time by vote of a majority of the Rule 12b-1 Directors or of a majority of the outstanding shares of the applicable class of the Fund. The Fund will not be obligated to pay distribution and service fees incurred under any plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Fund under the Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may make payments out of its own resources to dealers (including Prudential Securities) and other persons who distribute shares of the Fund (including Class Z shares). Such payments may be calculated by reference to the net asset value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of Securities Dealers, Inc. (the NASD) governing maximum sales charges. See "Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC, state securities regulators (with the exception of the Texas Securities Commissioner who joined the settlement on January 18, 1994) and the NASD to resolve allegations that from 1980 through 1990 PSI sold certain limited partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns and liquidity of these investments. Without admitting or denying the allegations asserted against it, PSI consented to the entry of an SEC Administrative Order which stated that PSI's conduct violated the federal securities laws, directed PSI to cease and desist from violating the federal securities laws, pay civil penalties, and adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a $10,000,000 civil penalty, established a settlement fund in the amount of $330,000,000 and procedures to resolve legitimate claims for ocmpensatory damages by purchasers of the partnership interests. PSI has agreed to provide additional funds, if necessary, for the purpose of the settlement fund. PSI's settlement with the state securities regulators included an agreement to pay a penalty of $500,000 per jurisdiction. PSI consented to a censure and to the payment of a $5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States Magistrate for the Southern District of New York alleging that PSI committed fraud in connection with the sale of certain limited partnership interests in violation of federal securities laws. An agreement was simultaneously filed to defer prosecution of these charges for a period of three years from the signing of the agreement, provided that PSI complies with the terms of the agreement. If, upon completion of the three year period, PSI has complied with the terms of the agreement, no prosecution will be instituted by the United States for the offenses charged in the complaint. If on the other hand, during the course of the three year period, PSI violates the terms of the agreement, the U.S. Attorney can then elect to pursue these charges. Under the terms of the agreement, PSI agreed, among other things, to pay an additional $330,000,000 into the fund established by the SEC to pay restitution to investors who purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see "Distributor" in the Statement of Additional Information, a copy of which may be obtained at no cost by calling 1-800-225-1852.
The Fund is not affected by PSI's financial condition and is an entirely separate legal entity from PSI, which has no beneficial ownership therein and the Fund's assets which are held by State Street Bank and Trust Company, an independent custodian, are separate and distinct from PSI.
FEE WAIVERS AND SUBSIDY
PIFM may from time to time waive all or a portion of its management fee and subsidize all or a portion of the operating expenses of the Fund. Fee waivers and expense subsidies will increase the Fund's total return.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker and/or futures commission merchant for the Fund provided that the commissions, fees or other remuneration it receives are fair and reasonable. See "Portfolio Transactions and Brokerage" in the Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy, Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and cash and, in that capacity, maintains certain financial and accounting books and records pursuant to an agreement with the Fund. Its mailing address is P .O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and in those capacities maintains certain books and records for the Fund. Its mailing address is P .O. Box 15005, New Brunswick, New Jersey 08906-5005. PMFS is a wholly-owned subsidiary of PIFM.
HOW THE FUND VALUES ITS SHARES
THE FUND'S NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE NUMBER OF OUTSTANDING SHARES OF THE FUND. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE BOARD OF DIRECTORS HAS FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE FUND'S NAV TO BE AS OF 4:15 P .M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily available, at fair value as determined in good faith under procedures established by the Fund's Board of Directors. See "Net Asset Value" in the Statement of Additional Information.
The Fund will compute its NAV once daily on days that the New York Stock Exchange is open for trading except on days on which no orders to purchase, sell or redeem shares have been received by the Fund or days on which changes in the value of the Fund's portfolio securities do not materially affect the NAV. The New York Stock Exchange is closed on the following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Although the legal rights of each class of shares are substantially identical, the different expenses borne by each class will result in different NAVs and dividends. The NAV of Class B and Class C shares will generally be lower than the NAV of Class A shares as a result of the larger distribution-related fee to which Class B and Class C shares are subject. The NAV of Class Z shares will generally be higher than the NAV of the other three classes because Class Z shares are not subject to any distribution and/or service fees. It is expected, however, that the NAV of the four classes will tend to converge immediately after the recording of dividends, if any, which will differ by approximately the amount of the distribution and/or service fee expense accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE ITS "YIELD" AND "TOTAL RETURN" (INCLUDING "AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE" TOTAL RETURN) IN ADVERTISEMENTS AND SALES LITERATURE. YIELD AND TOTAL RETURN ARE CALCULATED SEPARATELY FOR CLASS A, CLASS B, CLASS C AND CLASS Z SHARES. These figures are based on historical earnings and are not intended to indicate future performance. The "total return" shows how much an investment in the Fund would have increased (decreased) over a specified period of time (I.E., one, five or ten years or since inception of the Fund) assuming that all distributions and dividends by the Fund were reinvested on the reinvestment dates during the period and less all recurring fees. The "aggregate" total return reflects actual performance over a stated period of time. "Average annual" total return is a hypothetical rate of return that, if achieved annually, would have produced the same aggregate total return if performance had been constant over the entire period. "Average annual" total return smooths out variations in performance and takes into account any applicable initial or contingent deferred sales charges. Neither "average annual" total return nor "aggregate" total return takes into account any federal or state income taxes which may be payable upon redemption. The "yield" refers to the income generated by an investment in the Fund over a one-month or 30-day period. This income is then "annualized" that is, the amount of income generated by the investment during that 30-day period is assumed to be generated each 30-day period for twelve periods and is shown as a percentage of the investment. The income earned on the investment is also assumed to be reinvested at the end of the sixth 30-day period. The Fund also may include comparative performance information in advertising or marketing the Fund's shares. Such performance information may include data from Lipper Analytical Services, Inc., Morningstar Publications, Inc., other industry publications, business periodicals and market indices. See "Performance Information" in the Statement of Additional Information. Further performance information is contained in the Fund's annual and semi-annual reports to shareholders, which may be obtained without charge. See "Shareholder Guide--Shareholder Services--Reports to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE FUND HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A REGULATED
INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE FUND WILL
NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME AND CAPITAL
GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. See "Taxes, Dividends
and Distributions" in the Statement of Additional Information.
TAXATION OF SHAREHOLDERS
All dividends out of net investment income, together with distributions of short-term capital gains, will be taxable as ordinary income to the shareholder whether or not reinvested. Any net long-term capital gains (I.E., the excess of net long-term capital gains over net short-term capital losses) distributed to shareholders will be taxable as such to the shareholders, whether or not reinvested and regardless of the length of time a shareholder has owned his or her shares. The maximum long-term capital gains rate for individuals currently is 28% and the maximum tax rate for ordinary income is 39.6%. The maximum long-term capital gains rate for corporate shareholders currently is the same as the maximum tax rate for ordinary income.
Any gain or loss realized upon a sale, exchange or redemption of shares by a shareholder who is not a dealer in securities will be treated as long-term capital gain or loss if the shares have been held more than one year and otherwise as short-term capital gain or loss. Any loss, however, on the sale, exchange or redemption of shares that are held for six months or less will be treated as a long-term capital loss to the extent of any capital gain distributions received by the shareholder.
A shareholder who acquires shares of the Fund and sells or otherwise disposes of such shares within 90 days of acquisition may not be allowed to include certain sales charges incurred in acquiring such shares for purposes of calculating gain or loss realized upon a sale or exchange of shares of the Fund.
The Fund has obtained opinions of counsel to the effect that neither (i) the conversion of Class B shares into Class A shares nor (ii) the exchange of any class of the Fund's shares for any other class of its shares constitutes a taxable event for federal income tax purposes. However, such opinions are not binding on the Internal Revenue Service.
Shareholders are advised to consult their own tax advisers regarding specific questions as to federal, state, local and foreign taxes. See "Taxes, Dividends and Distributions" in the Statement of Additional Information.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Fund is required to withhold and remit to the U.S. Treasury 31% of dividends, capital gain income and redemption proceeds payable to individuals and certain noncorporate shareholders who fail to furnish correct tax identification numbers on IRS Form W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the required certifications regarding the shareholder's status under federal income tax law. Notwithstanding the foregoing, dividends of net investment income and short-term capital gains to a foreign shareholder will generally be subject to U.S. withholding tax at the rate of 30% (or lower treaty rate).
DIVIDENDS AND DISTRIBUTIONS
THE FUND EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET INVESTMENT INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY NET CAPITAL GAINS. In determining the amount of capital gains to be distributed, the amount of any capital loss carryforwards from prior years will be offset against capital gains. As of February 28, 1997, the Fund had a capital loss carryforward for federal income tax purposes of approximately $143,520,000. Accordingly, no capital gains
distribution is expected to be paid to shareholders until net gains have been realized in excess of such carryforward. Dividends paid by the Fund with respect to each class of shares, to the extent any dividends are paid, will be calculated in the same manner, at the same time, on the same day and will be in the same amount except that Class A, Class B and Class C shares will bear their own distribution charges, generally resulting in lower dividends for Class B and Class C shares in relation to Class A and Class Z shares and lower dividends for Class A shares in relation to Class Z shares. Distributions of net capital gains, if any, will be paid in the same amount for each class of shares. See "How the Fund Values its Shares."
Shares will begin earning daily dividends on the day following the date on which the shares are issued, the date of issuance customarily being the "settlement" date. Shares continue to earn daily dividends until they are redeemed. In the event an investor redeems all the shares in his or her account at any time during the month, all daily dividends declared to the date of redemption will be paid at the time of redemption.
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES, BASED ON THE NAV OF EACH CLASS ON THE PAYMENT AND RECORD DATE, RESPECTIVELY, OR SUCH OTHER DATE AS THE BOARD OF DIRECTORS MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE PAYMENT DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election should be submitted to Prudential Mutual Fund Services LLC, Attention: Account Maintenance, P .O. Box 15015, New Brunswick, New Jersey 08906-5015. The Fund will notify each shareholder after the close of the Fund's taxable year of both the dollar amount and the taxable status of that year's dividends and distributions on a per share basis. To the extent that, in a given year, distributions to shareholders exceed recognized net investment income and recognized short-term and long-term capital gains for the year, shareholders will receive a return of capital in respect of such year and, in an annual statement, will be notified of the amount of any return of capital for such year. Any distributions paid shortly after a purchase by an investor will have the effect of reducing the per share net asset value of the investor's shares by the per share amount of the distributions. Such distributions, although in effect a return of invested principal, are subject to federal income taxes. Accordingly, prior to purchasing shares of the Fund, an investor should carefully consider the impact of capital gains distributions which are expected to be or have been announced. If you hold shares through Prudential Securities you should contact your financial adviser to elect to receive dividends and distributions in cash.
WHEN THE FUND GOES "EX-DIVIDEND," ITS NAV IS REDUCED BY THE AMOUNT OF THE DIVIDEND OR DISTRIBUTION. IF YOU BUY SHARES JUST PRIOR TO THE EX-DIVIDEND DATE (WHICH GENERALLY OCCURS FOUR BUSINESS DAYS PRIOR TO THE RECORD DATE) THE PRICE YOU PAY WILL INCLUDE THE DIVIDEND OR DISTRIBUTION AND A PORTION OF YOUR INVESTMENT WILL BE RETURNED TO YOU AS A TAXABLE DISTRIBUTION. YOU SHOULD, THEREFORE, CONSIDER THE TIMING OF DIVIDENDS AND DISTRIBUTIONS WHEN MAKING YOUR PURCHASES.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
THE FUND WAS INCORPORATED IN MARYLAND ON APRIL 8, 1983. THE FUND IS AUTHORIZED TO ISSUE TWO 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, EACH OF WHICH CONSISTS OF 500 MILLION AUTHORIZED SHARES. Each class of common stock represents an interest in the same assets of the Fund and is identical in all respects except that, (i) each class is subject to different sales charges and distribution and/or service fees (except for Class Z shares which are not subject to any distribution and/or service fees) which may affect performance, (ii) each class has exclusive voting rights on 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, (iii) each class has a different exchange privilege, (iv) only Class B shares have a conversion feature and (v) Class Z shares are offered exclusively for sale to a group of limited investors. See "How the Fund is Managed--Distributor." 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. Currently, the Fund is offering four classes, designated as Class A, Class B, Class C and Class Z shares.
The Board of Directors may increase or decrease the number of authorized shares without approval by shareholders. Shares of the Fund, when issued, are fully paid, nonassessable, fully transferable and redeemable at the option of the holder. Shares are also redeemable at the option of the Fund under certain circumstances as described under "Shareholder Guide--How to Sell Your Shares." Each share of each class of common stock is equal as to earnings, assets and voting privileges, except as noted above, and each class (with the exception of Class Z shares, which are not subject to any distribution or service fees) bears the expenses related to the distribution of its shares. Except for the conversion feature applicable to the Class B shares, there are no conversion, preemptive or other subscription rights. In the event of liquidation, each share of common stock of the Fund is entitled to its portion of all of the Fund's assets after all debt and expenses of the Fund have been paid. Since Class B and Class C shares generally bear higher distribution expenses than Class A shares, the liquidation proceeds to shareholders of 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 INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR MORE DIRECTORS OR TO TRANSACT ANY OTHER BUSINESS.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has been incorporated by reference herein, does not contain all the information set forth in the Registration Statement filed by the Fund with the SEC under the Securities Act of 1933. Copies of the Registration Statement may be obtained at a reasonable charge from the SEC or may be examined, without charge, at the office of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, PRUSEC OR DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND SERVICES LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES, P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The purchase price is the NAV next determined following receipt of an order by the Transfer Agent or Prudential Securities plus a sales charge which, at your option, may be imposed either (i) at the time of purchase (Class A shares) or (ii) on a deferred basis (Class B or Class C shares). Class Z shares are offered to a limited group of investors at net asset value without any sales charge. Participants in programs sponsored by Prudential Retirement Services should contact their client representative for more information about Class Z shares. See "Alternative Purchase Plan" below. See also "How the Fund Values its Shares."
The minimum initial investment for Class A and Class B shares is $1,000 per class and $5,000 for Class C shares. There is no minimum investment requirement for Class Z shares. The minimum subsequent investment is $100 for all classes, except for Class Z shares, for which there is no such minimum. All minimum investment requirements are waived for certain retirement and employee savings plans or custodial accounts for the benefit of minors. For purchases made through the Automatic Savings Accumulation Plan, the minimum initial and subsequent investment is $50. See "Shareholder Services" below.
Application forms can be obtained from PMFS, Prudential Securities or Prusec. If a stock certificate is desired, it must be requested in writing for each transaction. Certificates are issued only for full shares. Shareholders who hold their shares through Prudential Securities will not receive stock certificates.
The Fund reserves the right to reject any purchase order (including an exchange into the Fund) or to suspend or modify the continuous offering of its shares. See "How to Sell Your Shares."
Your dealer is responsible for forwarding payment promptly to the Fund. The Distributor reserves the right to cancel any purchase order for which payment has not been received by the fifth business day following the investment.
Transactions in Fund shares may be subject to postage and handling charges imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account number. The following information will be requested: your name, address, tax identification number, class election, dividend distribution election, amount being wired and wiring bank. Instructions should then be given by you to your bank to transfer funds by wire to State Street Bank and Trust Company, Boston, Massachusetts, Custody and Shareholder Services Division, Attention: Prudential 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 eligible to invest (Class A, Class B, Class C or Class Z shares).
If you arrange for receipt by State Street of Federal Funds prior to 4:15 P .M., New York time, on a business day, you may purchase shares of the Fund as of that day. See "Net Asset Value" in the Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street directly and should be sure that the wire specifies Prudential 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 utilizing Federal Funds. The minimum amount which may be invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS FOUR CLASSES OF SHARES (CLASS A, CLASS B, CLASS C AND CLASS Z) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES (THE ALTERNATIVE PURCHASE PLAN).
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE
DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
-------------------------------------- ----------------------- --------------------------------------
CLASS A Maximum initial sales charge of 4% of .30 of 1% (Currently Initial sales charge waived or reduced
the public offering price being charged at a rate for certain purchases
of .15 of 1%)
CLASS B Maximum contingent deferred sales 1% (Currently being Shares convert to Class A shares
charge or CDSC of 5% of the lesser of charged at a rate of approximately seven years after
the amount invested or the redemption .825 of 1%) purchase
proceeds; declines to zero after six
years
CLASS C Maximum CDSC of 1% of the lesser of 1% (Currently being Shares do not convert to another class
the amount invested or the redemption charged at a rate of
proceeds on redemptions made within .75 of 1%)
one year of purchase
CLASS Z None None Sold to a limited group of investors
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The four classes of shares represent an interest in the same portfolio of investments of the Fund and have the same rights, except that (i) each class is subject to different sales charges and distribution and/or service fees (with the exception of Class Z shares, which are not subject to any distribution or service fees), which may affect performance, (ii) each class has exclusive voting rights on 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 differs from the interests of any other class and (iii) only Class B shares have a conversion feature. The four classes also have separate exchange privileges. See "How to Exchange Your Shares" below. The income attributable to each class and the dividends payable on the shares of each class will be reduced by the amount of the distribution fee (if any) of each class. Class B and Class C shares bear the expenses of a higher distribution fee which will generally cause them to have higher expense ratios and to pay lower dividends than the Class A and Class Z shares.
Financial advisers and other sales agents who sell shares of the Fund will receive different compensation for selling Class A, Class B, Class C and Class Z shares and will generally receive more compensation initially for selling Class A and Class B shares than for selling Class C or Class Z shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) that Class B shares automatically convert to Class A
shares approximately seven years after purchase (see "Conversion Feature--Class
B Shares" below).
The following is provided to assist you in determining which method of purchase best suits your individual circumstances and is based on current fees and expenses being charged to the Fund:
If you intend to hold your investment in the Fund for less than 7 years and do not qualify for a reduced sales charge on Class A shares, since Class A shares are subject to a maximum initial sales charge of 4% and Class B shares are subject to a CDSC of 5% which declines to zero over a 6 year period, you should consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for 7 years or more and do not qualify for a reduced sales charge on Class A shares, since Class B shares convert to Class A shares approximately 7 years after purchase and because all of your money would be invested initially in the case of Class B shares, you should consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more advantageous for you to purchase Class A shares over either Class B or Class C shares regardless of how long you intend to hold your investment. However, unlike Class B and Class C shares, you would not have all of your money invested initially because the sales charge on Class A shares is deducted at the time of purchase.
If you do not qualify for a reduced sales charge on Class A shares and you purchase Class B or Class C shares, you would have to hold your investment for more than 5 years in the case of Class B shares and 6 years in the case of Class C shares for the higher cumulative annual distribution-related fee on those shares to exceed the initial sales charge plus cumulative annual distribution- related 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 net asset value, the effect of the return on the investment over this period of time or redemptions when the CDSC is applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. See "Reduction and Waiver of Initial Sales Charges" and "Class Z Shares" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales charge alternative is the next determined NAV plus a sales charge (expressed as a percentage of the offering price and of the amount invested) as shown in the following table:
SALES CHARGE SALES CHARGE DEALER
AS PERCENTAGE AS PERCENTAGE CONCESSION AS
OF OFFERING OF AMOUNT PERCENTAGE OF
AMOUNT OF PURCHASE PRICE INVESTED OFFERING PRICE
- ------------------------- -------------- -------------- ----------------
$0 to $49,999 4.00% 4.17% 3.75%
$50,000 to $99,999 3.50 3.83 3.25
$100,000 to $249,999 2.75 2.83 2.50
$250,000 to $499,999 2.00 2.04 1.90
$500,000 to $999,999 1.50 1.52 1.40
$1,000,000 and above None None None
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The Distributor may reallow the entire initial sales charge to dealers. Selling dealers may be deemed to be underwriters, as that term is defined in the Securities Act.
In connection with the sale of Class A shares at NAV (without payment of an initial sales charge), the Manager, the Distributor or one of their affiliates will pay dealers, financial advisers and other persons which distribute shares a finders' fee based on a percentage of the net asset value of shares sold by such persons.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are available through Rights of Accumulation and Letters of Intent. Shares of the Fund and shares of other Prudential Mutual Funds (excluding money market funds other than those acquired pursuant to the exchange privilege) may be aggregated to determine the applicable reduction. See "Purchase and Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the Statement of Additional Information.
BENEFIT PLANS. Class A shares may be purchased at NAV, without payment of an initial sales charge, by pension, profit-sharing or other employee benefit plans qualified under Section 401 of the Internal Revenue Code and deferred compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal Revenue Code (collectively, Benefit Plans), provided that the Benefit Plan has existing assets of at least $1 million invested in shares of Prudential Mutual Funds (excluding money market funds other than those acquired pursuant to the exchange privilege) or 250 eligible employees or participants. In the case of Benefit Plans whose accounts are held directly with the Transfer Agent or Prudential Securities and for which the Transfer Agent or Prudential Securities does individual account recordkeeping (Direct Account Benefit Plans) and Benefit Plans sponsored by PSI or its subsidiaries (PSI or Subsidiary Prototype Benefit Plans), Class A shares may be purchased at NAV by participants who are repaying loans made from such plans to the participant.
PRUARRAY AND SMARTPATH PLANS. Class A shares may be purchased at NAV by certain savings, retirement and deferred compensation plans, qualified or non-qualified under the Internal Revenue Code, including pension, profit-sharing, stock-bonus or other employee benefit plans under Section 401 of the Internal Revenue Code and deferred compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal Revenue Code that participate in the Transfer Agent's PruArray or SmartPath Program (benefit plan record keeping services) (hereafter referred to as a PruArray or SmartPath Plan); provided that the plan has at least $1 million in existing assets or 250 eligible employees or participants. The term "existing assets" for this purpose includes stock issued by a PruArray or SmartPath Plan sponsor and shares of non-money market Prudential Mutual Funds and shares of certain unaffiliated non-money market mutual funds that participate in the PruArray or SmartPath Program (Participating Funds). "Existing assets" also include shares of money market funds acquired by exchange from a Participating Fund, monies invested in The Guaranteed Interest Account (GIA), a group annuity insurance product issued by Prudential, and units of The Stable Value Fund (SVF), an unaffiliated bank collective fund. Class A shares may also be purchased at NAV by plans that have monies invested in GIA and SVF, provided (i) the purchase is made with the proceeds of a redemption from either GIA or SVF and (ii) Class A shares are an investment option of the plan.
PRUARRAY ASSOCIATION BENEFIT PLANS. Class A shares are also offered at net asset value to Benefit Plans or non-qualified plans sponsored by employers which are members of a common trade, professional or membership association (Association) that participate in the PruArray Program provided that the Association enters into a written agreement with Prudential. Such Benefit Plans or non-qualified plans may purchase Class A shares at net asset value without regard to the assets or number of participants in the individual employer's qualified Plan(s) or non-qualified Plans so long as the employers in the Association (i) have retirement plan assets in the aggregate of at least $1 million or 250 participants in the aggregate and (ii) maintain their accounts with the Fund's transfer agent.
PRUARRAY SAVINGS PROGRAM. Class A shares are also offered at net asset value to employees of companies that enter into a written agreement with Prudential Retirement Services to participate in the PruArray Savings Program. Under this Program, a limited number of Prudential Mutual Funds are available for purchase at net asset value by Individual Retirement Accounts and Savings Accumulation Plans of the company's employees. The Program is available only to (i) employees who open an IRA or Savings Accumulation Plan account with the Fund's transfer agent and (ii) spouses of employees who open an IRA account with the Fund's transfer agent. The program is offered to companies that have at least 250 eligible employees.
SPECIAL RULES APPLICABLE TO RETIREMENT PLANS. After a Benefit Plan, or PruArray or SmarthPath Plan qualifies to purchase Class A shares at NAV, all subsequent purchases will be made at NAV.
OTHER WAIVERS. In addition, Class A shares may be purchased at NAV, through
Prudential Securities or the Transfer Agent, by the following persons: (a)
officers and current and former Directors/Trustees of the Prudential Mutual
Funds (including the Fund), (b) employees of Prudential Securities and PMF and
their subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent, (c)
employees of subadvisers of the Prudential Mutual Funds provided that purchases
at NAV are permitted by such person's employer, (d) 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,
(e) registered representatives and employees of dealers who have entered into a
selected dealer agreement with Prudential Securities provided that purchases at
NAV are permitted by such person's employer, (f) investors who have a business
relationship with a financial adviser who joined Prudential Securities from
another investment firm, provided that (i) the purchase is made within 90 days
of the commencement of the financial adviser's employment at Prudential
Securities, (ii) the purchase is made with proceeds of a redemption of shares of
any open-end, non-money market fund sponsored by the financial adviser's
previous employer (other than a fund which imposes a distribution or service fee
of .25 of 1% or less) and (iii) the financial adviser served as the client's
broker on the previous purchase and (g) 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 Investments serves as the
recordkeeper or administrator.
You must notify the Fund's Transfer Agent either directly or through Prudential Securities or Prusec at the time of purchase that you are entitled to a reduction or waiver of the sales charge. The reduction or waiver will be granted subject to confirmation of your entitlement. No initial sales charges are imposed upon Class A shares acquired upon the reinvestment of dividends and distributions. See "Purchase and Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of the deferred sales charge alternatives is the NAV per share next determined following receipt of an order by the Transfer Agent or Prudential Securities. Although there is no sales charge imposed at the time of purchase, redemptions of Class B and Class C shares may be subject to a CDSC. See "How to Sell Your Shares--Contingent Deferred Sales Charges." The Distributor will pay sales commissions of up to 4% of the purchase price of Class B shares to dealers, financial advisers and other persons who sell Class B shares at the time of sale from its own resources. 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. See "How the Fund is Managed--Distributor." In connection with the sale of Class C shares, the Distributor will pay dealers, financial advisers and other persons which distribute Class C shares a sales commission of up to 1% of the purchase price at the time of the sale.
CLASS Z SHARES
Class Z shares of the Fund are available for purchase by the following categories of investors:
(i) pension, profit-sharing or other employee benefit plans qualified under
Section 401 of the Internal Revenue Code, deferred compensation plans and
annuity plans under Sections 457 and 403(b)(7) of the Internal Revenue Code, and
non-qualified plans for which the Fund is an available option (collectively,
Benefit Plans), provided that such Benefit Plans (in combination with other
plans sponsored by the same employer or group of related employers) have at
least $50 million in defined contribution assets; (ii) participants in any
fee-based program or trust program sponsored by Prudential Securities, The
Prudential Savings Bank, F.S.B. (or any affiliate) which includes mutual funds
as investment options and for which the Fund is an available option; (iii)
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; (iv) Benefit Plans for which Prudential
Retirement Services serves as record keeper and, as of September 20, 1996, (a)
were Class Z shareholders of the Prudential Mutual Funds, or (b) executed a
letter of intent to purchase Class Z shares of the Prudential Mutual Funds; (v)
current and former Directors/Trustees of the Prudential Mutual Funds (including
the Fund); and (vi) employees of Prudential and/or Prudential Securities who
participate in a Prudential-sponsored employee saving plan.
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 based on a percentage of the net asset value of shares sold by such persons.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE FUND AT ANY TIME AT THE NAV NEXT DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES." In certain cases, however, redemption proceeds will be reduced by the amount of any applicable contingent deferred sales charge, as described below. See "Waiver of the Contingent Deferred Sales Charges--Class B Shares."
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST REDEEM YOUR SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER. IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION REQUEST TO BE PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and documents concerning redemptions should be sent to the Fund in care of its Transfer Agent, Prudential Mutual Fund Services LLC, Attention: Redemption Services, P .O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a person other than the record owner, (c) are to be sent to an address other than the address on the Transfer Agent's records, or (d) are to be paid to a corporation, partnership, trust or fiduciary, the signature(s) on the redemption request and on the certificates, if any, or stock power must be guaranteed by an "eligible guarantor institution." An "eligible guarantor institution" includes any bank, broker, dealer or credit union. The Transfer Agent reserves the right to request additional information from, and make reasonable inquiries of, any eligible guarantor institution. For clients of Prusec, a signature guarantee may be obtained from the agency or office manager of most Prudential Insurance and Financial Services or Prudential Preferred Financial Services Offices. In the case of redemptions from a PruArray or SmartPath 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 OF THE CERTIFICATE AND/OR WRITTEN REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may be postponed or the right of redemption suspended at times (a) when the New York Stock Exchange is closed for other than customary weekends and holidays, (b) when trading on such Exchange is restricted, (c) when an emergency exists as a result of which disposal by the Fund of securities owned by it is not reasonably practicable or it is not reasonably practicable for the Fund fairly to determine the value of its net assets, or (d) during any other period when the SEC, by order, so permits; provided that applicable rules and regulations of the SEC shall govern as to whether the conditions prescribed in (b), (c) or (d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the Board of Directors determines that it would be detrimental to the best interests of the remaining shareholders of the Fund to make payment wholly or partly in cash, the Fund may pay the redemption price in whole or in part by a distribution in kind of securities from the investment portfolio of the Fund, in lieu of cash, in conformity with applicable rules of the SEC. Securities will be readily marketable and will be valued in the same manner as in a regular redemption. See "How the Fund Values Its Shares." If your shares are redeemed in kind, you would incur transaction costs in converting the assets into cash. The Fund, however, has elected to be governed by Rule 18f-1 under the Investment Company Act, under which the Fund is obligated to redeem shares solely in cash up to the lesser of $250,000 or 1% of the net asset value of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Board of Directors may redeem all of the shares of any shareholder, other than a shareholder which is an IRA or other tax-deferred retirement plan, whose account has a net asset value of less than $500 due to a redemption. The Fund will give such shareholders 60 days' prior written notice in which to purchase sufficient additional shares to avoid such redemption. No contingent deferred sales charge will be imposed on any involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously exercised the repurchase privilege, you may reinvest any portion or all of the proceeds of such redemption in shares of the Fund at the NAV next determined after the order is received, which must be within 90 days after the date of the redemption. Any contingent deferred sales charge or 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 Fund's Transfer Agent, either directly or through Prudential Securities, 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 Charges" below. Exercise of the repurchase privilege may affect federal tax treatment of any gain or loss realized upon redemption. See "Taxes" in the Statement of Additional Information.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales charge or CDSC declining from 5% to zero over a six-year period. Class C shares redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will be deducted from the redemption proceeds and reduce the amount paid to you. The CDSC will be imposed on any redemptions by you which reduces the current value of your Class B or Class C shares to an amount which is lower than the amount of all payments by you for shares during the preceding six years, in the case of Class B shares, and one year, in the case of Class C shares. A CDSC will be applied on the lesser of the original purchase price or the current value of the shares being redeemed. Increases in the value of your shares or shares 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. See "How the Fund is Managed--Distributor" and "Waiver of the Contingent Deferred Sales Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years from the time of payment for the purchase of shares until the time of redemption of such shares. Solely for purposes of determining the number of years from the time of any payment for the purchase of shares, all payments during a month will be aggregated and deemed to have been made on the last day of the month. The CDSC will be calculated from the first day of the month after the initial purchase, excluding the time shares were held in a money market fund. See "How to Exchange Your Shares."
The following table sets forth the rates of the CDSC applicable to redemptions of Class B shares.
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 generally 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 net asset value above the total amount of payments for the purchase of Fund shares made during the preceding six years (five years for Class B shares purchased prior to January 22, 1990); then of amounts representing the cost of shares held beyond the applicable CDSC period; then of amounts representing the cost of shares acquired prior to July 1, 1985; 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 THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will be waived in the case of a redemption following the death or disability of a shareholder or, in the case of a trust account, following the death or disability of the grantor. The waiver is available for total or partial redemptions of shares owned by a person, either individually or in joint tenancy (with rights of survivorship), 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. These distributions include: (i) in the case of a
tax-deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59 1/2; and (iii) a tax-free
return of an excess contribution or plan distributions following the death or disability of the shareholder, provided that the shares were purchased prior to death or disability. The waiver does not apply in the case of a tax-free rollover or transfer of assets, other than one following a separation from service (I.E., following voluntary or involuntary termination of employment or following retirement). Under no circumstances will the CDSC be waived on redemptions resulting from the termination of a tax-deferred retirement plan, unless such redemptions otherwise qualify for a waiver as described above. In the case of Direct Account and PSI or Subsidiary Prototype Benefit Plans, the CDSC will be waived on redemptions which represent borrowings from such plans. Shares purchased with amounts used to repay a loan from such plans on which a CDSC was not previously deducted will thereafter be subject to a CDSC without regard to the time such amounts were previously invested. In the case of a 401(k) plan, the CDSC will also be waived upon the redemption of shares purchased with amounts used to repay loans made from the account to the participant and from which a CDSC was previously deducted.
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain redemptions from a 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 Fund's Transfer Agent will calculate the total amount available for this waiver annually, on the earlier of March 1, 1997 or the anniversary date of your purchase. The CDSC will be waived (or reduced) on redemptions until this threshold 12% amount is reached.
In addition, the CDSC will be waived on redemptions of shares held by a Director of the Fund.
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 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. See "Purchase and Redemption of Fund Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in the Statement of Additional Information.
A quantity discount may apply to redemptions of Class B shares purchased prior to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of Additional Information.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS C SHARES
PRUARRAY OR SMARTPATH PLANS. The CDSC will be waived on the following redemptions from qualified and non-qualified retirement and deferred compensation plans that participate in the Transfer Agent's PruArray and SmartPath Programs: (i) redemptions from a 403(b) or 457 plan; and (ii) redemptions from a qualified or non-qualified plan, provided that the investment options of the plan include shares of Prudential Mutual Funds and shares of non-affiliated mutual funds.
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. The first conversion of Class B shares occurred in February 1995, when the conversion feature was first implemented.
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 (I.E., $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 net asset value of the Class A shares may be higher than that of the Class B shares at the time of conversion. Thus, although the aggregate dollar value will be the same, you may receive fewer Class A shares than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all payments for Class B shares during a month will be deemed to have been made on the last day of the month, or for Class B shares acquired through exchange, or a series of exchanges, on the last day of the month in which the original payment for purchases of such Class B shares was made. For Class B shares previously exchanged for shares of a money market fund, the time period during which such shares were held in the money market fund will be excluded. For example, Class B shares held in a money market fund for one year will not convert to Class A shares until approximately eight years from purchase. For purposes of measuring the time period during which shares are held in a money market fund, exchanges will be deemed to have been made on the last day of the month. Class B shares acquired through exchange will convert to Class A shares after expiration of the conversion period applicable to the original purchase of such shares.
The conversion feature may be subject to the continuing availability of opinions of counsel or rulings of the Internal Revenue Service (i) that the dividends and other distributions paid on Class A, Class B, Class C and Class Z shares will not constitute "preferential dividends" under the Internal Revenue Code and (ii) that the conversion of shares does not constitute a taxable event. The conversion of Class B shares into Class A shares may be suspended if such opinions or rulings are no longer available. If conversions are suspended, Class B shares of the Fund will continue to be subject, possibly indefinitely, to their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND, YOU HAVE AN EXCHANGE PRIVILEGE WITH CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS, INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENT OF SUCH FUNDS. CLASS A, CLASS B, CLASS C AND CLASS Z SHARES MAY BE EXCHANGED FOR CLASS A, CLASS B, CLASS C AND CLASS Z SHARES, RESPECTIVELY, OF ANOTHER FUND ON THE BASIS ON THE RELATIVE NAV. No sales charge will be imposed at the time of the exchange. Any applicable CDSC payable upon the redemption of shares exchanged will be calculated from the first day of the month after the initial purchase, excluding the time shares were held in a money market fund. Class B and Class C shares may not be exchanged into money market funds other than Prudential Special Money Market Fund, Inc. For purposes of calculating the holding period applicable to the Class B conversion feature, the time period during which Class B shares were held in a money market fund will be excluded. See "Conversion Feature--Class B Shares" above. An exchange will be treated as a redemption and purchase for tax purposes. See "Shareholder Investment Account--Exchange Privilege" in the Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE THE TELEPHONE EXCHANGE PRIVILEGE ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund at (800) 225-1852 to execute a telephone exchange of shares on weekdays, except holidays, between the hours of 8:00 A. M. and 6:00 P. M., New York time. For your protection and to prevent fraudulent exchanges, your telephone call will be recorded and you will be asked to provide your personal identification number. A written confirmation of the exchange transaction will be sent to you. NEITHER THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER THE FOREGOING PROCEDURES. All exchanges will be made on the
basis of the relative NAV of the two funds next determined after the request is received in good order. The Exchange Privilege is available only in states where the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES OR THROUGH A DEALER WHICH HAS ENTERED INTO A SELECTED DEALER AGREEMENT WITH THE FUND'S DISTRIBUTOR, YOU MUST EXCHANGE YOUR SHARES BY CONTACTING YOUR FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES MUST BE RETURNED IN ORDER FOR THE SHARES TO BE EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund Services LLC, Attention: Exchange Processing, P .O. Box 15010, New Brunswick, New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE OF SHARES MAY BE DIFFICULT TO IMPLEMENT AND SHAREHOLDERS SHOULD MAKE EXCHANGES BY MAIL BY WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC, AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for shareholders who qualify to purchase Class A shares at NAV (see "Alternative Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges" above) and for shareholders who qualify to purchase Class Z shares (see "Alternative Purchase Plan--Class Z Shares" above). Under this exchange privilege, amounts representing any Class B and Class C shares (which are not subject to a CDSC) held in such a shareholder's account will be automatically exchanged for Class A shares for shareholders who qualify to purchase Class A shares at NAV 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 or Prusec 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 PSI's 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 PSI 401(k) Plan following separation from service (I.E., voluntary or involuntary termination of employment or retirement) will have their Class Z shares exchanged for Class A shares at NAV.
The Fund reserves the right to reject any exchange order including exchanges (and market timing transactions) which are of the size and/or frequency engaged in by one or more accounts acting in concert or otherwise, that have or may have an adverse effect on the ability of the Subadviser to manage the portfolio. The determination that such exchanges or activity may have an adverse effect and the determination to reject any exchange order shall be in the discretion of the Manager and the Subadviser.
The Exchange Privilege is not a right and may be suspended, modified or terminated on 60 days' notice to shareholders.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in the Fund, you can take advantage of the following additional services and privileges:
-AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES CHARGE. For your convenience, all dividends or distributions are automatically reinvested in full and fractional shares of the Fund at NAV without a sales charge. You may direct the Transfer Agent in writing not less than 5 full business days prior to the record date to have subsequent dividends and/or distributions sent in cash rather than reinvested. If you hold shares through Prudential Securities, you should contact your financial adviser.
-AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make regular purchases of the Fund's shares in amounts as little as $50 via an automatic debit to a bank account or Prudential Securities account (including a Command Account). For additional information about this service, you may contact your Prudential Securities financial adviser, Prusec representative or the Transfer Agent directly.
-TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans, including a 401(k) plan, self-directed individual retirement accounts and "tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code are available through the Distributor. These plans are for use by both self-employed individuals and corporate employers. These plans permit either self-direction of accounts by participants, or a pooled account arrangement. Information regarding the establishment of these plans, the administration, custodial fees and other details is available from Prudential Securities or the Transfer Agent. If you are considering adopting such a plan, you should consult with your own legal or tax adviser with respect to the establishment and maintenance of such a plan.
-SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to shareholders which provides for monthly or quarterly checks. Withdrawal of Class B and Class C shares may be subject to a CDSC. See "How to Sell Your Shares-- Contingent Deferred Sales Charges." See also "Shareholder Investment Account--Systematic Withdrawal Plan" in the Statement of Additional Information.
-REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual reports. The financial statements appearing in annual reports are audited by independent accountants. In order to reduce duplicate mailing and printing expenses, the Fund will provide one annual and semi-annual shareholder report and annual prospectus per household. You may request additional copies of such reports by calling (800) 225-1852 (toll-free) or by writing to the Fund at Gateway Center Three, Newark, New Jersey 07102. In addition, monthly unaudited financial data are available upon request from the Fund.
-SHAREHOLDER INQUIRIES. Shareholder inquiries should be addressed to the Fund at Gateway Center Three, Newark, New Jersey 07102, or by telephone, at (800) 225-1852 (toll-free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges described above, see "Shareholder Investment Account" in the Statement of Additional Information.
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Funds at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
Global Utility Fund, Inc.
The Global Government Plus Fund, Inc.
The Global Total Return Fund, Inc.
Prudential Distressed Securities Fund, Inc.
Prudential Dryden Fund
Prudential Active Balanced Fund
Prudential Stock Index Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small Companies Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
- - TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- - COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- - INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
TABLE OF CONTENTS
PAGE
----
FUND HIGHLIGHTS........................................................... 2
What are the Fund's Risk Factors and Special Characteristics?........... 2
FUND EXPENSES............................................................. 4
FINANCIAL HIGHLIGHTS...................................................... 5
HOW THE FUND INVESTS...................................................... 9
Investment Objective and Policies....................................... 9
Other Investments and Policies.......................................... 11
Other Investment Information............................................ 16
Investment Restrictions................................................. 18
HOW THE FUND IS MANAGED................................................... 18
Manager................................................................. 18
Distributor............................................................. 19
Fee Waivers and Subsidy................................................. 21
Portfolio Transactions.................................................. 21
Custodian and Transfer and Dividend Disbursing Agent.................... 21
HOW THE FUND VALUES ITS SHARES............................................ 22
HOW THE FUND CALCULATES PERFORMANCE....................................... 22
TAXES, DIVIDENDS AND DISTRIBUTIONS........................................ 23
GENERAL INFORMATION....................................................... 24
Description of Common Stock............................................. 24
Additional Information.................................................. 25
SHAREHOLDER GUIDE......................................................... 25
How to Buy Shares of the Fund........................................... 25
Alternative Purchase Plan............................................... 26
How to Sell Your Shares................................................. 30
Conversion Feature--Class B Shares...................................... 33
How to Exchange Your Shares............................................. 34
Shareholder Services.................................................... 36
THE PRUDENTIAL MUTUAL FUND FAMILY......................................... A-1
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- -------------------------------------------
MF128A 4440464
Class A: 744339-10-2
Class B: 744339-20-1
Class C: 744339-30-0
CUSIP Nos.: Class Z: 744339-40-9
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[PRUDENTIAL GOVERNMENT INCOME FUND LOGO]
PROSPECTUS
MAY 1, 1997
[PRUDENTIAL INVESTMENTS LOGO]
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 1, 1997
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.
The Fund's address is Gateway Center Three, Newark, New Jersey 07102, and its telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be read in conjunction with the Fund's Prospectus, dated May 1, 1997, a copy of which may be obtained from the Fund at Gateway Center Three, Newark, New Jersey 07102.
TABLE OF CONTENTS
CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
---- ---------------
General Information................................... B-2 --
Investment Objective and Policies..................... B-2 9
Investment Restrictions............................... B-9 18
Directors and Officers................................ B-11 18
Manager............................................... B-15 18
Distributor........................................... B-17 19
Portfolio Transactions and Brokerage.................. B-20 21
Purchase and Redemption of Fund Shares................ B-21 25
Shareholder Investment Account........................ B-25 30
Net Asset Value....................................... B-28 22
Taxes, Dividends and Distributions.................... B-29 23
Performance Information............................... B-32 22
Custodian, Transfer and Dividend Disbursing Agent and
Independent Accountants.............................. B-34 21
Financial Statements.................................. B-35 --
Independent Auditors' Report.......................... B-48 --
Appendix I -- Historical Performance Data............. I-1 --
Appendix II -- General Investment Information......... II-1 --
Appendix III -- Information Relating to The
Prudential........................................... III-1 --
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MF-128B 444079V
GENERAL INFORMATION
At a special meeting held on July 19, 1994, shareholders approved an amendment to the Fund's Articles of Incorporation to change the Fund's name from Prudential-Bache Government Plus Fund, Inc. to Prudential Government Income Fund, Inc.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek a high current return. The Fund will seek a high current return primarily from interest income from U.S. Government securities, premiums from put and call options on U.S. Government securities and net gains from closing purchase and sale transactions with respect to options on U.S. Government securities. The Fund may also realize net gains from sales of portfolio securities. 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
MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT
INSTRUMENTALITIES. 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. 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 individual 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. 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.
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 a share 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: (i) fixed-rate level payment mortgage loans; (ii) fixed-rate graduated payment mortgage loans; (iii) fixed-rate growing equity mortgage loans; (iv) fixed-rate mortgage loans secured by manufactured (mobile) homes; (v) mortgage loans on multifamily residential properties under construction; (vi) mortgage loans on completed multifamily projects; (vii) fixed-rate mortgage loans as to which escrowed funds are used to reduce the borrower's monthly payments during the early years of the mortgage loans ("buydown" mortgage loans); (viii) mortgage loans that provide for adjustments in payments based on periodic changes in interest rates or in other payment terms of the mortgage loans; and (ix) mortgage-backed serial notes. All of these mortgage loans will be FHA Loans or VA Loans and, except as otherwise specified above, will be fully-amortizing loans secured by first liens on one-to-four-family housing units. Legislative changes may be proposed from time to time in relation to the Department of Housing and Urban Development which, if adopted, could alter the viability of investing in GNMAs. As of the date of this Statement of Additional Information, no such legislation has been effected. The Fund's adviser would re-evaluate the Fund's investment objectives and policies if any such legislative proposals were adopted.
GNMA GUARANTEE. The National Housing Act authorizes GNMA to guarantee the timely payment of principal and interest on securities backed by a pool of mortgages insured by the Federal Housing Administration (FHA) or the Farmers' Home Administration (FMHA), or guaranteed by the Veterans Administration (VA). 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. 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.
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.
COLLATERALIZED MORTGAGE OBLIGATIONS
Certain issuers of mortgage-backed obligations (CMOs), including certain CMOs that have elected to be treated as Real Estate Mortgage Investment Conduits (REMICs), are not considered investment companies pursuant to a rule adopted by the Securities and Exchange Commission (SEC), and the Fund may invest in the securities of such issuers without the limitations imposed by the Investment Company Act of 1940, as amended (the Investment Company Act) on investments by the Fund in other investment companies. In addition, in reliance on an earlier SEC interpretation, the Fund's investments in certain other qualifying CMOs, which cannot or do not rely on the rule, are also not subject to the limitation of the Investment Company Act on acquiring interests in other investment companies. In order to be able to rely on the SEC's interpretation, these CMOs must be unmanaged, fixed asset issuers, that (a) invest primarily in mortgage-backed securities, (b) do not issue redeemable securities, (c) operate under general exemptive orders exempting them from all provisions of the Investment Company Act and (d) are not registered or regulated under the Investment Company Act as investment companies. To the extent that the Fund selects CMOs or REMICs that cannot rely on the rule or do not meet the above requirements, the Fund may not invest more than 10% of its assets in all such entities and may not acquire more than 3% of the voting securities of any single such entity.
OTHER SECURITIES
The Fund will invest in foreign banks and foreign branches of U.S. banks only if after giving effect to such investments all such investments would constitute less than 10% of the Fund's total assets (determined at the time of investment). Investing in securities of foreign companies in foreign countries involves certain considerations and risks which are not typically associated with investing in U.S. Government securities and those of domestic companies. Foreign companies are not generally subject to uniform accounting, auditing and financial standards and requirements comparable to those applicable to U.S. companies. There may be less publicly available information about foreign companies and governments compared to reports and ratings published about U.S. companies. Securities of some foreign companies are less liquid and more volatile than securities of comparable U.S. companies, and brokerage commissions and other transaction costs on foreign securities exchanges are generally higher than in the United States.
OPTION WRITING AND RELATED RISKS
The Fund will write (I.E., 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
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. See "How the Fund Invests--Other Investment Information--Illiquid Securities" in the Prospectus. 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 with its Custodian in a segregated account cash, U.S. Government securities or other liquid, unencumbered assets marked-to-market daily 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 with its Custodian in a segregated account cash, U.S. Government securities, equity securities or other liquid, unencumbered 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, U.S. Government securities, equity securities or other liquid, unencumbered assets in a segregated account with its Custodian.
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. The Fund's turnover rate for the fiscal years ended February 29, 1996 and February 28, 1997 was 123% and 107%, respectively.
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 with its Custodian, 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.
RISKS PERTAINING TO THE SECONDARY MARKET. An option position may be closed out only on an Exchange which provides a secondary market for an option of the same series. Although the Fund will generally purchase or write only those options for which there appears to be an active secondary market, there is no assurance that a liquid secondary market on an Exchange will exist for any particular option at any particular time, and for some 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 may incur transaction costs in connection therewith. If the Fund as a covered call option writer is unable to effect a closing purchase transaction in a secondary market, it will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange include the following: (a) insufficient trading interest in certain options; (b) restrictions on transactions imposed by an Exchange; (c) trading halts, suspensions or other restrictions imposed with respect to particular classes or series of options or underlying securities; (d) interruption of the normal operations on an Exchange; (e) inadequacy of the facilities of an Exchange or the OCC to handle current trading volume; or (f) a decision by one or more Exchanges to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that Exchange (or in that class or series of options) would cease to exist, although outstanding options on that Exchange that had been issued by the OCC as a result of trades on that Exchange would generally continue to be exercisable in accordance with their terms.
The hours of trading for options on U.S. Government securities may not conform to the hours during which the underlying securities are traded. To the extent that the option markets close before the markets for the underlying securities, significant price and rate movements can take place in the underlying markets that cannot be reflected in the option markets.
FUTURES CONTRACTS 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.
CHARACTERISTICS. 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 with its Custodian 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.
OPTIONS ON FUTURES CONTRACTS
CHARACTERISTICS. An option on a futures contract gives the purchaser the right, but not the obligation, to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put) at a specified exercise price at any time during the 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 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, U.S. Government securities, equity securities or other liquid, unencumbered assets, marked-to-market daily, in a segregated account with its Custodian. The Fund is considered "covered" with respect to a put option it writes on a futures contract if it (a) segregates and maintains with its Custodian cash, U.S. Government securities, equity securities or other liquid, unencumbered assets, marked-to-market daily, 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, U.S. Government securities, equity securities or other liquid, unencumbered assets, marked-to-market daily, in a segregated account with its Custodian. 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.
REPURCHASE AGREEMENTS
The Fund's repurchase agreements will be collateralized by U.S. Government obligations. The Fund will enter into repurchase transactions only with parties meeting creditworthiness standards approved by the Fund's Board of Directors. The Fund's investment adviser will monitor the creditworthiness of such parties, under the general supervision of the Board of Directors. In the event of a default or bankruptcy by a seller, the Fund will promptly seek to liquidate the collateral. To the extent that the proceeds from any sale of such collateral upon a default in the obligation to repurchase are less than the repurchase price, the Fund will suffer a loss.
The Fund participates in a joint repurchase account with other investment companies managed by Prudential Investments Fund Management LLC (PIFM) pursuant to an order of the SEC. On a daily basis, any uninvested cash balances of the Fund may be aggregated with such of other investment companies and invested in one or more repurchase agreements. Each fund participates in the income earned or accrued in the joint account based on the percentage of its investment.
INTEREST RATE TRANSACTIONS
The Fund may enter into interest rate swaps, on either an asset-based or liability-based basis, depending on whether it is hedging its assets or its liabilities. Under normal circumstances, the Fund will enter into interest rate swaps on a net basis, I.E., the two payment streams netted out, with the Fund receiving or paying, as the case may be, only the net amount of the two payments. The net amount of 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, U.S. Government securities or other liquid unencumbered assets, marked-to-market daily having an aggregate net asset value at least equal to the accrued excess will be maintained in a segregated account by a custodian that satisfies the requirements of the Investment Company Act. To the extent that the Fund enters into interest rate swaps on other than a net basis, the amount maintained in a segregated account will be the full amount of the Fund's obligations, if any, with respect to such interest rate swaps, accrued on a daily basis. Inasmuch as segregated accounts are established for these hedging transactions the investment adviser and the Fund believe such obligations do not constitute senior securities. If there is a default by the other party to such a transaction, the Fund will have contractual remedies pursuant to the agreement related to the transaction. The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. As a result, the swap market has become relatively liquid. The Fund will enter into interest rate swaps only with parties meeting creditworthiness standards approved by the Fund's Board of Directors. The investment adviser will monitor the creditworthiness of such parties under the supervision of the Board of Directors.
The use of interest rate swaps is 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 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.
ILLIQUID SECURITIES
The Fund may hold up to 15% of its net assets in repurchase agreements which have a maturity of longer than seven days or in other illiquid securities, including securities that are illiquid by virtue of the absence of a readily available market (either within or outside of the United States) or legal or contractual restrictions on resale. Historically, illiquid securities have included securities subject to contractual or legal restrictions on resale because they have not been registered under the Securities Act of 1933, as amended (Securities Act), securities which are otherwise not readily marketable and repurchase agreements having a maturity of longer than seven days. Securities which have not been registered under the Securities Act are referred to as private placements or restricted securities and are purchased directly from the issuer or in the secondary market. Mutual funds do not typically hold a significant amount of these restricted or other illiquid securities because of the potential for delays on resale and uncertainty in valuation. Limitations on resale may have an adverse effect on the marketability of portfolio securities and a mutual fund might be unable to dispose of restricted or other illiquid securities promptly or at reasonable prices and might thereby experience difficulty satisfying redemptions within seven days. A mutual fund might also have to register such restricted securities in order to dispose of them resulting in additional expense and delay. Adverse market conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed for certain securities that are not registered under the Securities Act including repurchase agreements, commercial paper, foreign securities, municipal securities and corporate bonds and notes. Institutional investors depend on an efficient institutional market in which the unregistered security can be readily resold or on an issuer's ability to honor a demand for repayment. The fact that there are contractual or legal restrictions on resale to the general public or to certain institutions may not be indicative of the liquidity of such investments.
Rule 144A of the Securities Act allows for a broader institutional trading market for securities otherwise subject to restriction on resale to the general public. Rule 144A establishes a "safe harbor" from the registration requirements of the Securities Act for resales of certain securities to qualified institutional buyers. The investment adviser anticipates that the market for certain restricted securities such as institutional commercial paper, convertible securities and foreign securities will expand further as a result of this regulation and the development of automated systems for the trading, clearance and settlement of unregistered securities of domestic and foreign issuers, such as the PORTAL System sponsored by the National Association of Securities Dealers, Inc. (NASD).
Restricted securities eligible for resale pursuant to Rule 144A under the Securities Act and commercial paper for which there is a readily available market will not be deemed to be illiquid. The investment adviser will monitor the liquidity of such restricted securities subject to the supervision of the Board of Directors. In reaching liquidity decisions, the investment adviser will consider, INTER ALIA, the following factors: (1) the frequency of trades and quotes for the security; (2) the number of dealers wishing to purchase or sell the security and the number of other potential purchasers; (3) dealer undertakings to make a market in the security and (4) the nature of the security and the nature of the marketplace trades (E.G., the time needed to dispose of the security, the method of soliciting offers and the mechanics of the transfer). In addition, in order for commercial paper that is issued in reliance on Section 4(2) of the Securities Act to be considered liquid, (i) it must be rated in one of the two highest rating categories by at least two nationally recognized statistical rating organizations (NRSRO), or if only one NRSRO rates the securities, by that NRSRO, or, if unrated, be of comparable quality in the view of the investment adviser; and (ii) it must not be "traded flat" (I.E., without accrued interest) or in default as to principal or interest. Repurchase agreements subject to demand are deemed to have a maturity equal to the notice period.
The staff of the SEC has also taken the position that purchased OTC options and the assets used as "cover" for written OTC options are illiquid securities unless the Fund and the counterparty have provided for the Fund, at 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."
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies are those which cannot be changed without the approval of the holders of a majority of the Fund's outstanding voting securities. A "majority of the Fund's outstanding voting securities," when used in this Statement of Additional Information, means the lesser of (i) 67% of the voting shares represented at a meeting at which more than 50% of the outstanding voting shares are present in person or represented by proxy or (ii) more than 50% of the outstanding voting shares.
The Fund may not:
1. Purchase securities on margin (but the Fund may obtain such short-term credits as may be necessary for the clearance of transactions); 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.
DIRECTORS AND OFFICERS
PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE(1) POSITION WITH FUND DURING PAST FIVE YEARS
- ----------------------------- ----------------------- ----------------------------------------------------------
Edward D. Beach (72) Director President and Director of BMC Fund, Inc., a closed-end
investment company; prior thereto, Vice Chairman of
Broyhill Furniture Industries, Inc.; Certified Public
Accountant; Secretary and Treasurer of Broyhill Family
Foundation, Inc.; Member of the Board of Trustees of Mars
Hill College; President, Treasurer and Director of The
High Yield Income Fund, Inc.
Eugene C. Dorsey (69) Director Retired President, Chief Executive Officer and Trustee of
the Gannett Foundation (now Freedom Forum); former
Publisher of four Gannett newspapers and Vice President
of Gannett Company; past Chairman of Independent Sector
(national coalition of philanthropic organizations);
former Chairman of the American Council for the Arts;
Director of the Advisory Board of Chase Manhattan Bank of
Rochester and The High Yield Income Fund, Inc.
Delayne Dedrick Gold (58) Director Marketing and Management Consultant; Director of The High
Yield Income Fund, Inc.
*Robert F. Gunia (50) Director Comptroller (since May 1996), Prudential Investments;
Executive Vice President and Treasurer (since December
1996), PIFM; Senior Vice President (since March 1987) of
Prudential Securities Incorporated (Prudential
Securities); formerly Chief Administrative Officer (July
1990-September 1996), Director (January 1989-September
1996) and Executive Vice President, Treasurer and Chief
Financial Officer (June 1987-September 1996) of
Prudential Mutual Fund Management, Inc. (PMF); Vice
President and Director of The Asia Pacific Fund, Inc.
(since May 1989); Director of The High Yield Income Fund,
Inc.
*Harry A. Jacobs, Jr. (75) Director Senior Director (since January 1986) of Prudential
One Seaport Plaza Securities; formerly Interim Chairman and Chief Executive
New York, NY 10292 Officer of PMF (June-September 1993); formerly Chairman
of the Board of Prudential Securities (1982-1985) and
Chairman of the Board and Chief Executive Officer of
Bache Group Inc. (1977-1982); Trustee of The Trudeau
Institute; Director of The First Australia Fund, Inc.,
The First Australia Prime Income Fund, Inc and The High
Yield Income Fund, Inc.
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* "Interested" director, as defined in the Investment Company Act, by reason of his affiliation with Prudential Securities, Prudential or PIFM.
PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE(1) POSITION WITH FUND DURING PAST FIVE YEARS
- ----------------------------- ----------------------- ----------------------------------------------------------
Donald D. Lennox(78) Director Chairman (since February 1990) and Director (since April
1989) of International Imaging Materials, Inc.; Retired
Chairman, Chief Executive Officer and Director of Shlegel
Corporation (industrial manufacturing) (March
1987-February 1989); Director of Gleason Corporation and
The High Yield Fund, Inc.
*Mendel A. Melzer CFA (36) Director Chief Investment Officer (since October 1996) of
751 Broad Street Prudential Mutual Funds; formerly Chief Financial Officer
Newark, NJ 07102 of Prudential Investments (November 1995-September 1996),
Senior Vice President and Chief Financial Officer of
Prudential Preferred Financial Services (April
1993-November 1995), Managing Director of Prudential
Investment Advisors (April 1991-April 1993) and Senior
Vice President of Prudential Capital Corporation (July
1989-April 1991); Director of the High Yield Income Fund,
Inc.
Thomas T. Mooney (55) Director President of the Greater Rochester Metro Chamber of
Commerce; former Rochester City Manager; Trustee of
Center for Governmental Research, Inc.; Director of Blue
Cross of Rochester, Monroe County Water Authority,
Rochester Jobs, Inc., Northeast-Midwest Institute,
Executive Service Corps of Rochester, Monroe County
Industrial Development Corporation, First Financial Fund,
Inc. and The High Yield Income Fund, Inc.
Thomas H. O'Brien (72) Director President, O'Brien Associates (financial and management
consultants) (since April 1984); formerly President of
Jamaica Water Securities Corp. (holding company)
(February 1989-August 1990); Chairman and Chief Executive
Officer (September 1987-February 1989) and Director
(September 1987-August 1990) of Jamaica Water Supply
Company; Director of Ridgewood Savings Bank; Trustee of
Hofstra University.
*Richard A. Redeker (53) Director and President Employee of PIFM; formerly President, Chief Executive
751 Broad Street Officer and Director (since October 1993), PMF; Executive
Newark, N.J. 07102 Vice President, Director and Member of the Operating
Committee (since October 1993), Prudential Securities;
Director (since October 1993) of Prudential Securities
Group, Inc. (PSG); Executive Vice President, The
Prudential Investment Corporation (since July 1994);
Director (since January 1994) of Prudential Mutual Fund
Distributors, Inc. (PMFD) and Prudential Mutual Fund
Services, Inc. (PMFS); formerly Senior Executive Vice
President and Director of Kemper Financial Services, Inc.
(September 1978-September 1993); Director and President
of The Global Yield Fund, Inc.
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* "Interested" director, as defined in the Investment Company Act, by reason of his affiliation with Prudential Securities, Prudential or PIFM.
PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE(1) POSITION WITH FUND DURING PAST FIVE YEARS
- ----------------------------- ----------------------- ----------------------------------------------------------
Nancy H. Teeters (66) Director Economist; formerly Vice President and Chief Economist of
International Business Machines Corporation (March
1986-June 1990); Director of Inland Steel Industries
(since July 1991) and the High Yield Income Fund, Inc.
Louis A. Weil, III (55) Director President and Chief Executive Officer (since January 1996)
and Director (since September 1991) of Central
Newspapers, Inc.; Chairman (since January 1996),
Publisher and Chief Executive Officer of Phoenix
Newspapers, Inc. (August 1991-December 1995), prior
thereto, Publisher of Time Magazine (May 1989-March
1991); formerly President, Publisher and Chief Executive
Officer of the Detroit News (February 1986-August 1989);
formerly member of the Advisory Board, Chase Manhattan
Bank-Westchester, Director of the High Yield Income Fund,
Inc.
Susan C. Cote (42) Vice President Executive Vice President (since February 1997) and Chief
Financial Officer (since May 1996) of PMF; formerly
Managing Director of Prudential Investments and Vice
President, The Prudential Investment Corporation
(February 1995-May 1966), Senior Vice President (January
1989-Janurary 1995) of Prudential Mutual Fund Management,
Inc., and Senior Vice President (January 1992-January
1995) of Prudential Securities.
Thomas A. Early (42) Vice President Executive Vice President, Secretary and General Counsel of
PMF (since December 1996); Vice President and General
Counsel, Prudential Retirement Services (since March
1994); formerly Associate General Counsel and Chief
Financial Services Officer, Frank Russel Company
(1988-1994).
Eugene S. Stark (39) Treasurer and Principal First Vice President (since September 1996) of PMF;
Financial and formerly, First Vice President of Prudential Mutual Fund
Accounting Officer Management, Inc.
Stephen M. Ungerman (44) Assistant Treasurer Tax Director of Prudential Investments and the Private
Asset Group of The Prudential Insurance Company of
America (since March 1996); First Vice President (since
February 1993) of PMF; formerly First Vice President of
Prudential Mutual Fund Management, Inc. (February
1993-September 1996); prior thereto, Senior Tax Manager
at Price Waterhouse LLP (1981-January 1993).
S. Jane Rose (51) Secretary Senior Vice President (since December 1996) of PMF;
formerly Senior Vice President (January 1991-September
1996) and Senior Counsel (June 1987-September 1996) of
Prudential Mutual Fund Management, Inc.; Senior Vice
President and Senior Counsel of Prudential Securities
(since July 1992); formerly Vice President and Associate
General Counsel of Prudential Securities.
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PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE(1) POSITION WITH FUND DURING PAST FIVE YEARS
- ----------------------------- ----------------------- ----------------------------------------------------------
Deborah A. Docs (39) Assistant Secretary Vice President (since December 1996) of PMF; formerly Vice
President and Associate General Counsel (June
1991-September 1996) of Prudential Mutual Fund
Management, Inc.; Vice President and Associate General
Counsel of Prudential Securities.
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(1) Unless otherwise noted the address for each of the above persons is c/o:
Prudential Investments Fund Management LLC, Gateway Center Three, 100
Mulberry Street, 9th Floor, Newark, New Jersey 07102-4077.
Directors and officers of the Fund are also trustees, directors and officers of some or all of the other investment companies distributed by Prudential Securities.
The officers conduct and supervise the daily business operations of the Fund, while the Directors, in addition to their functions set forth under "Manager" and "Distributor," review such actions and decide on general policy.
The Fund pays each of its Directors who is not an affiliated person of the Manager annual compensation of $5,500, in addition to certain out-of-pocket expenses. The amount of annual compensation paid to each Director may change as a result of the introduction of additional funds upon which the Director may be asked to serve.
Directors may receive their Directors' fees pursuant to a deferred fee arrangement with the Fund. Under the terms of the agreement, the Fund accrues daily the amount of Directors' fees which accrue interest at a rate equivalent to the prevailing rate applicable to 90-day U.S. Treasury Bills at the beginning of each calendar quarter or at the daily rate of the Fund. Payment of the interest so accrued is also deferred and accruals become payable at the option of the Director. The Fund's obligation to make payments of deferred Directors' fees, together with interest thereon, is a general obligation of the Fund.
The 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 72, except that retirement is being phased in for Directors who were age 68 or older as of December 31, 1993. Under this phase-in provision, Messrs. Beach, Jacobs, Lennox and O'Brien are scheduled to retire on December 31, 1999, 1998, 1997 and 1999, respectively.
Pursuant to the terms of the Management Agreement with the Fund, the Manager pays all compensation of officers and employees of the Fund as well as the fees and expenses of all Directors of the Fund who are affiliated persons of the Manager.
The following table sets forth the aggregate compensation paid by the Fund for the fiscal year ended February 28, 1997 to the Directors who are not affiliated with the Manager and the aggregate compensation paid to such Directors for service on the Fund's Board and the Board of any other investment companies managed by Prudential Mutual Fund Management, Inc. (Fund Complex) for the calender year ended December 31, 1996. In October 1996, shareholders elected a new Board of Directors. Below are listed all Directors who have served the Fund during its most recent fiscal year as well as the new Directors who took office after the shareholders' meeting in October.
COMPENSATION TABLE
PENSION OR
RETIREMENT TOTAL COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM FUND AND FUND
COMPENSATION AS PART OF FUND BENEFITS UPON COMPLEX PAID TO
NAME AND POSITION FROM FUND EXPENSES RETIREMENT DIRECTORS
- ---------------------------------------------- ------------- ----------------- ------------------- ------------------
Edward D. Beach, Director -- None N/A $ 166,000(21/39)*
Eugene C. Dorsey, Director** -- None N/A $ 98,583(12/36)*
Delayne Dedrick Gold, Director $ 9,200 None N/A $ 175,308(21/42)*
Robert F. Gunia, Director+ -- None N/A --
Arthur Hauspurg, Former Director $ 9,000 None N/A $ 38,250(5/7)*
Harry A. Jacobs, Jr., Director+ -- None N/A --
Donald D. Lennox, Director -- None N/A $ 90,000(10/22)*
Mendel A. Melzer, Director+ -- None N/A --
Thomas T. Mooney, Director** -- None N/A $ 135,375(18/36)*
Stephen P. Munn, Former Director $ 9,000 None N/A $ 49,125(6/8)*
Thomas H. O'Brien, Director -- None N/A $ 32,250(5/20)*
Richard A. Redeker, Director and President+ -- None N/A --
Nancy H. Teeters, Director -- None N/A $ 103,583(11/28)*
Louis A. Weil, III, Director $ 9,000 None N/A $ 91,250(13/18)*
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* Indicates number of funds/portfolios in Fund Complex (including the Fund) to which aggregate compensation relates.
+ Robert F. Gunia, Harry A. Jacobs, Jr., Mendel A. Melzer and Richard A. Redeker, who are each interested Directors, do not receive compensation from the Fund or any fund in the Fund Complex.
** Total compensation from all of the funds in the Fund Complex for the calendar year ended December 31, 1996, includes amounts deferred at the election of Directors under the Fund's deferred compensation plans. Including accrued interest, total compensation amounted to $111,535 and $139,869 for Eugene C. Dorsey and Thomas T. Mooney, respectively.
As of April 11, 1997, the Directors and officers of the Fund, as a group, owned less than 1% of the outstanding shares of the Fund.
As of April 11, 1997, the only beneficial owners, directly or indirectly of more than 5% of any class of shares of the Fund were: Anthony Tarantino and Frances Tarantino JTTEN, 656 Guy Lombardo Avenue, Freeport, New York who held 15,359 Class C shares(approximately 5% of the outstanding Class C shares); Prudential Insurance Company, Attn: Jay Duffy, 30 Scranton Office Park, Moosic, PA 18507-1774, who held 5,486,394 Class Z shares (approximately 65% of the outstanding Class Z shares); and Prudential Trust Co., Attn: John Stardy, 30 Scranton Office Park, Moosic, PA 18507-1774 who held 1,361,626 Class Z shares (approximately 16% of the outstanding Class Z shares).
As of April 11, 1997, Prudential Securities was the record holder for other beneficial owners of 59,806,821 Class A shares (or 60% of the outstanding Class A shares), 24,784,199 Class B shares (or 51% of the outstanding Class B shares), 188,969 Class C shares (or 65% of the outstanding Class C shares) and 13,821 Class Z shares (or .1% 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.
MANAGER
The manager of the Fund is Prudential Investments Fund Management LLC (PIFM or the Manager), Gateway Center Three, Newark, New Jersey 07102. PIFM 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 March 31, 1997, PIFM managed and/or administered open-end and closed-end management investment companies with assets of approximately $54.9 billion. According to the Investment Company Institute, as of December 31, 1996, the Prudential Mutual Funds were the 15th largest family of mutual funds in the United States.
PIFM is a subsidiary of Prudential Securities Incorporated and The Prudential Insurance Company of America (Prudential). Prudential Mutual Fund Services LLC (PMFS or the Transfer Agent), a wholly owned subsidiary of PIFM, serves as the transfer agent for the Prudential Mutual Funds and, in addition, provides customer service, record keeping and management and administration services to qualified plans.
Pursuant to the Management Agreement with the Fund (the Management Agreement), PIFM, 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. In connection therewith, PIFM is obligated to keep certain books and records of the Fund. PIFM also administers the Fund's corporate affairs and, in connection therewith, furnishes the Fund with office facilities, together with those ordinary clerical and bookkeeping services which are not being furnished by State Street Bank and Trust Company, the Fund's custodian, and PMFS, the Fund's transfer and dividend disbursing agent. The management services of PIFM for the Fund are not exclusive under the terms of the Management Agreement and PIFM is free to, and does, render management services to others.
For its services, PIFM receives, pursuant to the Management Agreement, a fee at an annual rate of .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 PIFM, 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 PIFM will be reduced by the amount of such excess. Reductions in excess of the total compensation payable to PIFM will be paid by PIFM to the Fund. No such reductions were required during the fiscal year ended February 28, 1997. Currently, the Fund believes there are no such restrictions.
In connection with its management of the corporate affairs of the Fund, PIFM bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel except the fees and expenses of Directors who are not affiliated persons of PIFM or the Fund's investment adviser;
(b) all expenses incurred by PIFM or by the Fund in connection with managing the ordinary course of the Fund's business, other than those assumed by the Fund as described below; and
(c) the costs and expenses payable to The Prudential Investment Corporation (PIC) pursuant to the subadvisory agreement between PIFM and PIC (the Subadvisory Agreement).
Under the terms of the Management Agreement, the Fund is responsible for the payment of the following expenses: (a) the fees payable to the Manager, (b) the fees and expenses of Directors who are not affiliated persons of the Manager or the Fund's investment adviser, (c) the fees and certain expenses of the Custodian and Transfer and Dividend Disbursing Agent, including the cost of providing records to the Manager in connection with its obligation of maintaining required records of the Fund and of pricing the Fund's shares, (d) the charges and expenses of legal counsel and independent accountants for the Fund, (e) brokerage commissions and any issue or transfer taxes chargeable to the Fund in connection with its securities transactions, (f) all taxes and corporate fees payable by the Fund to governmental agencies, (g) the fees of any trade associations of which the Fund may be a member, (h) the cost of stock certificates representing shares of the Fund, (i) the cost of fidelity and liability insurance, (j) the fees and expenses involved in registering and maintaining registration of the Fund and of its shares with the SEC, registering the Fund and qualifying its shares under state securities laws, including the preparation and printing of the Fund's registration statements and prospectuses for such purposes, (k) allocable communications expenses with respect to investor services and all expenses of shareholders' and Directors' meetings and of preparing, printing and mailing reports, proxy statements and prospectuses to shareholders in the amount necessary for distribution to the shareholders, (l) litigation and indemnification expenses and other extraordinary expenses not incurred in the ordinary course of the Fund's business and (m) distribution fees.
The Management Agreement provides that PIFM will not be liable for any error of judgment or for any loss suffered by the Fund in connection with the matters to which the Management Agreement relates, except a loss resulting from willful
misfeasance, bad faith, gross negligence or reckless disregard of duty. The Management Agreement provides that it will terminate automatically if assigned, and that it may be terminated without penalty by either party upon not more than 60 days' nor less than 30 days' written notice. The Management Agreement will continue in effect for a period of more than two years from the date of execution only so long as such continuance is specifically approved at least annually in conformity with the Investment Company Act. The Management Agreement was last approved by the Board of Directors, including a majority of the Directors who are not parties to the contract or interested persons of any such party as defined in the Investment Company Act, on April 10, 1996 and by the shareholders of the Fund on March 30, 1988.
For the fiscal years ended February 28, 1997, February 29, 1996 and February 28, 1995, the Fund paid management fees to PIFM or its predecessors of $7,351,081, $7,787,246 and $9,155,193, respectively.
PIFM has entered into the Subadvisory Agreement with PIC (the Subadviser), a wholly-owned subsidiary of Prudential. The Subadvisory Agreement provides that PIC will furnish investment advisory services in connection with the management of the Fund. In connection therewith, PIC is obligated to keep certain books and records of the Fund. PMF continues to have responsibility for all investment advisory services pursuant to the Management Agreement and supervises PIC's performance of such services. PIC is reimbursed by PIFM for the reasonable costs and expenses incurred by PIC in furnishing those services. Investment advisory services are provided to the Fund by a unit of the Subadviser, known as Prudential Mutual Fund Investment Management.
The Subadvisory Agreement was last approved by the Board of Directors, including a majority of the Directors who are not parties to the contract or interested persons of any such party as defined in the Investment Company Act, on April 10, 1996, and by shareholders of the Fund on March 30, 1988.
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, PIFM or PIC upon not more than 60 days', nor less than 30 days', written notice. The Subadvisory Agreement provides that it will continue in effect for a period of more than two years from its execution only so long as such continuance is specifically approved at least annually in accordance with the requirements of the Investment Company Act.
DISTRIBUTOR
Prudential Securities Incorporated, One Seaport Plaza, New York, New York 10292 (Prudential Securities or PSI), acts as the distributor of the shares of the Fund. Prior to January 2, 1996, Prudential Mutual Fund Distributors, Inc. (PMFD), One Seaport Plaza, New York, New York 10292, acted as distributor of the Class A shares of the Fund.
Pursuant to separate Plans of Distribution (the Class A Plan, the Class B Plan and the Class C Plan, collectively, the Plans) adopted by the Fund under Rule 12b-1 under the Investment Company Act and a distribution agreement (the Distribution Agreement), Prudential Securities (the Distributor) incurs the expenses of distributing the Fund's Class A, Class B and Class C shares. Prudential Securities 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.
On April 10, 1996, the Board of Directors, including a majority of the
Directors who are not interested persons of the Fund and who have no direct or
indirect financial interest in the operation of the Class A Plan, Class B Plan
or Class C Plan or in any agreement related to any Plan (the Rule 12b-1
Directors), at a meeting called for the purpose of voting on each Plan, approved
the continuance of the Plans and Distribution Agreement. The Class A Plan
provides that (i) up to .25 of 1% of the average daily net assets of the Class A
shares may be used to pay for personal service and the maintenance of
shareholder accounts (service fee) and (ii) total distribution fees (including
the service fee of up to .25 of 1%) may not exceed .30 of 1%. The Class B Plan
provides that (i) up to .25 of 1% of the average daily net assets of the Class B
shares may be paid as a service fee and (ii) up to .75 of 1% of the average
daily net assets 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 (not including the
service fee) may be used for distribution-related expenses with respect to the
Class B shares. The Class C Plan provides that (i) up to .25 of 1% of the
average daily net assets of the Class C shares may be paid as a service fee and
(ii) up to .75 of 1% (not including the service fee) may be used for
distribution-related expenses with respect to the Class C shares. The Class A
Plan was approved by Class A and Class B shareholders, and the Class B Plan was
approved by Class B shareholders on July 19, 1994. The Class C Plan was approved
by the sole shareholder of Class C shares on August 1, 1994.
CLASS A PLAN. For the fiscal year ended February 28, 1997, PSI received payments of $1,327,293 under the Class A Plan. This amount was primarily expended for payment of account servicing fees to financial advisers and other persons who sell Class A shares. For the fiscal year ended February 28, 1997, PSI also received approximately $186,000 in initial sales charges.
CLASS B PLAN. For the fiscal year ended February 28, 1997, Prudential Securities received $4,486,320 from the Fund under the Class B Plan and spent approximately $1,823,000 in distributing the Class B shares of the Fund. It is estimated that of the latter amount, approximately $41,000 (2.2%) was spent on printing and mailing of prospectuses to other than current shareholders, $517,100 (28.4%) on compensation to Pruco Securities Corporation, an affiliated broker-dealer, 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 $1,264,900 (69.4%) on the aggregate of (i) payment of commissions and account servicing fees to financial advisers ($794,100 or 43.6%), and (ii) an allocation on account of overhead and other branch office distribution-related expenses ($470,800 or 25.8%). The term "overhead and other branch office distribution-related expenses" represents (a) the expenses of operating branch offices of Prusec and Prudential Securities 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.
Prudential Securities also receives the proceeds of contingent deferred sales charges paid by investors upon certain redemptions of Class B shares. See "Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges" in the Prospectus. For the fiscal year ended February 28, 1997, Prudential Securities received approximately $1,200,800 in contingent deferred sales charges attributable to the Class B shares.
CLASS C PLAN. For the fiscal year ended February 28, 1997, Prudential
Securities received $18,299 from the Fund under the Class C Plan and spent
approximately $15,300 in distributing the Fund's Class C shares. It is estimated
that of the latter amount approximately $2,200 (14.6%) was spent on printing and
mailing of prospectuses to other than current shareholders; $1,500 (9.9%) on
compensation to Pruco Securities Corporation, an affiliated broker-dealer, for
commissions to its representatives and other expenses, including an allocation
of overhead and other branch office distribution-related expenses, incurred by
it for distribution of Fund shares; $11,600 (75.5%) on the aggregate of (i)
payments of commission and account servicing fees to financial advisors $7,700
(50.3%) and (ii) an allocation of overhead and other branch office
distribution-related expenses $3,900 (25.2%). The term "overhead and other
branch office distribution-related expenses" represents (a) the expenses of
operating Prudential Securities' branch offices in connection with the sale of
Fund shares, including lease costs, the salaries and employee benefits of
operations and sales support personnel, utility costs, communications costs and
the costs of stationery and supplies, (b) the costs of client sales seminars,
(c) expenses of mutual fund sales coordinators to promote the sale of Fund
shares and (d) other incidental expenses relating to branch promotion of Fund
sales.
Prudential Securities also receives the proceeds of contingent deferred sales charges paid by holders of Class C shares upon certain redemptions of Class C shares. See "Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges" in the Prospectus. For the fiscal year ended February 28, 1997, Prudential Securities received approximately $2,100 in contingent deferred sales charges attributable to Class C shares.
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 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 Prudential Securities to the extent permitted by applicable law against certain liabilities under the Securities Act. On November 3, 1995, the Board of Directors approved the transfer of the Distribution Agreement for Class A shares with PMFD to Prudential Securities, and on April 10, 1996, the Board of Directors, including a majority of the Rule 12b-1 Directors, approved a restated distribution agreement between the Fund and Prudential Securities relating to all four classes of shares.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC, state securities regulators in 51 jurisdictions and the NASD to resolve allegations that PSI sold interests in more than 700 limited partnerships (and a limited number of other types of securities) from January 1, 1980 through December 31, 1990, in violation of securities laws to persons for whom such securities were not suitable in light of the individuals' financial condition or investment objectives. It was also alleged that the safety, potential returns and liquidity of the investments had been misrepresented. The limited partnerships principally involved real estate, oil and gas producing properties and aircraft leasing ventures. The SEC Order (i) included findings that PSI's conduct violated the federal securities laws and that an order issued by the SEC in 1986 requiring PSI to adopt, implement and maintain certain supervisory procedures had not been complied with; (ii) directed PSI to cease and desist from violating the federal securities laws and imposed a $10 million civil penalty; and (iii) required PSI to adopt certain remedial measures including the establishment of a Compliance Committee of its Board of Directors. Pursuant to the terms of the SEC settlement, PSI established a settlement fund in the amount of $330,000,000 and procedures, overseen by a court approved Claims Administrator, to resolve legitimate claims for compensatory damages by purchasers of the partnership interests. PSI has agreed to provide additional funds, if necessary, for that purpose. PSI's settlement with the state securities regulators included an agreement to pay a penalty of $500,000 per jurisdiction. PSI consented to a censure and to the payment of a $5,000,000 fine in settling the NASD action. In settling the above referenced matters, PSI neither admitted nor denied the allegations asserted against it.
On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a Parallel Consent Order by the Texas Securities Commissioner. The firm also entered into a related agreement with the Texas Securities Commissioner. The allegations were that the firm had engaged in improper sales practices and other improper conduct resulting in pecuniary losses and other harm to investors residing in Texas with respect to purchases and sales of limited partnership interests during the period of January 1, 1980 through December 31, 1990. Without admitting or denying the allegations, PSI consented to a reprimand, agreed to cease and desist from future violations, and to provide voluntary donations to the State of Texas in the aggregate amount of $1,500,000. The firm agreed to suspend the creation of new customer accounts, the general solicitation of new accounts, and the offer for sale of securities in or from PSI's North Dallas office to new customers during a period of twenty consecutive business days, and agreed that its other Texas offices would be subject to the same restrictions for a period of five consecutive business days. PSI also agreed to institute training programs for its securities salesmen in Texas.
On October 27, 1994, Prudential Securities Group, Inc. (PSG) and PSI entered into agreements with the United States Attorney deferring prosecution (provided PSI complies with the terms of the agreement for three years) for any alleged criminal activity related to the sale of certain limited partnership programs from 1983 to 1990. In connection with these agreements, PSI agreed to add the sum of $330,000,000 to the Fund established by the SEC and executed a stipulation providing for a reversion of such funds to the United States Postal Inspection Service. PSI further agreed to obtain a mutually acceptable outside director to sit on the Board of Directors of PSG and the Compliance Committee of PSI. The new director will also serve as an independent "ombudsman" whom PSI employees can call anonymously with complaints about ethics and compliance. Prudential Securities shall report any allegations or instances of criminal conduct and material improprieties to the new director. The new director will submit compliance reports which shall identify all such allegations or instances of criminal conduct and material improprieties every three months for a three-year period.
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 reinvestment of dividends and distributions are not included in the
calculation of the 6.25% limitation. The annual asset-based sales charge on shares of the Fund may not exceed .75 of 1% per class. The 6.25% limitation applies to the Fund rather than on a per shareholder basis. If aggregate sales charges were to exceed 6.25% of total gross sales of shares of any class, all sales charges on shares of that class would be suspended.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities, futures contracts and options 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, if any. For purposes of this section, the term "Manager" includes the Subadviser. 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.
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 Prudential Securities or its affiliates acting as principal with respect to any part of the Fund's order.
Portfolio securities may not be purchased from any underwriting or selling syndicate of which Prudential Securities or 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 SEC. This limitation, in the opinion of the Fund, will not significantly affect the Fund's ability to pursue its present investment objective. However, in the future in other circumstances, the Fund may be at a disadvantage because of this limitation in comparison to other funds with similar objectives but not subject to such limitations.
In placing orders for portfolio securities of the Fund, the Manager is required to give primary consideration to obtaining the most favorable price and efficient execution. Within the framework of this policy, the Manager will consider the research and investment services provided by brokers, dealers or futures commission merchants who effect or are parties to portfolio transactions of the Fund, the Manager or the Manager's other clients. Such research and investment services are those which brokerage houses customarily provide to institutional investors and include statistical and economic data and research reports on particular companies and industries. Such services are used by the Manager in connection with all of its investment activities, and some of such services obtained in connection with the execution of transactions for the Fund may be used in managing other investment accounts. Conversely, brokers, dealers or futures commission merchants furnishing such services may be selected for the execution of transactions of such other accounts, whose aggregate assets are far larger than the Fund's, and the services furnished by such brokers, dealers or futures commission merchants may be used by the Manager in providing investment management for the Fund. Commission rates are established pursuant to negotiations with the broker, dealer or futures commission merchant based on the quality and quantity of execution services provided by the broker 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, Prudential Securities may act as a broker or futures commission merchant for the Fund. In order for Prudential Securities (or any affiliate) to effect any portfolio transactions for the Fund, the commissions, fees or other remuneration received by Prudential Securities (or any affiliate) must be reasonable and fair compared to the commissions, fees or other remuneration paid to other such brokers or futures commission merchants 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 Prudential Securities (or any affiliate) to receive no more than the remuneration which would be expected to be received by an unaffiliated broker or futures commission merchant in a commensurate arms-length transaction. Furthermore, the Board of Directors of the Fund, including a majority of the non-interested Directors, has adopted procedures which are reasonably designed to provide that any commissions, fees or other remuneration paid to Prudential Securities (or any affiliate) are consistent with the foregoing standard. In accordance with Section 11(a) 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 Prudential Securities (or any affiliate) are also subject to such fiduciary standards as may be imposed upon Prudential Securities (or such affiliate) by applicable law.
During the fiscal years ended February 28, 1997, February 29, 1996 and February 28, 1995, the Fund paid no brokerage commissions to Prudential Securities.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share plus a sales charge which, at the election of the
investor, may be imposed either (i) at the time of purchase (Class A shares), or
(ii) 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 "Shareholder Guide--How to Buy Shares of the Fund" in the
Prospectus.
Each class represents an interest in the same assets of the Fund and is identical in all respects except that (i) each class is subject to different sales charges and distribution and/or service expenses which may affect performance, (ii) 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, (iii) each class has a different exchange privilege, (iv) only Class B shares have a conversion feature and (v) Class Z shares are offered exclusively for sale to a limited group of investors. See "Distributor" and "Shareholder Investment Account--Exchange Privilege."
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the Distributor, Class A shares are sold at a maximum sales charge of 4%, and Class B*, Class C* and Class Z shares are sold at net asset value. Using the Fund's net asset value at February 28, 1997, the maximum offering price of the Fund's shares is as follows:
CLASS A
Net asset value and redemption price per Class A share............. $ 8.76
Maximum sales charge (4% of offering price)........................ .37
---------
Offering price to public........................................... $ 9.13
---------
---------
CLASS B
Net asset value, offering price and redemption price per Class B
share*........................................................... $ 8.77
---------
---------
CLASS C
Net asset value, offering price and redemption price per Class C
share*........................................................... $ 8.77
---------
---------
CLASS Z
Net asset value, offering price and redemption price per Class Z
share............................................................ $ 8.76
---------
---------
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* Class B and Class C shares are subject to a contingent deferred sales charge on certain redemptions. See "Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges" in the Prospectus.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or eligible group of related investors purchases Class A shares of the Fund concurrently with Class A shares of other Prudential Mutual Funds, the purchases may be combined to take advantage of the reduced sales charges applicable to larger purchases. See the table of breakpoints under "Shareholder Guide--Alternative Purchase Plan" in the Prospectus.
An eligible group of related Fund investors includes any combination of the following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or group that holds 25% or more of the outstanding voting securities of a corporation will be deemed to control the corporation, and a partnership will be deemed to be controlled by each of its general partners);
(e) a trust created by the individual, the beneficiaries of which are the individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account created by the individual or the individual's spouse; and
(g) one or more employee benefit plans of a company controlled by an individual.
In addition, an eligible group of related Fund investors may include an employer (or group of related employers) and one or more qualified retirement plans of such employer or employers (an employer controlling, controlled by or under common control with another employer is deemed related to that employer).
The Distributor must be notified at the time of purchase that the investor is entitled to a reduced sales charge. The reduced sales charge will be granted subject to confirmation of the investors holdings. The Combined Purchase and Cumulative Purchase Privilege does not apply to individual participants in any retirement or group plans.
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through Rights of Accumulation, under which an investor or an eligible group of related investors, as described above under "Combined Purchase and Cumulative Purchase Privilege," may aggregate the value of their existing holdings of the shares of the Fund and shares of other Prudential Mutual Funds (excluding money market funds other than those acquired pursuant to the exchange privilege) to determine the reduced sales charge. However, the value of shares held directly with the Transfer Agent and through Prudential Securities will not be aggregated to determine the reduced sales charge. All shares must be held either directly with the Transfer Agent or through Prudential Securities. The value of existing holdings for purposes of determining the reduced sales charge is calculated using the maximum offering or price (net asset value plus maximum sales charge) as of the previous business day. See "How the Fund Values Its Shares" in the Prospectus. The Distributor must be notified at the time of purchase that the investor is entitled to a reduced sales charge. The reduced sales charges will be granted subject to confirmation of the investor's holdings. Rights of accumulation are not available to individual participants in any retirement or group plans.
LETTERS OF INTENT. Reduced sales charges are available to investors (or an eligible group of related investors), including retirement and group plans, who enter into a written Letter of Intent providing for the purchase, within a thirteen-month period, of shares of the Fund and shares of other Prudential Mutual Funds (Investment Letter of Intent). Retirement and group plans may also qualify to purchase Class A shares at net asset value by entering into a Letter of Intent whereby they agree to enroll, within a thirteen month period, a specified number of eligible employees or participants (Participant Letter of Intent).
For purposes of the Investment Letter of Intent, all shares of the Fund and shares of other Prudential Mutual Funds (excluding money market funds other than those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable reduction. However, the value of shares held directly with the Transfer Agent and through Prudential Securities will not be aggregated to determine the reduced sales charge. All shares must be held either directly with the Transfer Agent or through Prudential Securities.
A Letter of Intent permits a purchaser, in the case of an Investment Letter of Intent, to establish a total investment goal to be achieved by any number of investments over a thirteen-month period and, in the case of a Participant Letter of Intent, to establish a minimum eligible employee or participant goal over a thirteen month period. Each investment made during the period, in the case of an Investment Letter of Intent, will receive the reduced sales charge applicable to the amount represented by the goal, as if it were a single investment. In the case of a Participant Letter of Intent, each investment made during the period will be made at net asset value. Escrowed Class A shares totaling 5% of the dollar amount of the Letter of Intent will be held by the Transfer Agent in the name of the purchaser, except in the case of retirement and group plans where the employer or plan sponsor will be responsible for paying any applicable sales charge. The effective date of an Investment Letter of Intent (except in the case of retirement and group plans) may be back-dated up to 90 days, in order that any investments made during this 90-day period, valued at the purchaser's cost, can be applied to the fulfillment of the Letter of Intent goal, except in the case of retirement and group plans.
The Investment Letter of Intent does not obligate the investor to purchase, nor the Fund to sell, the indicated amount. Similarly, the Participant Letter of Intent does not obligate the retirement or group plan to enroll the indicated number of eligible employees or participants. In the event the Letter of Intent goal is not achieved within the thirteen-month period, the purchaser (or the employer or plan sponsor in the case of any retirement or group plan) is required to pay the difference between the sales charge otherwise applicable to the purchases made during this period and sales charges actually paid. Such payment may be made directly to the Distributor or, if not paid, the Distributor will liquidate sufficient escrowed shares to obtain such difference. Investors electing to purchase Class A shares of the Fund pursuant to a Letter of Intent should carefully read such Letter of Intent.
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, in the case of an Investment Letter of Intent, be granted subject to confirmation of the investor's holdings or in the case of a Participant Letter of Intent, subject to confirmation of the number of eligible employees or participants in the retirement or group plan. Letters of Intent are not available to individual participants in any retirement or group plans.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
The contingent deferred sales charge is waived under circumstances described in the Prospectus. See "Shareholder Guide--How to Sell Your Shares--Waiver of the Contingent Deferred Sales Charges--Class B Shares" in the Prospectus. In connection with these waivers, the Transfer Agent will require you to submit the supporting documentation set forth below.
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) is permanently disabled. The letter
death or to be of long-continued and must also indicate the date of disability.
indefinite duration.
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.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account is established for each investor under which the shares are held for the investor 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. 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 on the payment date, cash payment will be made directly to the dealer. Any shareholder who receives a cash payment representing a dividend or distribution may reinvest such distribution at net asset value by returning the check or the proceeds to the Transfer Agent within 30 days after the payment date. Such investment will be made at the net asset value per share next determined after receipt of the check or proceeds by the Transfer Agent. Such shareholder will receive credit for any contingent deferred sales charge paid in connection with the amount of proceeds being reinvested.
EXCHANGE PRIVILEGE
The Fund makes available to its shareholders the privilege of exchanging their shares of the Fund for shares of certain other Prudential Mutual Funds, including one or more specified money market funds, subject in each case to the minimum investment requirements of such funds. Shares of such other Prudential Mutual Funds may also be exchanged for shares of the Fund. All exchanges are made on the basis of relative net asset value next determined after receipt of an order in proper form. An exchange will be treated as a redemption and purchase for tax purposes. Shares may be exchanged for shares of another fund only if shares of such fund may legally be sold under applicable state laws. For retirement and group plans having a limited menu of Prudential Mutual Funds, the Exchange Privilege is available for those funds eligible for investment in the particular program.
It is contemplated that the exchange privilege may be applicable to new mutual funds whose shares may be distributed by the Distributor.
CLASS A. Shareholders of the Fund may exchange their Class A shares for Class A shares of certain other Prudential Mutual Funds, shares of Prudential Government Securities Trust (Short-Intermediate Term Series) and shares of the money market funds specified below. No fee or sales load will be imposed upon the exchange. Shareholders of money market funds who acquired such shares upon exchange of Class A shares may use the Exchange Privilege only to acquire Class A shares of the Prudential Mutual Funds participating in the Exchange Privilege.
The following money market funds participate in the Class A Exchange Privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets, Inc. (Class A Shares) 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 Prudential Special Money Market
Fund, Inc., a money market 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 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 Prudential Special Money Market Fund without imposition of any CDSC at the time of exchange. Upon subsequent redemption from such money market fund or after re-exchange into the Fund, such shares will be subject to the CDSC calculated 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 transferred first. In measuring the time period shares are held in a money market fund and "tolled" for purposes of calculating the CDSC holding period, exchanges are deemed to have been made on the last day of the month. Thus, if shares are exchanged into the Fund from a money market fund during the month (and are held in the Fund at the end of the month), the entire month will be included in the CDSC holding period. Conversely, if shares are exchanged into a money market fund prior to the last day of the month (and are held in the money market fund on the last day of the month), the entire month will be excluded from the CDSC holding period. 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 the Distributor has the right to reject any exchange application relating to such Fund's shares.
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a fixed amount of dollars in shares at set intervals. An investor buys more shares when the price is low and fewer shares when the price is high. The average cost per share is lower than it would be if a constant number of shares were bought at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement to save for a major expenditure, such as the purchase of a home, or to finance a college education. The cost of a year's education at a four-year college today averages around $14,000 at a private college and around $6,000 at a public university. Assuming these costs increase at a rate of 7% a year, as has been projected, for the freshman class of 2011, the cost of four years at a private college could reach $210,000 and over $90,000 at a public university.(1)
The following chart shows how much you would need in monthly investments to achieve specified lump sums to finance your investment goals.(2)
PERIOD OF MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000 - ------------------------------------------------------------ ----------- ----------- ----------- ----------- 25 Years.................................................... $ 110 $ 165 $ 220 $ 275 20 Years.................................................... 176 264 352 440 15 Years.................................................... 296 444 592 740 10 Years.................................................... 555 833 1,110 1,388 5 Years.................................................... 1,371 2,057 2,742 3,428 See "Automatic Savings Accumulation Plan." - ------------------------ (1) Source information concerning the costs of education at public and private universities is available from The College Board Annual Survey of Colleges, 1993. Average costs for private institutions include tuition, fees, room and board for its 1993-1994 academic year. (2) The chart assumes an effective rate of return of 8% (assuming monthly compounding). This example is for illustrative purposes only and is not intended to reflect the performance of an investment in shares of the Fund. The investment return and principal value of an investment will fluctuate so that an investor's shares when redeemed may be worth more or less than their original cost. |
AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP)
Under ASAP, an investor may arrange to have a fixed amount automatically invested in shares of the Fund monthly by authorizing his or her bank account or Prudential Securities account (including a Command Account) to be debited to invest specified dollar amounts in shares of the Fund. The investor's bank must be a member of the Automatic Clearing House System. Stock certificates are not issued to ASAP participants.
Further information about this program and an application form can be obtained from the Transfer Agent, Prudential Securities or Prusec.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through Prudential Securities or the Transfer Agent. Such withdrawal plan provides for monthly or quarterly checks in any amount, except as provided below, up to the value of the shares in the shareholder's account. Withdrawals of Class B or Class C shares may be subject to a CDSC. See "Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges" in the Prospectus.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum account values applies, (ii) withdrawals may not be for less than $100 and (iii) the shareholder must elect to have all dividends and/or distributions automatically reinvested in additional full and fractional shares at net asset value on shares held under this plan. See "Shareholder Investment Account--Automatic Reinvestment of Dividends and/or Distributions."
Prudential Securities and the Transfer Agent act as agents for the shareholder in redeeming sufficient full and fractional shares to provide the amount of the periodic withdrawal payment. The systematic withdrawal plan may be terminated at any time, and the Distributor reserves the right to initiate a fee of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.
Withdrawal payments should not be considered as dividends, yield or income. If periodic withdrawals continuously exceed reinvested dividends and distributions, the shareholder's original investment will be correspondingly reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any gain or loss realized must be recognized for federal income tax purposes. In addition, withdrawals made concurrently with purchases of additional shares are inadvisable because of the sales charges applicable to (i) the purchase of Class A shares and (ii) the withdrawal of Class B and Class C shares. Each shareholder should consult his or her own tax adviser with regard to the tax consequences of the systematic withdrawal plan, particularly if used in connection with a retirement plan.
TAX-DEFERRED RETIREMENT PLANS
Various tax-deferred retirement plans, including a 401(k) plan,
self-directed individual retirement accounts and "tax-sheltered accounts" under
Section 403(b)(7) of the Internal Revenue Code are available through the
Distributor. These plans are for use by both self-employed individuals and
corporate employers. These plans permit either self-direction of accounts by
participants, or a pooled account arrangement. Information regarding the
establishment of these plans, the administration, custodial fees and other
details are available from Prudential Securities or the Transfer Agent.
Investors who are considering the adoption of such a plan should consult with their own legal counsel or tax adviser with respect to the establishment and maintenance of any such plan.
TAX-DEFERRED RETIREMENT ACCOUNTS
INDIVIDUAL RETIREMENT ACCOUNTS. An individual retirement account (IRA) permits the deferral of federal income tax on income earned in the account until the earnings are withdrawn. The following chart represents a comparison of the earnings in a personal savings account with those in an IRA, assuming a $2,000 annual contribution, an 8% rate of return and a 39.6% federal income tax bracket and shows how much more retirement income can accumulate within an IRA as opposed to a taxable individual savings account.
TAX-DEFERRED COMPOUNDING(1)
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
-------------------- -------- --------
10 years............ $ 26,165 $ 31,291
15 years............ 44,675 58,649
20 years............ 68,109 98,846
25 years............ 97,780 157,909
30 years............ 135,346 244,692
- ------------------------
(1) The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings in
the IRA account will be subject to tax when withdrawn from the account.
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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, e.g., to seek 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 a program may not be appropriate for all investors, investors should consult their Prudential Securities Financial Adviser or Prudential/Pruco Securities Representative concerning the appropriate blends 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
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. 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.
The Fund will compute its net asset value at 4:15 P.M., New York time, on each day the New York Stock Exchange is open for trading except on days on which no orders to purchase, sell or redeem Fund shares have been received or days on which changes in the value of the Fund's portfolio securities do not affect net asset value. In the event the New York Stock Exchange closes early on any business day, the net asset value of the Fund's shares shall be determined at a time between such closing and 4:15 P.M., New York time.
Net asset value is calculated separately for each class. The net asset value of Class B and Class C shares will generally be lower than the net asset value of Class A shares as a result of the larger distribution-related fee to which Class B and Class C shares are subject. The net asset value of Class Z shares will generally be higher than the net asset value of Class A, Class B or Class C shares as a result of the fact that the Class Z shares are not subject to any distribution of service fee. It is expected, however, that the net asset value per share of each class will tend to converge immediately after the recording the dividends, which will differ by approximately the amount of the distribution-related expense accrual differential among the classes.
TAXES, DIVIDENDS AND DISTRIBUTIONS
GENERAL. The Fund has elected to qualify and intends to remain qualified as
a regulated investment company under Subchapter M of the Internal Revenue Code
for each taxable year. Accordingly, the Fund generally must, among other things,
(a) derive at least 90% of its gross income (without offset for losses from the
sale or other disposition of securities or foreign currencies) from dividends,
interest, proceeds from loans of securities and gains from the sale or other
disposition of securities or foreign currencies or other income related to its
business of investing in securities and currencies, including, but not limited
to, gains derived from options and futures on such securities or foreign
currencies; (b) derive less than 30% of its gross income from gains (without
offset for losses) from the sale or other disposition of securities or options
thereon and certain other financial instruments held less than three months; and
(c) diversify its holdings so that, at the end of each fiscal quarter, (i) 50%
of the market value of the Fund's assets is represented by cash, U.S. Government
securities and other securities limited, in respect of any one issuer, to an
amount not greater than 5% of the Fund's assets and no more than 10% of the
outstanding voting securities of any 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). These requirements may limit the Fund's
ability to engage in or close out transactions involving options on securities,
interest rate futures and options thereon.
The Fund has received a private letter ruling from the Internal Revenue Service (IRS) to the effect that the Fund's investments in options on U.S. Government securities, in interest rate futures contracts and in options thereon will be treated as "securities" for purposes of the foregoing requirements for qualification under Subchapter M of the Internal Revenue Code.
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.
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 long-term capital gains, if any, are taxable as long-term capital gains regardless of how long the investor has held his or her Fund shares. However, if a shareholder holds shares in the Fund for not more than six months, then any loss recognized on the sale of such shares will be treated as long-term capital loss to the extent of any distribution on the shares which was treated as long-term capital gain. Shareholders will be notified annually by the Fund as to the federal tax status of distributions made by the Fund. Dividends paid by the Fund will not be subject to 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.
Dividends and distributions generally are taxable to shareholders in the year in which they are received; however, dividends declared in October, November and December and paid on 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 distributions paid shortly after a purchase by an investor may have the effect of reducing the per share net asset value of the investor's shares by the per share amount of the distributions. Furthermore, such distributions, although in effect a return of capital, are subject to federal income taxes. Therefore, prior to purchasing shares of the Fund, the investor should carefully consider the impact of capital gains distributions, which are expected to be or have been announced.
Dividends of net investment income and distributions of net short-term capital gains paid to a shareholder (including a shareholder acting as a nominee or fiduciary) who is a nonresident alien individual, a foreign corporation or a foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty rate) withholding tax upon the gross amount of the dividends unless the dividends are effectively connected with a U.S. trade or business conducted by the foreign shareholder. Capital gain dividends paid to a foreign shareholder are generally not subject to withholding tax. A foreign shareholder will, however, be required to pay U.S. income tax on any dividends and capital gain distributions which are effectively connected with a U.S. trade or business of the foreign shareholder.
Any loss realized on a sale, redemption or exchange of shares of the Fund by a shareholder will be disallowed to the extent the shares are replaced within a 61-day period (beginning 30 days before the disposition of shares). Shares purchased pursuant to the reinvestment of a dividend or distribution will constitute a replacement of shares.
Although the Fund does not receive interest payments on zero-coupon bonds in cash, it is required to accrue interest on such bonds for tax purposes. Accordingly, in order to meet the distribution requirements discussed above, the Fund may have to liquidate securities or borrow money. To date, the Fund has not engaged in borrowing or liquidated securities solely or primarily for the purpose of meeting income distribution requirements attributable to investments in zero coupon bonds.
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, 1997 of approximately $143,520,000, of which $12,390,000 expires in 1998, $41,964,000 expires in 1999, $1,736,000 expires in 2001, $2,920,000 expires in 2002, $66,560,000 expires in 2003 and $17,950,000 expires in 2003.
A shareholder who acquires shares of the Fund and sells or otherwise disposes of such shares within 90 days of acquisition may not be allowed to include certain sales charges incurred in acquiring such shares for purposes of calculating gain or loss realized upon a sale or exchange of shares of the Fund.
The per share dividends on Class B and Class C shares will 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 distributions of net capital gains, if any, will be paid in the same amount for Class A, Class B and Class C shares. See "Net Asset Value."
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 tax year; that is, treated as having been sold at market value. Sixty percent of any gain or loss recognized as a result of such "deemed sales" will be treated as long-term capital gain or loss and the remainder will be treated as short-term capital gain or loss. The Fund has received a private letter ruling from the IRS to the effect that a "deemed sale" of a security held for less than three months at the end of a tax year will not result in gain from the sale of securities held for less than three months for purposes of determining qualification of the Fund as a regulated investment company.
If the Fund holds a U.S. Government security which is offset by a Section 1256 contract, the Fund is considered to hold a "mixed straddle". The Fund may elect whether 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, the change of long-term capital gains into short-term capital gains, or the change of short-term capital losses into long-term capital losses. Nevertheless, 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
gain or loss will be long-term or short-term depending on the holding period of
the security at the time the mixed straddle is entered into. 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 rules for determining whether gain or loss upon exercise, expiration or termination of an identified mixed straddle will be treated as long-term, short-term, or sixty percent long-term and forty percent short-term are complex. In general, which treatment applies will depend upon the order of disposition of the Section 1256 and the non-Section 1256 positions of a straddle and whether all or fewer than all of such positions are disposed of on any day.
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, change long-term gains into short-term gains, change short-term losses into long-term losses, or change 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 that the provisions of Section 1256 will not apply to Section 1256 contracts which are part of a mixed straddle. In the case of such an election, the taxation of options on U.S. Government securities and the taxation of futures will be governed by provisions of the Internal Revenue Code dealing with taxation of capital assets 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 purchase 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 on 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 on 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, change long-term gains into short-term gains, change short-term losses into long-term losses, or change 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.
PENNSYLVANIA PERSONAL PROPERTY TAX. The Fund has obtained a written letter of determination from the Pennsylvania Department of Revenue that the Fund is subject to the Pennsylvania foreign franchise and corporate net income tax. Accordingly, it is expected that Fund shares will be exempt from Pennsylvania personal property taxes. The Fund anticipates that it will continue such business activities but reserves the right to suspend them at any time, resulting in the termination of the exemption.
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.
|
The yield for the 30-day period ended February 28, 1997 for the Fund's Class A, Class B, Class C and Class Z shares was 5.92%, 5.49%, 5.57% and 6.32%, 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 "How the Fund Calculates 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 return takes into account any applicable initial or contingent deferred sales charges but does not take into account any federal or state income taxes that may be payable upon redemption.
The average annual total return for Class A shares for the one year, five year and since commencement of offering of Class A shares (January 22, 1990) periods ended on February 28, 1997 was -0.5%, 5.5% and 7.1%, respectively. The average annual total return with respect to the Class B shares of the Fund for the one, five and ten year periods ended February 28, 1997 was -1.9%, 5.5% and 6.4%, respectively. The average annual total return for Class C shares for the one year and since commencement of offering Class C shares (August 1, 1994) periods ended February 28, 1997, was 2.2% and 6.8%, respectively. The average annual total return for Class Z shares for the one year period ended February 28, 1997 was 3.2%.
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 "How the Fund Calculates Performance" in the Prospectus.
Aggregate total return represents the cumulative change in the value of an investment in the Fund and is computed by the following formula:
Where: P = a hypothetical initial payment of $1000.
ERV = ending redeemable value of a hypothetical $1000 payment made at
the beginning of the 1, 5 or 10 year periods at the end of the
1, 5 or 10 year periods (or fractional portion thereof).
Aggregate total return does not take into account any federal or state income taxes that may be payable upon redemption or any applicable initial or contingent deferred sales charges.
The aggregate total return for Class A shares for the one year, five year and since commencement of offering Class A shares (January 22, 1990) periods ended February 28, 1997 was 3.7%, 36.2% and 69.0%, respectively. The aggregate total return for Class B shares for the one, five and ten year periods ended February 28, 1997 was 3.1%, 31.4% and 86.6%, respectively. The aggregate total return for Class C shares for the one year and since commencement of offering Class C shares (August 1, 1994) periods ended February 28, 1997 was 3.2% and 18.4%, respectively. The aggregate total return for Class Z shares for the period ended February 28, 1997 was 3.2%.
From time to time, the performance of the Fund may be measured against various indices. Set forth below is a chart which compares the performance of different types of investments over the long-term and the rate of inflation.(1)
[CHART]
(1)Source: Ibbotson Associates, STOCKS, BONDS, BILLS AND INFLATION--1995 YEARBOOK (annually updates the work of Roger G. Ibbotson and Rex A. Sinquefield). All rights reserved. Common stock returns are based on the Standard & Poor's 500 Stock Index, a market-weighted, unmanaged index of 500 common stocks in a variety of industry sectors. It is a commonly used indicator of broad stock price movements. This chart is for illustrative purposes only, and is not intended to represent the performance of any particular investment or fund. Investors cannot invest directly in an index. Past performance is not a guarantee of future results.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT,
AND INDEPENDENT ACCOUNTANTS
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.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the Fund. It is a wholly-owned subsidiary of PMF. PMFS provides customary transfer agency services to the Fund, including the handling of shareholder communications, the processing of shareholder transactions, the maintenance of shareholder account records, payment of dividends and distributions, and related functions. For these services, PMFS receives an annual fee per shareholder account, a new account set-up fee for each manually-established account and a monthly inactive zero balance account fee per shareholder account. PMFS is also reimbursed for its out-of-pocket expenses, including but not limited to postage, stationery, printing, allocable communications expenses and other costs. For the fiscal year ended February 28, 1997, the Fund incurred fees of approximately $1,880,000 for the services of PMFS.
Deloitte & Touche LLP, Two World Financial Center, New York, New York 10281 served as the Fund's independent accountants for the year ended February 28, 1997 and in that capacity audited the Fund's annual reports. Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036, currently serves as the Fund's independent public accountants and, in that capacity, will audit the Fund's financial statements for the fiscal year ending February 28, 1998.
Principal
Amount
(000) Description Value (Note 1)
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--97.8%
- ------------------------------------------------------------
U.S. GOVERNMENT AGENCY MORTGAGE PASS-THROUGHS--42.1%
Federal Home Loan Mortgage Corp.,
$36,702 7.50%, 2/01/22 - 4/01/25 $ 36,742,243
64,937 8.00%, 1/01/23 - 9/01/24 66,276,202
5,306 8.50%, 6/01/07 - 4/01/20 5,569,039
2,376 11.50%, 10/01/19 2,685,825
Federal National Mortgage Assoc.,
24,360 6.50%, 5/01/11 - 6/01/24 23,199,612
52,641 7.00%, 7/01/03 - 9/01/26 51,349,346
31,894 7.125%, 2/01/07 32,138,188
33,420 7.50%, 4/01/07 - 10/01/26 33,843,281
44,663 8.00%, 5/01/25 - 4/01/26 45,481,780
42,106 8.50%, 6/01/17 - 3/01/25 44,109,198
10,671 9.00%, 8/01/24 - 4/01/25 11,233,511
2,223 9.50%, 10/01/19 - 3/01/25 2,412,456
Government National Mortgage
Assoc.,
28,012 6.50%, 12/15/23 - 5/15/24 26,851,741
61,784Pound 7.00%, 2/15/09 - 11/15/24 60,518,539
57,924 7.50%, 5/15/02 - 3/15/26 58,004,062
37,762 8.00%, 7/15/16 - 3/15/24 39,041,320
21,729 9.00%, 4/15/01 - 7/15/21 22,781,649
20,458 9.50%, 10/15/09 - 12/15/17 22,274,310
Government National Mortgage Assoc. II,
3,857 9.50%, 5/20/18 - 8/20/21 4,143,448
--------------
Total U.S. Government Agency
Mortgage Pass-Throughs
(cost $572,955,507) 588,655,750
- ------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS--33.6%
United States Treasury Bonds,
26,825 6.00%, 2/15/26 23,807,187
20,000 6.50%, 11/15/26 19,081,200
20,000 6.625%, 2/15/27 19,531,200
3,000D 7.625%, 2/15/25 3,258,270
750 9.00%, 11/15/18 922,028
20,000 10.375%, 11/15/09 24,421,800
1,860 12.00%, 8/15/13 2,623,474
United States Treasury Bonds,
$50,000D 12.50%, 8/15/14 $ 73,656,000
20,000D 12.75%, 11/15/10 27,931,200
25,000D 13.25%, 5/15/14 38,230,500
55,000 10.625%, 8/15/15 76,321,300
40,000D 12.375%, 5/15/04 53,262,400
United States Treasury Notes,
80,475DD 6.125%, 12/31/01 79,544,709
15,000 6.50%, 5/31/01 15,065,550
4,100 6.875%, 7/31/99 4,162,771
1,770 7.25%, 8/15/04 1,843,561
5,000 8.875%, 5/15/00 5,378,100
United States Treasury Strips,
800 Zero Coupon, 8/15/08 370,848
700 Zero Coupon, 8/15/11 260,540
500 Zero Coupon, 11/15/11 182,870
--------------
Total U.S. Government Obligations
(cost $479,879,617) 469,855,508
- ------------------------------------------------------------
U.S. GOVERNMENT AGENCY SECURITIES--11.9%
Federal Home Loan Bank,
1,000 6.78%, 7/24/02 988,280
Federal National Mortgage Assoc.,
15,500 6.15%, 12/14/01 15,160,860
Small Business Administration
Participation Certificate,
20,755 Series 1995-20B, 8.15%, 2/01/15 21,900,372
35,000 Series 1996-20H, 7.25%, 8/01/16 35,304,500
20,000 Series 1996-20K, 6.95%, 11/01/16 19,692,000
24,744 Series 1995-20L, 6.45%, 12/01/15 23,166,376
Tennessee Valley Authority,
600 Series 1993-D, 7.25%, 7/15/43 567,522
30,000 Series 1995-B, 6.235%, 7/15/45 29,787,900
20,000 Series 1996-A, 5.98%, 4/01/36 20,250,000
--------------
Total U.S. Government Agency
Securities (cost $169,125,598) 166,817,810
|
Principal
Amount
(000) Description Value (Note 1)
- ------------------------------------------------------------
U.S. GOVERNMENT AGENCY - STRIPPED SECURITIES--6.7%
Federal National Mortgage Assoc.,
$17,100 Zero Coupon, 8/07/01 $ 12,849,111
50,000 Zero Coupon, 7/24/06 26,258,000
Financing Corp.,
5,000 Zero Coupon, 3/07/04 3,137,250
Israel AID,
46,100 Zero Coupon, 2/15/09 20,173,360
25,584 Zero Coupon, 8/15/09 10,775,981
37,600 Zero Coupon, 5/15/15 10,261,040
37,600 Zero Coupon, 5/15/16 9,546,640
--------------
Total U.S. Government Agency -
Stripped Securities
(cost $88,067,064) 93,001,382
- ------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS--2.2%
Asset Securitization Corp.,
20,000 Series 96-MD6 Class A-1B,
6.88%, 11/13/26 19,893,750
Resolution Trust Corp.,
5,363 7.75%, 9/25/29 5,292,788
Structured Asset Securities Corp.,
5,000 Series 95-C1 Class C,
7.375%, 9/25/24 5,025,781
--------------
Total Collateralized Mortgage
Obligations
(cost $29,960,953) 30,212,319
- ------------------------------------------------------------
SUPRANATIONAL BOND--0.8%
International Bank For
Reconstruction
& Development,
10,000 8.625%, 10/15/16
(cost $12,400,900) 11,528,400
ASSET BACKED SECURITIES--0.3%
Chemical Master Credit Card Trust
I,
$500 Series 95-3 Class A,
6.23%, 4/15/05 $ 490,465
Circuit City Credit Card Master
Trust,
500 Series 94-2 Class A,
8.00%, 11/15/03 516,660
Discover Card Master Trust 1,
500 Series 94-1 Class A,
6.70%, 2/16/00 502,030
NationsBank Credit Card Master
Trust,
500 Series 95-1 Class A,
6.45%, 4/15/03 499,685
Prime Credit Card Master Trust,
600 Series 95-1 Class A,
6.75%, 11/15/05 598,308
Sears Credit Account Master Trust,
600 Series 96-3 Class A,
7.00%, 7/15/08 608,808
Standard Credit Card Master Trust
I,
500 Series 94-4 Class A,
8.25%, 11/07/03 530,625
500 Series 95-1 Class A,
8.25%, 1/07/07 538,125
--------------
Total Asset Backed Securities
(cost $4,357,407) 4,284,706
- ------------------------------------------------------------
ADJUSTABLE RATE MORTGAGE PASS-THROUGHS--0.2%
Ryland Mortgage Securities Corp.,
3,610 Mortgage Participation Securities,
Series 1993-3 Class A-3,
7.402%, 9/25/24
(cost $3,681,930) 3,639,078
------------------------------------------------------------
Total long-term investments
(cost $1,360,428,976) 1,367,994,953
--------------
|
Principal
Amount
(000) Description Value (Note 1)
- ------------------------------------------------------------
SHORT-TERM INVESTMENT--2.1%
- ------------------------------------------------------------
REPURCHASE AGREEMENT--2.1%
$28,987 Joint Repurchase Agreement
Account,
5.369%, 3/03/97
(cost $28,987,000) $ 28,987,000
- ------------------------------------------------------------
TOTAL INVESTMENTS--99.9%
(cost $1,389,415,976; Note 4) 1,396,981,953
Other assets in excess of
liabilities--0.1% 1,305,257
--------------
Net Assets--100% $1,398,287,210
--------------
--------------
|
FEBRUARY 28, 1997
ASSETS -----------------
Investments, at value (cost $1,389,415,976).............................................................. $ 1,396,981,953
Cash..................................................................................................... 133,199
Receivable for investments sold.......................................................................... 40,078,272
Collateral for securities loaned, at value............................................................... 32,668,125
Interest receivable...................................................................................... 13,561,950
Receivable for Fund shares sold.......................................................................... 1,059,547
Deferred expenses and other assets....................................................................... 34,005
-----------------
Total assets.......................................................................................... 1,484,517,051
-----------------
LIABILITIES
Payable for investments purchased........................................................................ 39,791,648
Payable upon return of securities loaned................................................................. 32,668,125
Payable for dollar roll.................................................................................. 5,752,500
Payable for Fund shares reacquired....................................................................... 3,811,981
Accrued expenses and other liabilities................................................................... 2,391,661
Dividends payable........................................................................................ 871,091
Management fee payable................................................................................... 543,778
Distribution fee payable................................................................................. 399,057
-----------------
Total liabilities..................................................................................... 86,229,841
-----------------
NET ASSETS............................................................................................... $ 1,398,287,210
-----------------
-----------------
Net assets were comprised of:
Common stock, at par.................................................................................. $ 1,595,030
Paid-in capital in excess of par...................................................................... 1,529,161,531
-----------------
1,530,756,561
Accumulated net realized losses on investments........................................................ (140,035,328)
Net unrealized appreciation on investments............................................................ 7,565,977
-----------------
Net assets at February 28, 1997.......................................................................... $ 1,398,287,210
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($860,318,879 divided by 98,158,439 shares of common stock issued and outstanding)................. $8.76
Maximum sales charge (4.0% of offering price)......................................................... .37
-----------------
Maximum offering price to public...................................................................... $9.13
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share
($461,988,063 divided by 52,668,167 shares of common stock issued and outstanding)................. $8.77
-----------------
-----------------
Class C:
Net asset value, offering price and redemption price per share
($2,569,498 divided by 292,931 shares of common stock issued and outstanding)...................... $8.77
-----------------
-----------------
Class Z:
Net asset value, offering price and redemption price per share
($73,410,770 divided by 8,383,465 shares of common stock issued and outstanding)................... $8.76
-----------------
-----------------
|
YEAR ENDED
NET INVESTMENT INCOME FEBRUARY 28, 1997
-----------------
Income
Interest................................. $ 112,935,435
Income from securities loaned-net........ 50,521
-----------------
112,985,956
-----------------
Expenses
Management fee........................... 7,351,081
Distribution fee--Class A................ 1,327,293
Distribution fee--Class B................ 4,486,320
Distribution fee--Class C................ 18,299
Transfer agent's fees and expenses....... 2,150,000
Reports to shareholders.................. 735,000
Custodian's fees and expenses............ 510,000
Registration fees........................ 140,000
Audit fee and expenses................... 70,000
Directors' fees.......................... 48,000
Legal fees and expenses.................. 40,000
Insurance expense........................ 38,000
Miscellaneous............................ 6,444
-----------------
Total expenses........................ 16,920,437
-----------------
Net investment income...................... 96,065,519
-----------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss):
Investment transactions.................. (19,648,213)
Financial futures contracts.............. 251,988
Written options transactions............. (792,969)
-----------------
(20,189,194)
Net change in unrealized
appreciation on investments.............. (26,314,444)
-----------------
Net loss on investments.................... (46,503,638)
-----------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS.................. $ 49,561,881
-----------------
-----------------
|
YEAR ENDED FEBRUARY 28/29
INCREASE (DECREASE) -------------------------
IN NET ASSETS 1997 1996
---- ----
Operations
Net investment income........ $ 96,065,519 $ 99,348,829
Net realized gain (loss) on
investment transactions... (20,189,194) 53,485,429
Net change in unrealized
appreciation on
investments............... (26,314,444) 34,676,738
--------------- -----------------
Net increase in net assets
resulting from
operations................ 49,561,881 187,510,996
--------------- -----------------
Dividends to shareholders from
net investment income (Note
1)
Class A................... (60,005,745) (60,495,599)
Class B................... (33,204,797) (38,807,245)
Class C................... (151,010) (45,985)
Class Z................... (2,703,967) --
--------------- -----------------
(96,065,519) (99,348,829)
--------------- -----------------
Fund share transactions (net of
share conversions) (Note 5)
Net proceeds from shares
subscribed................ 326,332,216 226,050,700
Net asset value of shares
issued to shareholders in
reinvestment of
dividends................. 57,955,409 57,501,726
Cost of shares reacquired.... (528,279,294) (360,013,003)
--------------- -----------------
Decrease in net assets from
Fund share transactions... (143,991,669) (76,460,577)
--------------- -----------------
Total increase (decrease)...... (190,495,307) 11,701,590
NET ASSETS
Beginning of year.............. 1,588,782,517 1,577,080,927
--------------- -----------------
End of year.................... $ 1,398,287,210 $ 1,588,782,517
--------------- -----------------
--------------- -----------------
|
SECURITY VALUATION: The Fund values portfolio securities on the basis of current market quotations provided by dealers or by a pricing service approved by the Board of Directors, which uses information such as quotations from dealers, market transactions in comparable securities, various relationships between securities and calculations on yield to maturity in determining values. Options and financial futures contracts listed on exchanges are valued at their closing price on the applicable exchange. When market quotations are not readily available, a security is valued at fair value as determined in good faith by or under the direction of the Board of Directors.
Short-term securities which mature in more than 60 days are valued at current market quotations. Short-term securities which mature in 60 days or less are valued at amortized cost.
In connection with repurchase agreement transactions, the Fund's custodian, or designated subcustodians as the case may be under triparty repurchase agreements, takes possession of the underlying collateral securities, the value of which exceeds the principal amount of the repurchase transaction, including accrued interest. To the extent that any repurchase transaction exceeds one business day, the value of the collateral is marked-to-market on a daily basis to ensure the adequacy of the collateral. If the seller defaults and the value of the collateral declines or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by the Fund may be delayed or limited.
OPTIONS: The Fund may either purchase or write options in order to hedge against adverse market movements or fluctuations in value caused by changes in prevailing interest rates with respect to securities which the Fund currently owns or intends to purchase. The Fund's principal reason for writing options is to realize, through receipt of premiums, a greater current return than would be realized on the underlying security alone. When the Fund purchases an option, it pays a premium and an amount equal to that premium is recorded as an investment. When the Fund writes an option, it receives a premium and an amount equal to that premium is recorded as a liability. The investment or liability is adjusted daily to reflect the current market value of the option. If an option expires unexercised, the Fund realizes a gain or loss to the extent of the premium received or paid. If an option is exercised, the premium received or paid is an adjustment to the proceeds from the sale or the cost of the purchase in determining whether the Fund has realized a gain or loss. The difference between the premium and the amount received or paid on effecting a closing purchase or sale transaction is also treated as a realized gain or loss. Gain or loss on purchased options is included in net realized gain (loss) on investment transactions. Gain or loss on written options is presented separately as net realized gain (loss) on written option transactions.
The Fund, as a writer of an option, may have no control over whether the underlying securities may be sold (called) or purchased (put). As a result, the Fund bears the market risk of an unfavorable change in the price of the security underlying the written option. The Fund, as purchaser of an option, bears the risk of the potential inability of the counterparties to meet the terms of their contracts.
DOLLAR ROLLS: The Fund enters into mortgage dollar rolls in which the Fund sells mortgage securities for delivery in the current month, realizing a gain or loss and simultaneously contracts to repurchase somewhat similar (same type, coupon and maturity) securities on a specified future date. During the roll period, the Fund forgoes principal and interest paid on the securities. The Fund is compensated by the interest earned on the cash proceeds of the initial sale and by the lower repurchase price at the future date. The difference between the sales proceeds and the lower repurchase price is recorded as interest income. The Fund maintains a segregated account, the dollar value of which is at least equal to its obligations, in respect of dollar rolls.
Securities Transactions and Net Investment Income: Securities transactions are recorded on the trade date. Realized gains or losses on sales of securities are calculated on the identified cost basis. Interest income is recorded on the accrual basis. Net investment income (other than distribution fees) and unrealized and realized gains or losses are allocated daily to each class of shares based upon the relative proportion of net assets of each class at the beginning of the day. Expenses are recorded on the accrual basis which may require the use of certain estimates by management.
DIVIDENDS AND DISTRIBUTIONS: The Fund declares daily and pays monthly dividends from net investment income. The Fund will distribute at least annually any net capital gains in excess of loss carryforwards, if any. Dividends and distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles.
The management fee paid PMF is computed daily and payable monthly, at an annual rate of .50 of 1% of the Fund's average daily net assets up to $3 billion and .35 of 1% of the average daily net assets of the Fund in excess of $3 billion.
The Fund has a distribution agreement with Prudential Securities Incorporated ("PSI"), which acts as the distributor of the Class A, Class B, Class C and Class Z shares of the Fund. The Fund compensates PSI for distributing and servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of distribution (the "Class A, B and C Plans"), regardless of expenses actually incurred by them. The distribution fees for Class A, B and C shares are accrued daily and payable monthly. No distribution or service fees are paid to PSI as distributor of the Class Z shares of the Fund.
Pursuant to the Class A Plan, the Fund compensates PSI for its distribution-related expenses 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. Such expenses under the Class A Plan were .15 of 1% of the average daily net assets of the Class A shares for the period ended February 28, 1997.
Pursuant to the Class B Plan, the Fund compensates PSI for its distribution-related expenses with respect to Class B shares at an annual rate of up to 1% of the average daily net assets up to $3 billion, .80 of 1% of the next $1 billion of such net assets and .50 of 1% over $4 billion of the average daily net assets of the Class B shares. Such expenses under the Class B Plan were charged at an effective rate of .825 of 1% of the average daily net assets of Class B shares.
Pursuant to the Class C Plan, the Fund compensates PSI for its distribution-related expenses with respect to Class C shares at an annual rate of up to .825 of 1% of the average daily net assets up to $3 billion, .80 of 1% of the next $1 billion of such net assets and .50 of 1% over $4 billion of the average daily net assets of the Class C shares. Such expenses under Class C Plan were charged at an effective rate of .75 of 1% of average daily net assets.
PSI advised the Fund that it received approximately $186,000 in front-end sales charges resulting from sales of Class A shares during the year ended February 28, 1997. From these fees, PMFD paid such sales charges to dealers which in turn paid commissions to salespersons.
PSI has advised the Fund that for the year ended February 28, 1997 it received approximately $1,203,000 in contingent deferred sales charges imposed upon redemptions by certain Class B and Class C shareholders.
PSI, PMF and PIC are indirect, wholly-owned subsidiaries of The Prudential Insurance Company of America.
The federal income tax cost basis of the Fund's investments at February 28, 1997 was $1,390,001,050 and, accordingly, net unrealized appreciation for federal income tax purposes was $6,980,903 (gross unrealized appreciation-$23,069,733; gross unrealized depreciation-$16,088,830).
The Fund had a capital loss carryforward as of February 28, 1997 of approximately $143,520,000 of which $12,390,000 expires in 1998, $41,964,000 expires in 1999, $1,736,000 expires in 2001, $2,920,000 expires in 2002, $66,560,000 expires in 2003 and $17,950,000 expires in 2005. Accordingly, no capital gains distribution is expected to be paid to shareholders until net gains have been realized in excess of such amounts. During the fiscal year ended February 28, 1997, approximately $8,302,000 of the capital loss carryforward expired unused.
Transactions in written options during the year ended February 28, 1997 were as follows:
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
--------- ----------
Options written...................... 1,500 $1,554,688
Options terminated in closing
purchase transactions.............. (1,250) (949,219)
Options expired...................... (250) (605,469)
--------- ----------
Options outstanding at February 28,
1997............................... 0 0
--------- ----------
--------- ----------
|
The average balance of dollar rolls outstanding during the year ended February 28, 1997 was approximately $2,625,000. This amount of dollar rolls outstanding at February 28, 1997 was $5,752,500, which was .4% of total assets.
Bear, Stearns & Co., 5.37%, in the principal amount of $330,000,000, repurchase price $330,147,812, due 3/3/97. The value of the collateral including accrued interest was $336,993,809.
CS First Boston Corp., 5.39%, in the principal amount of $125,000,000, repurchase price $125,056,146, due 3/3/97. The value of the collateral including accrued interest was $128,134,804.
Dean Witter, Reynolds, Inc., 5.35%, in the principal amount of $25,000,000, repurchase price $25,011,145, due 3/3/97. The value of the collateral including accrued interest was $25,500,582.
J.P. Morgan Securities, Inc., 5.37% in the principal amount of $330,000,000, repurchase price $330,147,812, due 3/3/97. The value of the collateral including accrued interest was $336,600,627.
SBC Warburg, 5.30%, in the principal amount of $113,616,000, repurchase price $113,666,180, due 3/3/97. The value of the collateral including accrued interest was $115,893,997.
There are 2 billion shares of common stock, $.01 par value per share, divided into four classes, designated Class A, B, C and Class Z common stock, each of which consists of 500,000,000 authorized shares.
Transactions in shares of common stock were as follows:
CLASS A SHARES AMOUNT
- ----------------------------------- ----------- -------------
Year ended February 28, 1997:
Shares sold........................ 23,880,421 $ 211,010,343
Shares issued in reinvestment of
dividends........................ 3,985,757 35,069,511
Shares reacquired.................. (41,836,738) (368,907,729)
----------- -------------
Net decrease in shares outstanding
before conversion................ (13,970,560) (122,827,875)
Shares issued upon conversion from
Class B.......................... 9,099,955 79,924,887
Shares reacquired upon conversion
into Class Z..................... (1,559,278) (14,231,482)
----------- -------------
Net decrease in shares
outstanding...................... (6,429,883) $ (57,134,470)
----------- -------------
----------- -------------
Year ended February 29, 1996:
Shares sold........................ 11,604,764 $ 103,313,788
Shares issued in reinvestment of
dividends........................ 3,905,262 35,174,408
Shares reacquired.................. (23,885,431) (215,512,733)
----------- -------------
Net decrease in shares
outstanding before conversion.... (8,375,405) (77,024,537)
Shares issued upon conversion from
Class B.......................... 11,556,901 103,626,580
----------- -------------
Net increase in shares
outstanding...................... 3,181,496 $ 26,602,043
----------- -------------
----------- -------------
CLASS B SHARES AMOUNT
- ----------------------------------- ----------- -------------
Year ended February 28, 1997:
Shares sold........................ 4,648,727 $ 40,926,466
Shares issued in reinvestment of
dividends........................ 2,285,644 20,127,506
Shares reacquired.................. (16,152,439) (142,246,190)
----------- -------------
Net decrease in shares outstanding
before conversion................ (9,218,068) (81,192,218)
Shares reacquired upon conversion
into Class A..................... (9,099,955) (79,924,887)
----------- -------------
Net decrease in shares
outstanding...................... (18,318,023) $(161,117,105)
----------- -------------
----------- -------------
Year ended February 29, 1996:
Shares sold........................ 14,021,663 $ 120,993,355
Shares issued in reinvestment of
dividends........................ 2,476,368 22,291,045
Shares reacquired.................. (16,054,530) (144,301,708)
----------- -------------
Net increase in shares
outstanding before conversion.... 443,501 (1,017,308)
Shares reacquired upon conversion
into Class A..................... (11,547,682) (103,626,580)
----------- -------------
Net decrease in shares
outstanding...................... (11,104,181) $(104,643,888)
----------- -------------
----------- -------------
CLASS C
- -----------------------------------
Year ended February 28, 1997:
Shares sold........................ 165,423 $ 1,461,600
Shares issued in reinvestment of
dividends........................ 13,603 119,788
Shares reacquired.................. (85,011) (747,770)
----------- -------------
Net increase in shares
outstanding...................... 94,015 $ 833,618
----------- -------------
----------- -------------
Year ended February 29, 1996:
Shares sold........................ 192,911 $ 1,743,557
Shares issued in reinvestment of
dividends........................ 3,991 36,273
Shares reacquired.................. (21,707) (198,562)
----------- -------------
Net increase in shares
outstanding...................... 175,195 $ 1,581,268
----------- -------------
----------- -------------
|
CLASS Z SHARES AMOUNT
- ----------------------------------- ----------- -------------
March 4, 1996* through
February 28, 1997:
Shares sold**...................... 8,380,612 $ 72,933,807
Shares issued in reinvestment of
dividends........................ 299,172 2,638,604
Shares reacquired.................. (1,855,597) (16,377,605)
----------- -------------
Net increase in shares outstanding
before conversion from Class A... 6,824,187 59,194,806
Shares issued upon conversion from
Class A.......................... 1,559,278 14,231,482
----------- -------------
Net increase in shares
outstanding...................... 8,383,465 $ 73,426,288
----------- -------------
----------- -------------
|
CLASS A
----------------------------------------------------------
YEAR ENDED FEBRUARY 29/28,
----------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- ------- -------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 9.04 $ 8.59 $ 9.13 $ 9.40 $ 9.17
-------- -------- -------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income......................... 0.60 0.60 0.59 0.61 0.66
Net realized and unrealized gain (loss) on
investment transactions.................... (0.28) 0.45 (0.54) (0.25) 0.35
-------- -------- -------- ------- -------
Total from investment operations........... 0.32 1.05 0.05 0.36 1.01
-------- -------- -------- ------- -------
LESS DISTRIBUTIONS
Dividends from net investment income.......... (0.60) (0.60) (0.59) (0.61) (0.66)
Distributions in excess of accumulated
gains...................................... -- -- -- (0.02) --
Distributions from paid-in capital in excess
of par..................................... -- -- -- -- (0.12)
-------- -------- -------- ------- -------
Total distributions........................ (0.60) (0.60) (0.59) (0.63) (0.78)
-------- -------- -------- ------- -------
Net asset value, end of year.................. $ 8.76 $ 9.04 $ 8.59 $ 9.13 $ 9.40
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
TOTAL RETURN(a):.............................. 3.70% 12.41% .83% 3.90% 11.55%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $860,319 $945,038 $871,145 $51,673 $61,297
Average net assets (000)...................... $884,862 $909,169 $ 95,560 $55,921 $46,812
Ratios to average net assets:
Expenses, including distribution fees...... 0.90% 0.91% 0.98% 0.84% 0.84%
Expenses, excluding distribution fees...... 0.75% 0.76% 0.83% 0.69% 0.69%
Net investment income...................... 6.78% 6.65% 7.45% 6.48% 7.17%
For Class A, B, C and Z shares:
Portfolio turnover rate.................... 107% 123% 206% 80% 36%
|
CLASS B
------------------------------------------------------------------
YEAR ENDED FEBRUARY 29/28,
------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 9.04 $ 8.60 $ 9.13 $ 9.40 $ 9.17
-------- -------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income......................... 0.54 0.54 0.53 0.53 0.58
Net realized and unrealized gain (loss) on
investment transactions.................... (0.27) 0.44 (0.53) (0.25) 0.35
-------- -------- ---------- ---------- ----------
Total from investment operations........... 0.27 0.98 -- 0.28 0.93
-------- -------- ---------- ---------- ----------
LESS DISTRIBUTIONS
Dividends from net investment income.......... (0.54) (0.54) (0.53) (0.53) (0.58)
Distributions in excess of accumulated
gains...................................... -- -- -- (0.02) --
Distributions from paid-in capital in excess
of par..................................... -- -- -- -- (0.12)
-------- -------- ---------- ---------- ----------
Total distributions........................ (0.54) (0.54) (0.53) (0.55) (0.70)
-------- -------- ---------- ---------- ----------
Net asset value, end of year.................. $ 8.77 $ 9.04 $ 8.60 $ 9.13 $ 9.40
-------- -------- ---------- ---------- ----------
-------- -------- ---------- ---------- ----------
TOTAL RETURN(a):.............................. 3.12% 11.54% .24% 3.03% 10.61%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $461,988 $641,946 $ 705,732 $2,202,555 $2,680,259
Average net assets (000)...................... $543,796 $647,515 $1,735,413 $2,487,990 $2,670,924
Ratios to average net assets:
Expenses, including distribution fees...... 1.57% 1.58% 1.66% 1.68% 1.69%
Expenses, excluding distribution fees...... 0.75% 0.76% 0.80% 0.69% 0.69%
Net investment income...................... 6.11% 5.99% 6.17% 5.64% 6.32%
|
CLASS C CLASS Z
---------------------------------- ------------
AUGUST 1, MARCH 4,
YEAR ENDED 1994(c) 1996(d)
FEBRUARY 29/28, THROUGH THROUGH
----------------- FEBRUARY 28, FEBRUARY 28,
1997 1996 1995 1997
------ ------ ------------ ------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 9.04 $ 8.60 $ 8.69 $ 9.13
------ ------ ----- ------
Income from investment operations
Net investment income......................... 0.54 0.54 0.31 0.61
Net realized and unrealized gain (loss) on
investment transactions.................... (0.27) 0.44 (0.09) (0.37)
------ ------ ----- ------
Total from investment operations........... 0.27 0.98 0.22 0.24
------ ------ ----- ------
LESS DISTRIBUTIONS
Dividends from net investment income.......... (0.54) (0.54) (0.31) (0.61)
------ ------ ----- ------
Net asset value, end of period................ $ 8.77 $ 9.04 $ 8.60 $ 8.76
------ ------ ----- ------
------ ------ ----- ------
TOTAL RETURN(a):.............................. 3.20% 11.63% 2.75% 3.16%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $2,569 $1,799 $ 204 $ 73,411
Average net assets (000)...................... $2,440 $ 765 $ 111 $ 39,551
Ratios to average net assets:
Expenses, including distribution fees...... 1.50% 1.51% 1.63%(b) 0.75%(b)
Expenses, excluding distribution fees...... 0.75% 0.76% 0.88%(b) 0.75%(b)
Net investment income...................... 6.19% 5.99% 6.69%(b) 6.76%(b)
|
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of Prudential Government Income Fund, Inc. as of February 28, 1997, the related statements of operations for the year then ended and of changes in net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of the securities owned as of February 28, 1997 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of Prudential Government Income Fund, Inc. as of February 28, 1997, the results of its operations, the changes in its net assets and its financial highlights for the respective stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
New York, New York
April 11, 1997
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
(VALUE OF $1 INVESTED ON 12/31/25)
[CHART]
Source: Prudential Investment Corporation based on data from Ibbotson Associates, ENCORR Software, Chicago, Illinois. 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 1987 through 1995. 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 "Fund Expenses" in the prospectus. The net effect of the deduction of the operating expenses of a mutual fund on these historical total returns, including the compounded effect over time, could be substantial.
HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS
'87 '88 '89 '90 '91 '92 '93 '94 '95
- ----------------------------------------------------------------------------------------------------
U.S. GOVERNMENT
TREASURY
BONDS(1) 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4%
- ----------------------------------------------------------------------------------------------------
U.S. GOVERNMENT
MORTGAGE
SECURITIES(2) 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8%
- ----------------------------------------------------------------------------------------------------
U.S. INVESTMENT
GRADE
CORPORATE
BONDS(3) 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3%
- ----------------------------------------------------------------------------------------------------
U.S.
HIGH YIELD
CORPORATE
BONDS(4) 5.0% 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2%
- ----------------------------------------------------------------------------------------------------
WORLD
GOVERNMENT
BONDS(5) 35.2% 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6%
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
DIFFERENCE BETWEEN
HIGHEST
AND LOWEST RETURN
PERCENT 33.2 10.2 18.8 24.9 30.9 11.0 10.3 9.9 5.5
|
(1)LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over 150 public issues of the U.S. Treasury having maturities of at least one year.
(2)LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the Government National Mortgage Association (GNMA), Federal National Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
(3)LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate, nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated issues and include debt issued or guaranteed by foreign sovereign governments, municipalities, governmental agencies or international agencies. All bonds in the index have maturities of at least one year.
(4)LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over 750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch Investors Service). All bonds in the index have maturities of at least one year.
(5)SALOMON BROTHERS WORLD GOVERNMENT INDEX (NON U.S.) includes over 800 bonds issued by various foreign governments or agencies, excluding those in the U.S., but including those in Japan, Germany, France, the U.K., Canada, Italy, Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All bonds in the index have maturities of at least one year.
This chart below shows the historical volatility of general interest rates as measured by the long U.S. Treasury Bond.
LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1996)
Source: Stocks, Bonds, Bills, and Inflation 1996 Yearbook, Ibbotson Associates, Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield). Used with permission. All rights reserved. The chart illustrates the historical yield of the long-term U.S. Treasury Bond from 1926-1996. 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.
APPENDIX II--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk, 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.
II-1
APPENDIX III--INFORMATION RELATING TO THE PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company of America (Prudential) and its subsidiaries as well as information relating to the Prudential Mutual Funds. See "Management of the Fund--Manager" in the Prospectus. The data will be used in sales materials relating to the Prudential Mutual Funds. Unless otherwise indicated, the information is as of December 31, 1995 and is subject to change thereafter. All information relies on data provided by The Prudential Investment Corporation (PIC) or from other sources believed by the Manager to be reliable. Such information has not been verified by the Fund.
INFORMATION ABOUT PRUDENTIAL
The Manager and PIC(1) are subsidiaries of Prudential, which is one of the largest diversified financial services institutions in the world and, based on total assets, the largest insurance company in North America as of December 31, 1995. Its primary business is to offer a full range of products and services in three areas: insurance, investments and home ownership for individuals and families; health-care management and other benefit programs for employees of companies and members of groups; and asset management for institutional clients and their associates. Prudential (together with its subsidiaries) employs more than 92,000 persons worldwide, and maintains a sales force of approximately 13,000 agents and 5,600 financial advisors. Prudential is a major issuer of annuities, including variable annuities. Prudential seeks to develop innovative products and services to meet consumer needs in each of its business areas. Prudential uses the rock of Gibraltar as its symbol. The Prudential rock is a recognized brand name throughout the world.
INSURANCE. Prudential has been engaged in the insurance business since 1875. It insures or provides financial services to more than 50 million people worldwide--one of every five people in the United States. Long one of the largest issuers of individual life insurance, the Prudential has 19 million life insurance policies in force today with a face value of $1 trillion. Prudential has the largest capital base ($11.4 billion) of any life insurance company in the United States. The Prudential provides auto insurance for more than 1.7 million cars and insures more than 1.4 million homes.
MONEY MANAGEMENT. The Prudential is one of the largest pension fund managers in the country, providing pension services to 1 in 3 Fortune 500 firms. It manages $36 billion of individual retirement plan assets, such as 401(k) plans. In July 1995, INSTITUTIONAL INVESTOR ranked Prudential the third largest institutional money manager of the 300 largest money management organizations in the United States as of December 31, 1994. As of December 31, 1995, Prudential had more than $314 billion in assets under management. Prudential's Money Management Group (of which Prudential Mutual Funds is a key part) manages over $190 billion in assets of institutions and individuals.
REAL ESTATE. The Prudential Real Estate Affiliates, the fourth largest real estate brokerage network in the United States, has more than 34,000 brokers and agents and more than 1,100 offices in the United States.(2)
HEALTHCARE. Over two decades ago, the Prudential introduced the first federally-funded, for-profit HMO in the country. Today, almost 5 million Americans receive healthcare from a Prudential managed care membership.
FINANCIAL SERVICES. The Prudential Bank, a wholly-owned subsidiary of the Prudential, has nearly $3 billion in assets and serves nearly 1.5 million customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
Prudential Mutual Fund Management is one of the sixteenth largest mutual fund companies in the country, with over 2.5 million shareholders invested in more than 50 mutual fund portfolios and variable annuities with more than 3.7 million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage over $55 billion in mutual fund and variable annuity assets. Some of Prudential's portfolio managers have over 20 years of experience managing investment portfolios.
(1) The Prudential Investment Corporation (PIC) serves as the Subadviser to substantially all of the Prudential Mutual Funds. Wellington Management Company serves as the subadviser to Global Utility Fund, Inc., Nicholas-Applegate Capital Management as subadviser to Nicholas-Applegate Fund, Inc., Jennison Associates Capital Corp. as the subadviser to Prudential Jennison Series Fund, Inc. and BlackRock Financial Management, Inc. as subadviser to The BlackRock Government Income Trust. There are multiple subadvisers for The Target Portfolio Trust.
(2) As of December 31, 1994.
III-1
From time to time, there may be media coverage of portfolio managers and other investment professionals associated with the Manager and the Subadviser in national and regional publications, on television and in other media. Additionally, individual mutual fund portfolios are frequently cited in surveys conducted by national and regional publications and media organizations such as THE WALL STREET JOURNAL, THE NEW YORK TIMES, BARRON'S and USA TODAY.
EQUITY FUNDS. Forbes magazine listed Prudential Equity Fund among twenty mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995. Honorees are chosen annually among mutual funds (excluding sector funds) which are open to new investors and have had the same management for at least five years. Forbes considers, among other criteria, the total return of a mutual fund in both bull and bear markets as well as a fund's risk profile. Prudential Equity Fund is managed with a "value" investment style by PIC. In 1995, Prudential Securities introduced Prudential Jennison Fund, a growth-style equity fund managed by Jennison Associates Capital Corp., a premier institutional equity manager and a subsidiary of Prudential.
HIGH YIELD FUNDS. Investing in high yield bonds is a complex and research intensive pursuit. A separate team of high yield bond analysts monitor the 167 issues held in the Prudential High Yield Fund (currently the largest fund of its kind in the country) along with 100 or so other high yield bonds, which may be considered for purchase.(3) Non-investment grade bonds, also known as junk bonds or high yield bonds, are subject to a greater risk of loss of principal and interest including default risk than higher-rated bonds. Prudential high yield portfolio managers and analysts meet face-to-face with almost every bond issuer in the High Yield Fund's portfolio annually, and have additional telephone contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated research organization. Fourteen investment grade bond analysts monitor the financial viability of approximately 1,750 different bond issuers in the investment grade corporate and municipal bond markets--from IBM to small municipalities, such as Rockaway Township, New Jersey. These analysts consider among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from almost 200 brokers and market service vendors. They also receive nearly 100 trade publications and newspapers--from PULP AND PAPER FORECASTER to WOMEN'S WEAR DAILY--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect detailed information on which to trade. From natural gas prices in the Rocky Mountains to the results of local municipal elections, a Prudential portfolio manager or trader is able to monitor it if it's important to a Prudential mutual fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign government securities a year. PIC seeks information from government policy makers. In 1995, Prudential's portfolio managers met with several senior U.S. and foreign government officials, on issues ranging from economic conditions in foreign countries to the viability of index-linked securities in the United States.
Prudential Mutual Funds' portfolio managers and analysts met with over 1,200 companies in 1995, often with the Chief Executive Officer (CEO) or Chief Financial Officer (CFO). They also attended over 250 industry conferences.
Prudential Mutual Fund global equity managers conducted many of their visits overseas, often holding private meetings with a company in a foreign language (our global equity managers speak 7 different languages, including Mandarin Chinese).
TRADING DATA.(4) On an average day, Prudential Mutual Funds' U.S. and foreign equity trading desks traded $77 million in securities representing over 3.8 million shares with nearly 200 different firms. Prudential Mutual Funds' bond trading desks traded $157 million in government and corporate bonds on an average day. That represents more in daily trading than most bond funds tracked by Lipper even have in assets.(5) Prudential Mutual Funds' money market desk traded $3.2
(3) As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.
(4) Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios
of the Prudential Series Fund and institutional and non-US accounts managed
by Prudential Mutual Fund Investment Management, a division of PIC, for the
year ended December 31, 1995.
(5) Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate
U.S. Government, Short Investment Grade Debt, Intermediate Investment Grade
Debt, General U.S. Treasury, General U.S. Government and Mortgage funds.
III-2
billion in money market securities on an average day, or over $800 billion a year. They made a trade every 3 minutes of every trading day. In 1994, the Prudential Mutual Funds effected more than 40,000 trades in money market securities and held on average $20 billion of money market securities.(6)
Based on complex-wide data, on an average day, over 7,250 shareholders telephoned Prudential Mutual Fund Services, Inc., the Transfer Agent of the Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On an annual basis, that represents approximately 1.8 million telephone calls answered.
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the United States with approximately 5,600 financial advisors. It offers to its clients a wide range of products, including Prudential Mutual Funds and annuities. As of December 31, 1995, assets held by Prudential Securities for its clients approximated $168 billion. During 1994, over 28,000 new customer accounts were opened each month at PSI.(7)
Prudential Securities has a two-year Financial Advisor training program plus advanced education programs, including Prudential Securities "university," which provides advanced education in a wide array of investment areas. Prudential Securities is the only Wall Street firm to have its own in-house Certified Financial Planner (CFP) program. In the December 1995 issue of REGISTERED REP, an industry publication, Prudential Securities' Financial Advisor training programs received a grade of A- (compared to an industry average of B+) .
In 1995, Prudential Securities' equity research team ranked 8th in Institutional Investor magazine's 1995 "All America Research Team" survey. Five Prudential Securities' analysts were ranked as first-team finishers.(8)
In addition to training, Prudential Securities provides its financial advisors with access to firm economists and market analysts. It has also developed proprietary tools for use by financial advisors, including the Financial ArchitectSM, a state-of-the-art asset allocation software program which helps Financial Advisors to evaluate a client's objectives and overall financial plan, and a comprehensive mutual fund information and analysis system that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds, including charges and expenses, call your Prudential Securities financial adviser or Pruco/Prudential representative for a free prospectus. Read it carefully before you invest or send money.
(7) As of December 31, 1994.
(8) On an annual basis, INSTITUTIONAL INVESTOR magazine surveys more than 700 institutional money managers, chief investment officers and research directors, asking them to evaluate analysts in 76 industry sectors. Scores are produced by taking the number of votes awarded to an individual analyst and weighting them based on the size of the voting institution. In total, the magazine sends its survey to approximately 2,000 institutions and a group of European and Asian institutions.
III-3
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS:
(1) Financial statements included in the Prospectus constituting Part A of this Registration Statement:
Financial Highlights
(2) Financial statements included in the Statement of Additional Information constituting Part B of this Registration Statement:
Portfolio of Investments at February 28, 1997 (audited).
Statement of Assets and Liabilities at February 28, 1997 (audited).
Statement of Operations for the year ended February 28, 1997 (audited).
Statement of Changes in Net Assets for the years ended February 28, 1997 and February 29, 1996 (audited).
Notes to Financial Statements.
Financial Highlights with respect to the five-year period ended February 28, 1997 (audited).
Independent Auditors' Report.
(b) EXHIBITS:
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.
2. Amended and Restated By-laws of the Registrant, incorporated by
reference to Exhibit 2 to Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR.
3. Not applicable.
4. 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.
5. (a) Management Agreement between the Registrant and Prudential Mutual
Fund Management, Inc.*
(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation.*
6. (a) Dealer Agreement between Prudential Securities Inc. and dealer or
dealers to be determined.*
(b) Distribution Agreement.*
7. Not Applicable.
8. (a) Revised Custodian Agreement between the Registrant and State
Street Bank and Trust Company.*
(b) Special Custody Agreement among the Registrant, State Street Bank
and Trust Company, and Goldman, Sachs & Co.*
(c) Customer Agreement between the Registrant and Goldman, Sachs &
Co.*
(d) 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.
9. Transfer Agency Agreement between the Registrant and Prudential
Mutual Fund Services, Inc.*
10. Opinion of Counsel.*
11. Consent of Independent Accountants.*
|
12. Not Applicable.
13. Purchase Agreement.*
14. Not Applicable.
15. (a) Distribution and Service Plan for Class A shares, incorporated by
reference to Exhibit 15(a) to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR.
(b) Distribution and Service Plan for Class B shares, incorporated by
reference to Exhibit 15(b) to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR.
(c) Distribution and Service Plan for Class C shares, incorporated by
reference to Exhibit 15(c) to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR.
16. (a) Schedule of computation of performance (Class A).*
(b) Schedule of computation of performance (Class B).*
(c) Schedule of computation of performance (Class C), incorporated by
reference to Exhibit 16(c) to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR.
(d) Schedule of computation of performance (Class Z)*
17. Financial Data Schedules.*
18. Rule 18f-3 Plan, filed as Exhibit 18 to Post-Effective Amendment No.
21 to the Registration Statement on Form N-1A (File No. 2-82976)
filed via EDGAR on March 1, 1996.
|
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of April 11, 1997 there were 69,807, 40,804, 406 and 1,367 record holders of Class A, Class B, Class C and Class Z shares of common stock, respectively, $.01 par value per share, of the Registrant.
ITEM 27. INDEMNIFICATION.
As permitted by Section 17(h) and (i) of the Investment Company Act of 1940,
as amended (the 1940 Act), and pursuant to Article VI of the Fund's By-Laws
(Exhibit 2 to the Registration Statement), officers, directors, employees and
agents of the Registrant will not be liable to the Registrant, any stockholder,
officer, director, employee, agent or other person for any action or failure to
act, except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
Section 2-418 of Maryland General Corporation Law permits indemnification of
directors who acted in good faith and reasonably believed that the conduct was
in the best interests of the Registrant. As permitted by Section 17(i) of the
1940 Act, pursuant to Section 10 of each Distribution Agreement (Exhibit 6 to
the Registration Statement), each Distributor of the Registrant may be
indemnified against liabilities which it may incur, except liabilities arising
from bad faith, gross negligence, willful misfeasance or reckless disregard of
duties.
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (Securities Act), may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the 1940 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in connection with the successful defense of any action, suit or proceeding) is asserted against the Registrant by such director, officer or controlling person in connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the 1940 Act and will be governed by the final adjudication of such issue.
The Registrant has purchased an insurance policy insuring its officers and directors against liabilities, and certain costs of defending claims against such officers and directors, to the extent such officers and directors are not found to have committed conduct constituting willful misfeasance, bad faith, gross negligence or reckless disregard in the performance of their duties. The insurance policy also insures the Registrant against the cost of indemnification payments to officers and directors under certain circumstances.
Section 9 of the Management Agreement (Exhibit 5(a) to the Registration Statement) and Section 4 of the Subadvisory Agreement (Exhibit 5(b) to the Registration Statement) limit the liability of Prudential Mutual Fund Management, Inc. (PMF) and The Prudential Investment Corporation (PIC), respectively, to liabilities arising from willful misfeasance, bad faith or gross negligence in the performance of their respective duties or from reckless disregard by them of their respective obligations and duties under the agreements.
The Registrant hereby undertakes that it will apply the indemnification provisions of its By-Laws and the Distribution Agreement in a manner consistent with Release No. 11330 of the Securities and Exchange Commission under the 1940 Act so long as the interpretation of Section 17(h) and 17(i) of such Act remain in effect and are consistently applied.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
(a) Prudential Investments Fund Management LLC
See "How the Fund is Managed--Manager" in the Prospectus constituting Part A of this Registration Statement and "Manager" in the Statement of Additional Information constituting Part B of this Registration Statement.
The business and other connections of the officers of PIFM are listed in Schedules A and D of Form ADV of PIFM as currently on file with the Securities and Exchange Commission, the text of which is hereby incorporated by reference (File No. 801-31104).
The business and other connections of PIFM's directors and principal executive officers are set forth below. Except as otherwise indicated, the address of each person is Gateway Center Three, Newark, NJ 07102.
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS
- ------------------------- -------------------- -------------------------------------------------------------
Brian M. Storms President and Chief President and Chief Executive Officer, PIFM
Executive Officer
Robert F. Gunia Executive Vice Comptroller, Prudential Investments; Executive Vice President
President and and Treasurer, PIFM; Senior Vice President of Prudential
Treasurer Securities Incorporated (Prudential Securities)
Thomas A. Early Executive Vice Executive Vice President, Secretary and General Counsel,
President, Secretary PIFM;
and General Counsel
Susan C. Cote Executive Vice Executive Vice President, Chief Financial Officer, PIFM
President, Chief Managing Director, Prudential Investments and Vice
Financial Officer President, PIC
Neil A. McGuinness Executive Vice Executive Vice President, PIFM
President
Robert J. Sullivan Executive Vice Executive Vice President, PIFM
President
|
(b) The Prudential Investment Corporation (PIC)
See "How the Fund is Managed--Manager" in the Prospectus constituting Part A of this Registration Statement and "Manager" in the Statement of Additional Information constituting Part B of this Registration Statement.
The business and other connections of PIC's directors and executive officers are as set forth below. Except as otherwise indicated, the address of each person is Prudential Plaza, Newark, NJ 07101.
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ------------------------- -------------------- -------------------------------------------------------------
E. Michael Caulfield Chairman of the Chief Executive Officer, Prudential Investments of
Board, President, Prudential; Chairman of the Board, President, Chief
Chief Executive Executive Officer and Director, PIC
Officer and Director
Jonathan M. Greene Senior Vice President--Investment Management, Prudential Investments of
President and Prudential; Senior Vice President and Director, PIC
Director
John R. Strangfeld Vice President and President of Private Asset Management Group of Prudential;
Director Vice President and Director, PIC
|
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) Prudential Securities
Prudential Securities is distributor for Command Government Fund, Command Money Fund, Command Tax-Free Fund, Prudential Government Securities Trust (Short-Intermediate Term Series, Money Market Series and U.S. Treasury Money Market Series), Prudential Institutional Liquidity Portfolio, Inc., Prudential MoneyMart Assets, Inc., Prudential Special Money Market Fund, Inc., Prudential Tax-Free Money Fund, Inc., Prudential Jennison Series Fund, Inc., The Target Portfolio Trust, Prudential Allocation Fund, Prudential California Municipal Fund, Prudential Distressed Securities Fund, Inc., Prudential Diversified Bond Fund, Inc., Prudential Dryden Fund, Prudential Emerging Growth Fund, Inc., Prudential Equity Fund, Inc., Prudential Equity Income Fund, Prudential Europe Growth Fund, Inc., Prudential Global Genesis Fund, Inc., Prudential Global Limited Maturity Fund, Inc., Prudential Government Income Fund, Inc., Prudential High Yield Fund, Inc., Prudential Intermediate Global Income Fund, Inc., Prudential Mortgage Income Fund, Inc., Prudential Multi-Sector Fund, Inc., Prudential Municipal Bond Fund, Prudential Municipal Series Fund, Prudential National Municipals Fund, Inc., Prudential Natural Resources Fund, Inc., Prudential Pacific Growth Fund, Inc., Prudential Small Companies Fund, Inc., Prudential Structured Maturity Fund, Inc., Prudential Utility Fund, Inc., Prudential World Fund, Inc., The Global Government Plus Fund, Inc., The Global Total Return Fund, Inc., Global Utility Fund, Inc., Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth Equity Fund) and The BlackRock Government Income Trust. Prudential Securities is also a depositor for the following unit investment trust:
Corporate Investment Trust Fund Prudential Equity Trust Shares National Equity Trust Prudential Unit Trusts Government Securities Equity Trust National Municipal Trust
(b) Information concerning the directors and officers of Prudential Securities Incorporated is set forth below.
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
- ------------------------------------ ----------------------------------------------------------- --------------
Robert C. Golden ................... Executive Vice President and Director None
One New York Plaza
New York, N.Y. 10292
Alan D. Hogan....................... Executive Vice President, Chief Administrative Officer and None
Director
George A. Murray.................... Executive Vice President and Director None
Leland B. Paton .................... Executive Vice President and Director None
One New York Plaza
New York, N.Y. 10292
Martin Pfinsgraff................... Executive Vice President, Chief Financial Officer and None
Director
Vincent T. Pica, II ................ Executive Vice President and Director None
One New York Plaza
New York, N.Y. 10292
Hardwick Simmons.................... Chief Executive Officer, President and Director None
Lee B. Spencer, Jr.................. General Counsel, Executive Vice President, Secretary and None
Director
- ------------------------
(1) The address of each person named is One Seaport Plaza, New York, NY 10292
unless otherwise indicated.
|
(c) Registrant has no principal underwriter who is not an affiliated person of the Registrant.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section 31(a) of the 1940 Act and the Rules thereunder are maintained at the offices of State Street Bank and Trust Company, One Heritage Drive, North Quincy, Massachusetts 02171, the Registrant, Gateway Center Three, Newark, New Jersey 07102, and Prudential Mutual Fund Services LLC, Raritan Plaza One, Edison, New Jersey. Documents required by Rules 31a-1(b)(5), (6), (7), (9), (10) and (11) and 31a-1(f) will be kept at 2 Gateway Center, documents required by Rules 31a-1(b)(4) and (11) and 31a-1(d) at One Seaport Plaza and the remaining accounts, books and other documents required by such other pertinent provisions of Section 31(a) and the Rules promulgated thereunder will be kept by State Street Bank and Trust Company and Prudential Mutual Fund Services LLC.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the captions "How the Fund is Managed--Manager" and "Management of the Fund-- Distributor" in the Prospectus and the captions "Manager" and "Distributor" in the Statement of Additional Information, constituting Parts A and B, respectively, of this Registration Statement, Registrant is not a party to any management-related service contract.
ITEM 32. UNDERTAKINGS.
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 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 1st day of May, 1997.
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
/s/ Richard A. Redeker ------------------------------------------------- (RICHARD A. REDEKER, PRESIDENT) |
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment to the Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------------------------------------------- ----------------------------------------------------
/s/ Eugene S. Stark Treasurer and Principal Financial May 1, 1997
- ------------------------------------ and Accounting Officer
EUGENE S. STARK
/s/ Edward D. Beach Director May 1, 1997
- ------------------------------------
EDWARD D. BEACH
/s/ Eugene C. Dorsey Director May 1, 1997
- ------------------------------------
EUGENE C. DORSEY
/s/ Delayne Dedrick Gold Director May 1, 1997
- ------------------------------------
DELAYNE DEDRICK GOLD
/s/ Robert F. Gunia Director May 1, 1997
- ------------------------------------
ROBERT F. GUNIA
/s/ Harry A. Jacobs, Jr. Director May 1, 1997
- ------------------------------------
HARRY A. JACOBS, JR.
/s/ Donald D. Lennox Director May 1, 1997
- ------------------------------------
DONALD D. LENNOX
/s/ Mendel A. Melzer Director May 1, 1997
- ------------------------------------
MENDEL A. MELZER
/s/ Thomas T. Mooney Director May 1, 1997
- ------------------------------------
THOMAS T. MOONEY
/s/ Thomas O'Brien Director May 1, 1997
- ------------------------------------
THOMAS O'BRIEN
/s/ Richard A. Redeker President and Director May 1, 1997
- ------------------------------------
RICHARD A. REDEKER
/s/ Nancy H. Teeters Director May 1, 1997
- ------------------------------------
NANCY H. TEETERS
/s/ Louis A. Weil, III Director May 1, 1997
- ------------------------------------
LOUIS A. WEIL, III
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EXHIBIT INDEX
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.
2. Amended and Restated By-laws of the Registrant, incorporated by
reference to Exhibit 2 to Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR.
3. Not applicable.
4. 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.
5. (a) Management Agreement between the Registrant and Prudential Mutual
Fund Management, Inc.*
(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation.*
6. (a) Dealer Agreement between Prudential Securities Inc. and dealer or
dealers to be determined.*
(b) Distribution Agreement.*
7. Not Applicable.
8. (a) Revised Custodian Agreement between the Registrant and State
Street Bank and Trust Company.*
(b) Special Custody Agreement among the Registrant, State Street Bank
and Trust Company, and Goldman, Sachs & Co.*
(c) Customer Agreement between the Registrant and Goldman, Sachs &
Co.*
(d) Form of Amendment to Custodian Contract 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.
9. Transfer Agency Agreement between the Registrant and Prudential
Mutual Fund Services, Inc.*
10. Opinion of Counsel.*
11. Consent of Independent Accountants.*
12. Not Applicable.
13. Purchase Agreement.*
14. Not Applicable.
15. (a) Distribution and Service Plan for Class A shares, incorporated by
reference to Exhibit 15(a) to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR.
(b) Distribution and Service Plan for Class B shares, incorporated by
reference to Exhibit 15(b) to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR.
(c) Distribution and Service Plan for Class C shares, incorporated by
reference to Exhibit 15(c) to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR.
16. (a) Schedule of computation of performance (Class A).*
(b) Schedule of computation of performance (Class B).*
(c) Schedule of computation of performance (Class C), incorporated by
reference to Exhibit 16(c) to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR.
(d) Schedule of computation of performance (Class Z).*
17. Financial Data Schedules.*
18. Rule 18f-3 Plan, filed as Exhibit 18 to Post-Effective Amendment No.
21 to the Registration Statement on Form N-1A (File No. 2-82976)
filed via EDGAR on March 1, 1996.
|
*Filed herewith.
Prudential-Bache Government Plus Fund, Inc.
MANAGEMENT AGREEMENT
Agreement made this 1st day of July, 1988 between Prudential-Bache Government Plus Fund, Inc., a Maryland corporation (the Fund), and Prudential Mutual Fund Management, Inc., a Delaware corporation (the Manager).
W I T N E S S E T H
WHEREAS, the Fund is a diversified, open-end management investment company registered under the Investment Company Act of 1940, as amended (the 1940 Act); and
WHEREAS, the Fund desires to retain the Manager to render or contract to obtain as hereinafter provided investment advisory services to the Fund and the Fund also desires to avail itself of the facilities available to the Manager with respect to the administration of its day to day corporate affairs, and the Manager is willing to render such investment advisory and administrative services;
NOW, THEREFORE, the parties agree as follows:
1. The Fund hereby appoints the Manager to act as manager of the Fund and administrator of its corporate affairs for the period and on the terms set forth in this Agreement. The Manager accepts such appointment and agrees to render the services herein described, for the compensation herein provided. The Manager is authorized to enter into an agreement with The Prudential Investment Corporation (PIC) pursuant to which PIC shall furnish to the Fund the investment advisory services in connection with the management of the Fund (the Subadvisory Agreement). The Manager
will continue to have responsibility for all investment advisory services furnished pursuant to the Subadvisory Agreement.
2. Subject to the supervision of the Board of Directors of the Fund, the
Manager shall administer the Fund's corporate affairs and, in connection
therewith, shall furnish the Fund with office facilities and with clerical,
bookkeeping and recordkeeping services at such office facilities and, subject to
Section 1 hereof and the Subadvisory Agreement, the Manager shall manage the
investment operations of the Fund and the composition of the Fund's portfolio,
including the purchase, retention and disposition thereof, in accordance with
the Fund's investment objectives, policies and restrictions as stated in the
Prospectus (hereinafter defined) and subject to the following understandings:
(a) The Manager shall provide supervision of the Fund's investments and determine from time to time what investments or securities will be purchased, retained, sold or loaned by the Fund, and what portion of the assets will be invested or held uninvested as cash.
(b) The Manager, in the performance of its duties and obligations under this Agreement, shall act in conformity with the Articles of Incorporation, By-Laws and Prospectus (hereinafter defined) of the Fund and with the instructions and directions of the Board of Directors of the Fund and will conform to and comply with the requirements of the 1940 Act and all other applicable federal and state laws and regulations.
(c) The Manager shall determine the securities and
futures contracts to be purchased or sold by the Fund and will place orders pursuant to its determinations with or through such persons, brokers, dealers or futures commission merchants (including but not limited to Prudential Securities Incorporated) in conformity with the policy with respect to brokerage as set forth in the Fund's Registration Statement and Prospectus (hereinafter defined) or as the Board of Directors may direct from time to time. In providing the Fund with investment supervision, it is recognized that the Manager will give primary consideration to securing the most favorable price and efficient execution. Consistent with this policy, the Manager may consider the financial responsibility, research and investment information and other services provided by brokers, dealers or futures commission merchants who may effect or be a party to any such transaction or other transactions to which other clients of the Manager may be a party. It is understood that Prudential Securities Incorporated may be used as principal broker for securities transactions but that no formula has been adopted for allocation of the Fund's investment transaction business. It is also understood that it is desirable for the Fund that the Manager have access to supplemental investment and market research and security and economic analysis provided by brokers or futures commission merchants and that such brokers may execute brokerage transactions at a higher cost to the Fund than may result when allocating brokerage to other brokers or futures commission merchants
on the basis of seeking the most
favorable price and efficient execution. Therefore, the Manager is
authorized to pay higher brokerage commissions for the purchase and sale of
securities and futures contracts for the Fund to brokers or futures
commission merchants who provide such research and analysis, subject to
review by the Fund's Board of Directors from time to time with respect to
the extent and continuation of this practice. It is understood that the
services provided by such broker or futures commission merchant may be
useful to the Manager in connection with its services to other clients.
On occasions when the Manager deems the purchase or sale of a security
or a futures contract to be in the best interest of the Fund as well as
other clients of the Manager or the Subadviser, the Manager, to the extent
permitted by applicable laws and regulations, may, but shall be under no
obligation to, aggregate the securities or futures contracts to be so sold
or purchased in order to obtain the most favorable price or lower brokerage
commissions and efficient execution. In such event, allocation of the
securities or futures contracts so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Manager in the
manner it considers to be the most equitable and consistent with its
fiduciary obligations to the Fund and to such other clients.
(d) The Manager shall maintain all books and records with respect to the Fund's portfolio transactions and shall render to the Fund's Board of Directors such periodic and special
reports as the Board may reasonably request.
(e) The Manager shall be responsible for the financial and accounting records to be maintained by the Fund (including those being maintained by the Fund's Custodian).
(f) The Manager shall provide the Fund's Custodian on each business day with information relating to all transactions concerning the Fund's assets.
(g) The investment management services of the Manager to the Fund under this Agreement are not to be deemed exclusive, and the Manager shall be free to render similar services to others.
3. The Fund has delivered to the Manager copies of each of the following documents and will deliver to it all future amendments and supplements, if any:
(a) Articles of Incorporation of the Fund, as filed with the Secretary of State of Maryland (such Articles of Incorporation, as in effect on the date hereof and as amended from time to time, are herein called the "Articles of Incorporation");
(b) By-Laws of the Fund (such By-Laws, as in effect on the date hereof and as amended from time to time, are herein called the "By-Laws");
(c) Certified resolutions of the Board of Directors of the Fund authorizing the appointment of the Manager and approving the form of this agreement;
(d) Registration Statement under the 1940 Act and the
Securities Act of 1933, as amended, on Form N-1A (the Registration Statement), as filed with the Securities and Exchange Commission (the Commission) relating to the Fund and shares of the Fund's Common Stock and all amendments thereto;
(e) Notification of Registration of the Fund under the 1940 Act on Form N-8A as filed with the Commission and all amendments thereto; and
(f) Prospectus of the Fund (such Prospectus and Statement of Additional Information, as currently in effect and as amended or supplemented from time to time, being herein called the "Prospectus").
4. The Manager shall authorize and permit any of its directors, officers and employees who may be elected as directors or officers of the Fund to serve in the capacities in which they are elected. All services to be furnished by the Manager under this Agreement may be furnished through the medium of any such directors, officers or employees of the Manager.
5. The Manager shall keep the Fund's books and records required to be maintained by it pursuant to paragraph 2 hereof. The Manager agrees that all records which it maintains for the Fund are the property of the Fund and it will surrender promptly to the Fund any such records upon the Fund's request, provided however that the Manager may retain a copy of such records. The Manager further agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act any such records as are required to be maintained by the Manager pursuant to Paragraph 2 hereof.
6. During the term of this Agreement, the Manager shall pay the following expenses:
(i) the salaries and expenses of all personnel of the Fund and the Manager except the fees and expenses of directors who are not affiliated persons of the Manager or the Fund's investment adviser,
(ii) all expenses incurred by the Manager or by the Fund in connection with managing the ordinary course of the Fund's business other than those assumed by the Fund herein, and
(iii) the costs and expenses payable to PIC pursuant to the Subadvisory Agreement.
The Fund assumes and will pay the expenses described below:
(a) the fees and expenses incurred by the Fund in connection with the management of the investment and reinvestment of the Fund's assets,
(b) the fees and expenses of directors who are not affiliated persons of the Manager or the Fund's investment adviser,
(c) the fees and expenses of the Custodian that relate to (i) the custodial function and the recordkeeping connected therewith, (ii) preparing and maintaining the general accounting records of the Fund and the providing of any such records to the Manager useful to the Manager in connection with the Manager's responsibility for the accounting records of the Fund pursuant to Section 31 of the 1940 Act and the rules promulgated thereunder, (iii) the pricing of the shares of the
Fund, including the cost of any pricing service or services which may be retained pursuant to the authorization of the Board of Directors of the Fund, and (iv) for both mail and wire orders, the cashiering function in connection with the issuance and redemption of the Fund's securities,
(d) the fees and expenses of the Fund's Transfer and Dividend Disbursing Agent, which may be the Custodian, that relate to the maintenance of each shareholder account,
(e) the charges and expenses of legal counsel and independent accountants for the Fund,
(f) brokers' commissions and any issue or transfer taxes chargeable to the Fund in connection with its securities and futures transactions,
(g) all taxes and corporate fees payable by the Fund to federal, state or other governmental agencies,
(h) the fees of any trade associations of which the Fund may be a member,
(i) the cost of stock certificates representing, and/or non-negotiable share deposit receipts evidencing, shares of the Fund,
(j) the cost of fidelity, directors and officers and errors and omissions insurance,
(k) the fees and expenses involved in registering and maintaining registration of the Fund and of its shares with the Securities and Exchange Commission, registering the Fund as a broker or dealer and qualifying its shares under state
securities laws, including the preparation and printing of the Fund's registration statements, prospectuses and statements of additional information for filing under federal and state securities laws for such purposes,
(l) allocable communications expenses with respect to investor services and all expenses of shareholders' and directors' meetings and of preparing, printing and mailing reports to shareholders in the amount necessary for distribution to the shareholders,
(m) litigation and indemnification expenses and other extraordinary expenses not incurred in the ordinary course of the Fund's business, and
(n) any expenses assumed by the Fund pursuant to a Plan of Distribution adopted in conformity with Rule 12b-1 under the 1940 Act.
7. In the event the expenses of the Fund for any fiscal year (including the fees payable to the Manager but excluding interest, taxes, brokerage commissions, distribution fees and litigation and indemnification expenses and other extraordinary expenses not incurred in the ordinary course of the Fund's business) exceed the lowest applicable annual expense limitation established and enforced pursuant to the statute or regulations of any jurisdictions in which shares of the Fund are then qualified for offer and sale, the compensation due the Manager will be reduced by the amount of such excess, or, if such reduction exceeds the compensation payable to the Manager, the Manager will pay to
the Fund the amount of such reduction which exceeds the amount of such compensation.
8. For the services provided and the expenses assumed pursuant to this Agreement, the Fund will pay to the Manager as full compensation therefor a fee at an annual rate of .50 of 1% of the Fund's average daily net assets up to $50 million and .30 of 1% of the Fund's average daily net assets in excess of $50 million. This fee will be computed daily and will be paid to the Manager monthly. Any reduction in the fee payable and any payment by the Manager to the Fund pursuant to paragraph 7 shall be made monthly. Any such reductions or payments are subject to readjustment during the year.
9. Nothing in this Agreement shall prohibit the Manager from paying any expenses which might be considered as indirectly financing any activity primarily intended to result in the sale of Fund shares.
10. The Manager shall not be liable for any error of judgment or for any loss suffered by the Fund in connection with the matters to which this Agreement relates, except a loss resulting from a breach of fiduciary duty with respect to the receipt of compensation for services (in which case any award of damages shall be limited to the period and the amount set forth in Section 36(b)(3) of the 1940 Act) or loss resulting from willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard by it of its obligations and duties under this Agreement.
11. This Agreement shall continue in effect for a period of more than two years from the date hereof only so long as such continuance is specifically approved at least annually in conformity with the requirements of the 1940 Act; provided, however, that this Agreement may be terminated by the Fund at any time, without the payment of any penalty, by the Board of Directors of the Fund or by vote of a majority of the outstanding voting securities (as defined in the 1940 Act) of the Fund, or by the Manager at any time, without the payment of any penalty, on not more than 60 days' nor less than 30 days' written notice to the other party. This Agreement shall terminate automatically in the event of its assignment (as defined in the 1940 Act).
12. Nothing in this Agreement shall limit or restrict the right of any director, officer or employee of the Manager who may also be a director, officer or employee of the Fund to engage in any other business or to devote his or her time and attention in part to the management or other aspects of any business, whether of a similar or dissimilar nature, nor limit or restrict the right of the Manager to engage in any other business or to render services of any kind to any other corporation, firm, individual or association.
13. Except as otherwise provided herein or authorized by the Board of Directors of the Fund from time to time, the Manager shall for all purposes herein be deemed to be an independent contractor and shall have no authority to act for or represent the Fund in any way or otherwise be deemed an agent of the Fund.
14. During the term of this Agreement, the Fund agrees to furnish the Manager at its principal office all prospectuses, proxy statements, reports to shareholders, sales literature, or other material prepared for distribution to shareholders of the Fund or the public, which refer in any way to the Manager, prior to use thereof and not to use such material if the Manager reasonably objects in writing within five business days (or such other time as may be mutually agreed) after receipt thereof. In the event of termination of this Agreement, the Fund will continue to furnish to the Manager copies of any of the above mentioned materials which refer in any way to the Manager. Sales literature may be furnished to the Manager hereunder by first-class or overnight mail, facsimile transmission equipment or hand delivery. The Fund shall furnish or otherwise make available to the Manager such other information relating to the business affairs of the Fund as the Manager at any time, or from time to time, reasonably requests in order to discharge its obligations hereunder.
15. This Agreement may be amended by mutual consent, but the consent of the Fund must be obtained in conformity with the requirements of the 1940 Act.
16. Any notice or other communication required to be given pursuant to this Agreement shall be deemed duly given if delivered or mailed by registered mail, postage prepaid, (1) to the Manager at One Seaport Plaza, New York, N.Y. 10292, Attention: Secretary; or (2) to the Fund at One Seaport Plaza, New York, N.Y. 10292, Attention: President.
17. This Agreement shall be governed by and construed in accordance with the laws of the State of New York.
18. The Fund may use the name "Prudential-Bache Government Plus Fund, Inc." or any name including the word "Prudential" or "Bache" only for so long as this Agreement or any extension, renewal or amendment hereof remains in effect, including any similar agreement with any organization which shall have succeeded to the Manager's business as Manager or any extension, renewal or amendment thereof remain in effect. At such time as such an agreement shall no longer be in effect, the Fund will (to the extent that it lawfully can) cease to use such a name or any other name indicating that it is advised by, managed by or otherwise connected with the Manager, or any organization which shall have so succeeded to such businesses. In no event shall the Fund use the name "Prudential-Bache Government Plus Fund, Inc." or any name including the word "Prudential" or "Bache" if the Manager's function is transferred or assigned to a company of which The Prudential Insurance Company of America does not have control.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed by their officers designated below as of the day and year first above written.
PRUDENTIAL-BACHE GOVERNMENT
PLUS FUND, INC.
By/s/ LAWRENCE C. MCQUADE ------------------------------ Lawrence C. McQuade |
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC.
By/s/ ROBERT F. GUNIA ------------------------------ Robert F. Gunia |
PRUDENTIAL-BACHE GOVERNMENT PLUS FUND, INC.
Subadvisory Agreement
Agreement made as of this 1st day of July, 1988 between Prudential Mutual Fund Management Inc., a Delaware Corporation ("PMF" or the "Manager"), and The Prudential Investment Corporation, a New Jersey Corporation (the "Subadviser").
WHEREAS, the Manager has entered into a Management Agreement, dated July 25, 1989(the "Management Agreement"), with Prudential-Bache Government Plus Fund, Inc. (the "Fund"), a Maryland corporation and a diversified open-end management investment company registered under the Investment Company Act of 1940 (the "1940 Act"), pursuant to which PMF will act as Manager of the Fund.
WHEREAS, PMF desires to retain the Subadviser to provide investment advisory services to the Fund in connection with the management of the Fund and the Subadviser is willing to render such investment advisory services.
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the Board of Directors of the Fund, the Subadviser shall manage the investment operations of the Fund and the composition of the Fund's portfolio, including the purchase, retention and disposition thereof, in accordance with the Fund's investment objectives, policies and restrictions as stated in the Prospectus, (such Prospectus and Statement of Additional Information as currently in effect and as amended or supplemented from time to time, being herein called the "Prospectus"), and subject to the following understandings:
(i) The Subadviser shall provide supervision of the Fund's invest- ments and determine from time to time what investments and securities will be purchased, retained, sold or loaned by the Fund, and what portion of the assets will be invested or held uninvested as cash.
(ii) In the performance of its duties and obligations under this Agreement, the Subadviser shall act in conformity with the Articles of Incorporation, By-Laws and Prospectus of the Fund and with the instructions and directions of the Manager and of the Board of Directors of the Fund and will conform to and comply with the requirements of the 1940 Act, the Internal Revenue Code of 1986 and all other applicable federal and state laws and regulations.
(iii) The Subadviser shall determine the securities to be purchased or sold by the Fund and will place orders with or through such persons, brokers or dealers (including but not limited to Prudential-Bache Securities Inc.) to carry out the policy with respect to brokerage as set forth in the Fund's Registration Statement and Prospectus or as the Board of Directors may direct from time to time. In providing the Fund with investment supervision, it is recognized that the Subadviser will give primary consideration to securing the most favorable price and efficient execution. Within the framework of this policy, the Subadviser may consider the financial responsibility, research and investment information and other services provided by brokers or dealers who may effect or be a party to any such transaction or other transactions to which the Subadviser's other clients may be a party. It is understood that Prudential-Bache Securities Inc. may be used as principal broker for securities transactions but that no formula has been adopted for allocation of the Fund's investment transaction business. It is also understood that it is desirable for the Fund that the Subadviser have access to supplemental investment and market research and security and economic analysis provided by brokers who may execute brokerage transactions at a higher cost to the Fund than may result when allocating brokerage to other brokers on the basis of seeking the most favorable price and efficient execution. Therefore, the Subadviser is authorized to place orders for the purchase and sale of securities for the Fund with such brokers subject to review by the Fund's Board of Directors from time to time with respect to the extent and continuation of this practice. It is understood that the services provided by such brokers may be useful to the Subadviser in connection with the Subadviser's services to other clients.
On occasions when the Subadviser deems the purchase or sale of a security to be in the best interest of the Fund as well as other clients of the Subadviser, the Subadviser, to the extent permitted by applicable laws and regulations, may, but shall be under no obligation to, aggregate the securities to be sold or purchased in order to obtain the most favorable price or lower brokerage commissions and efficient execution. In such event, allocation of the securities so purchased or sold, as well as the expenses incurred in the transaction, will be made by the Subadviser in the manner the Subadviser considers to be the most equitable and consistent with its fiduciary obligations to the Fund and to such other clients.
(iv) The Subadviser shall maintain all books and records with respect
to the Fund's portfolio transactions required by subparagraphs (b)(5), (6),
(7), (9), (10) and (11) and paragraph (f) of Rule 31a-1 under the 1940 Act
and shall render to the Fund's Board of Directors such periodic and special
reports as the Board may reasonably request.
(v) The Subadviser shall provide the Fund's Custodian on each business day with information relating to all transactions concerning the Fund's assets and shall provide the Manager with such information upon request of the Manager.
(vi) The investment management services provided by the Subadviser hereunder are not to be deemed exclusive, and the Subadviser shall be free to render similar services to others.
(b) The Subadviser shall authorize and permit any of its directors, officers and employees who may be elected as directors or officers of the Fund to serve in the capacities in which they are elected. Services to be furnished by the Subadviser under this Agreement may be furnished through the medium of any of such directors, officers or employees.
(c) The Subadviser shall keep the Fund's books and records required to be maintained by the Subadviser pursuant to paragraph 1(a) hereof and shall timely furnish to the Manager all information relating to the Subadviser's services hereunder needed by the Manager to keep the other books and records of the Fund required by Rule 31a-1 under the 1940 Act. The Subadviser agrees that all records which it maintains for the Fund are the property of the Fund and the Subadviser will surrender promptly to the Fund any of such records upon the Fund's request, provided however that the Subadviser may retain a copy of such records. The Subadviser further agrees to preserve for the periods prescribed by Rule 31a-2 of the Commission under the 1940 Act any such records as are required to be maintained by it pursuant to paragraph 1(a) hereof.
2. The Manager shall continue to have responsibility for all services to be provided to the Fund pursuant to the Management Agreement and shall oversee and review the Subadviser's performance of its duties under this Agreement.
3. The Manager shall reimburse the Subadviser for reasonable costs and expenses incurred by the Subadviser determined in a manner acceptable to the Manager in furnishing the services described in paragraph 1 hereof.
4. The Subadviser shall not be liable for any error of judgment or for any loss suffered by the Fund or the Manager in connection with the matters to which this Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the Subadviser's part in the performance of its duties or from its reckless disregard of its obligations and duties under this Agreement.
5. This Agreement shall continue in effect for a period of more than two years from the date hereof only so long as such continuance is specifically approved at least annually in conformity with the requirements of the 1940 Act; provided, however, that this Agreement may be terminated by the Fund at any time, without the payment of any penalty, by the Board of Directors of the Fund or by vote of a majority of the outstanding voting securities (as defined in the 1940 Act) of the Fund, or by the Manager or the Subadviser at any time, without the payment of any penalty, on not more than 60 days' nor less than 30 days' written notice to the other party. This Agreement shall terminate automatically in the event of its assignment (as defined in the 1940 Act) or upon the termination of the Management Agreement.
6. Nothing in this Agreement shall limit or restrict the right of any of the Subadviser's directors, officers, or employees who may also be a director, officer or employee of the Fund to engage in any other business or to devote his or her time and attention in part to the management or other aspects of any business, whether of a similar or a dissimilar nature, nor limit or restrict the Subadviser's right to engage in any other business or to render services of any kind to any other corporation, firm, individual or association.
7. During the term of this Agreement, the Manager agrees to furnish the Subadviser at its principal office all prospectuses, proxy statements, reports to stockholders, sales literature or other material prepared for distribution to stockholders of the Fund or the public, which refer to the Subadviser in any way, prior to use thereof and not to use material if the Subadviser reasonably objects in writing five business days (or such other time as may be mutually agreed) after receipt thereof. Sales literature may be furnished to the Subadviser hereunder by first-class or overnight mail, facsimile transmission equipment or hand delivery.
8. This Agreement may be amended by mutual consent, but the consent of the Fund must be obtained in conformity with the requirements of the 1940 Act.
9. This Agreement shall be governed by the laws of the State of New York.
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to be executed by their officers designated below as of the day and year first above written.
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC.
BY /S/ MICHAEL J. DOWNEY ----------------------------------- President |
THE PRUDENTIAL INVESTMENT CORPORATION
BY /S/ JOHN BOOKMEYER, JR. ----------------------------------- |
PRUDENTIAL SECURITIES INCORPORATED
One Seaport Plaza
New York, NY 10292
SELECTED DEALER AGREEMENT
,1996
[Dealer Name]
[Address]
Dear [Name]:
As the distributor of shares of certain investment companies presently or hereafter managed by Prudential Mutual Fund Management, Inc. ("PMF"), shares of which companies are distributed by us at their respective net asset values plus sales charges, if any, pursuant to Distribution Agreements between us and each such company (collectively, the "Funds"), we invite you to participate as a selected dealer in the distribution of shares of any and all of the Funds as set forth at Schedule A, upon the following terms and conditions:
1. You are to offer and sell such shares only at the public offering prices which shall be currently in effect, in accordance with the terms of the then current prospectus of each Fund. You shall not have authority to act as agent for any Fund, for us, or for any other dealer in any respect. All orders are subject to acceptance by us and become effective only upon confirmation by us.
2. On each sale of shares by you, the total sales charges or discounts, if any, to selected dealers shall be as stated in Schedule A, which Schedule A may be amended from time to time in accordance with the provisions of Section 16. Schedule A may be provided in written or electronic format.
Such sales charges or discounts to selected dealers are subject to reductions under a variety of circumstances as described in the then current prospectus of the Funds. To obtain these reductions, we must be notified when the sale takes place which would qualify for the reduced charge. There is no sales charge or discount to selected dealers on the reinvestment of dividends or capital gains reinvestment or on shares acquired in exchange for shares of another Fund. Subject to other provisions of this Agreement, from time to time an account servicing fee shall be paid
to selected dealer with respect to shares of the Funds. Such account servicing fees should be payable only on accounts for which you provide personal service and/or maintenance services for shareholder accounts.
3. As a selected dealer, you are hereby authorized to: (i) place purchase orders on behalf of your customers or for your own BONA FIDE investment through us for shares of the Funds which orders are to be effected subject to the applicable compensation provisions set forth in each Fund's then current prospectus; and (ii) tender shares directly to the Fund or its agent for redemption subject to the applicable terms and conditions set forth in each Fund's then current prospectus.
4. Redemption of shares will be made at the net asset value of such shares in accordance with the then current prospectus of each Fund.
5. You represent and warrant that:
(a) You are a registered broker dealer with the Securities and Exchange Commission ("SEC") and a member of the National Association of Securities Dealers, Inc. ("NASD") and that you agree to abide by the Conduct Rules of the NASD;
(b) You are a corporation duly organized and existing and in good standing under the laws of the state, commonwealth or other jurisdiction in which you are organized and that you are duly registered or exempt from registration as a broker-dealer in all fifty states, Puerto Rico and the District of Columbia and that you will not offer shares of any Fund for sale in any state where we have informed you in writing that they are not qualified for sale under the Blue Sky laws and regulations of such states or where you are not qualified to act as a broker-dealer;
(c) You are empowered under applicable laws and by your charter and by-laws to enter into and perform this Agreement and that there are no impediments, prior or existing, regulatory, self-regulatory, administrative, civil or criminal matters affecting your ability to perform under this Agreement;
(d) All requisite corporate proceedings have been taken to authorize you to enter into and perform this Agreement;
(e) You agree to keep in force appropriate broker's blanket bond insurance policies covering any and all acts of your employees, officers and directors adequate to reasonably
protect and indemnify Prudential Securities Incorporated ("PSI") and the Funds against any loss which any party may suffer or incur, directly or indirectly, as a result of any action by you, or your employees, officers and directors; and
(f) You agree to maintain the required net capital as warranted by the rules and regulations of the SEC, NASD and other regulatory authorities.
6. We represent and warrant that:
(a) We are a registered broker dealer with the SEC and a member of the NASD and that we agree to abide by the Conduct Rules of the NASD;
(b) We are a corporation duly organized and existing and in good standing under the laws of the state, commonwealth or other jurisdiction in which we are organized and that we are duly registered or exempt from registration as a broker-dealer in all fifty states, Puerto Rico and the District of Columbia;
(c) We are empowered under applicable laws and by our charter and by- laws to enter into and perform this Agreement and that there are no impediments, prior or existing, regulatory, self-regulatory, administrative, civil or criminal matters affecting our ability to perform under this Agreement;
(d) All requisite corporate procedures have been taken to authorize us to enter into and perform this Agreement;
(e) We agree to maintain the required net capital as warranted by the rules and regulations of the SEC, NASD and other regulatory authorities.
7. This Agreement is in all respects subject to Rule 2830 of the Conduct Rules of the NASD which shall control any provisions to the contrary in this Agreement.
8. You agree:
(a) To purchase shares on behalf of your customers only through us or to sell shares only on behalf of your customers.
(b) To purchase shares on behalf of your customers through us only for the purpose of covering purchase orders already received from your customers or for your own BONA FIDE investment.
(c) That you will not purchase from, or sell any shares on behalf of, investors at prices lower than the redemption prices then quoted by the Funds, subject to any applicable charges as stated in such Fund's then current prospectus. You shall, however, be permitted to sell shares for the account of their record owners to the Fund at the redemption prices currently established for such shares and may charge the owner a fair commission for handling the transaction.
(d) That you will not delay placing customers' orders for shares.
(e) That if any shares confirmed to you hereunder are redeemed by the Funds within seven business days after such confirmation of your original order, you shall forthwith refund to us the full sales charge or discount, if any, allowed to you on such sales. We shall forthwith pay to the Fund our share of the sales charge, if any, on the original sale, and shall also pay to the Fund the refund from you as herein provided. Termination or cancellation of this Agreement shall not relieve you or us from the requirements of this subparagraph.
(f) To (i) be liable for, (ii) hold PSI, the Funds, PMF and Prudential Mutual Fund Services, Inc. ("PMFS") (the Funds' transfer agent), our officers, directors and employees harmless from and (iii) indemnify us and them from any loss, liability, cost and expense arising from: (A) any statements or representations that you or your employees make concerning the Funds that are inconsistent with either the pertinent Fund's current prospectus and statement of additional information or any other written material we have provided to you, (B) any sale of shares of a Fund in any state, any U.S. territory or the District of Columbia where the Fund's shares were not properly registered or qualified, when we have indicated to you that the Fund's shares were not properly registered and qualified; and (C) any of your actions relating to the processing of purchase, exchange and redemption orders and the servicing of shareholder accounts. Your obligation under this paragraph shall survive the termination of this Agreement.
(g) As a condition of the receipt of an account servicing fee as described at Sections 2 and 14, you agree to provide to shareholders of the Funds personal service and/or maintenance services with respect to shareholder accounts.
9. We agree to be liable for, and to hold you, your officers, directors
and employees harmless from and to indemnify you and each of them for any loss,
liability, cost and expense arising from: (A) any material misstatement in or
omission of a material fact from a Fund's current prospectus or statement of
additional information or in the written material we provided you; (B) any
failure of any Fund's shares to be properly registered and available for sale
under any applicable federal law and regulation or the laws and regulations of
any state, any U.S. territory or the District of Columbia when we have
represented to you that the Fund's shares are so registered and qualified; and
(C) any of our actions, or the actions of our affiliates, relating to the
processing of purchase, exchange and redemption orders and the servicing of
shareholder accounts. Our obligation under this section 9 shall survive the
termination of this Agreement.
10. We shall not accept from you any conditional orders for shares. Delivery of certificates, if any, for shares purchased shall be made by the Fund only against receipt of the purchase price, subject to deduction for sales charge or discount reallowed to you and our portion of the sales charge on such sale, if any. If payment for the shares purchased is not received within the time customary for such payments, the sale may be canceled forthwith without any responsibility or liability on our part or on the part of the Funds (in which case you will be responsible for any loss, including loss of profit, suffered by the Funds resulting from your failure to make payments as aforesaid), or, at our option, we may sell on your behalf the shares ordered back to the Funds (in which case we may hold you responsible for any loss, including loss of profit, suffered by us resulting from your failure to make payment as aforesaid).
11. Shares of the Funds are qualified for sale or exempt from qualification in the states and territories or districts listed in Schedule B, which Schedule B may be amended from time to time. Schedule B may be provided in written or electronic format. Qualification of shares of the Funds in the various states, including the filing in any state of further notices respecting such shares, is our responsibility or the responsibility of the Funds.
12. You will not offer or sell any of the shares except under circumstances that will result in compliance with the applicable
Federal and state securities laws (subject to our obligations set forth in
Section 11) and in connection with sales and offers to sell shares you will
furnish to each person to whom any such sale or offer is made a copy of the
applicable then current prospectus. All out-of-pocket expenses incurred in
connection with your activities under this Agreement will be borne by you.
13. We shall be under no obligation to each other except for obligations expressly assumed by us herein. Nothing herein contained, however, shall be deemed to be a condition, stipulation or provision binding any persons acquiring any security to waive compliance with any provision of the Securities Act of 1933, or of the Rules and Regulations of the SEC or to relieve the parties hereto from any liability arising under the Securities Act of 1933.
14. Notwithstanding anything to the contrary contained herein, from time to time during the term of this Agreement PSI may (but is not hereby obliged to) make payments to you, in consideration of your furnishing personal service and/or maintenance services for shareholder accounts with respect to the Funds. Any such payments made pursuant to this Section 14 shall be subject to the following terms and conditions:
(a) Any such payments shall be in such amounts as we may from time to time advise you in writing but in any event not in excess of the amounts permitted, if any, by each Fund's Plan of Distribution in effect. Any such payments shall be in addition to the selling concession, if any, allowed to you pursuant to this Agreement.
(b) The provisions of this Section 14 relate to each Plan of Distribution adopted by the Fund pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the "Act").
(c) The provisions of this Section 14 and any other related provisions applicable to a Fund shall remain in effect for not more than a year and thereafter for successive annual periods only so long as such continuance is specifically approved at least annually in conformity with Rule 12b-1 under the Investment Company Act ("Act"). The provisions of this Section 14 shall automatically terminate with respect to a particular Plan in the event of the assignment (as defined by the Act) of this Agreement or in the event such Plan terminates or is not continued or in the event this Agreement terminates or ceases to remain in effect. In
addition, the provisions of this Section 14 may be terminated at any time, without penalty, by either party with respect to any particular Plan on not more than 60 days' nor less than 30 days' written notice delivered or mailed by registered mail, postage prepaid, to the other party.
15. You and your agents and employees are not authorized to make any written or oral representations concerning the Funds or their shares except those contained in or consistent with the prospectus and such other written materials we provide relating to the Funds. We shall supply prospectuses, reasonable quantities of supplemental sales literature, sales bulletins, and additional information as issued and/or requested by you. You agree not to use other advertising or sales material relating to the Funds, unless forwarded to PSI's Marketing Review Department for review prior to use and approved in writing by us in advance of such use. Any printed information furnished by us other than the then current prospectuses and SAIs for the Funds, periodic reports and proxy solicitation materials is our sole responsibility and not the responsibility of the Funds, and you agree that the Funds shall have no liability or responsibility to you in these respects unless expressly assumed in connection therewith.
16. Either party to this Agreement may terminate the Agreement by giving 30 days written notice to the other. Such notice shall be deemed to have been given on the date on which it was either delivered personally to the other party or any officer or partner thereof, or was mailed postpaid or delivered to a telegraph office for transmission to the other party at his or its address as shown below. This Agreement may be amended by us at any time and your placing of an order after the effective date of any such amendment shall constitute your acceptance thereof.
17. This Agreement shall be construed in accordance with the laws of the State of New York and shall be binding upon both parties hereto when signed by us and accepted by you in the space provided below.
18. If a dispute arises between you and us with respect to this Agreement which you and we are unable to resolve ourselves, it shall be settled by arbitration in accordance with the then-existing NASD Code of Arbitration Procedures ("NASD Code"). The parties agree, that to the extent permitted by the NASD Code, the arbitrator(s) shall be selected from the securities industry.
19. This Agreement is in full force and effect as of the date hereof and supersedes any previous agreements relating to the subject matter hereof.
Very truly yours,
PRUDENTIAL SECURITIES INCORPORATED
Firm Name:
-----------------------------
Address:
---------------------------
City: State: Zip Code:
-------------------------- ------------ ----------
ACCEPTED BY (signature)
-------------------------------------------------------
Name (print) Title
------------------------- ---------------------------------
Date 199 Phone #
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Please return two signed copies of this Agreement (one of which will be signed above by us and thereafter returned to you) in the accompanying return envelope to:
Prudential Securities Incorporated Attention: Phyllis J. Berman National Sales Division Three Gateway Center 100 Mulberry Street, 8th Floor Newark, NJ 07102-4077
EXHIBIT 99.6(b)
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
DISTRIBUTION AGREEMENT
Agreement made as of May 9, 1996, between Prudential Government Income Fund, Inc., a Maryland corporation (the Fund), and Prudential Securities Incorporated, a Delaware corporation (the Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company Act of 1940, as amended (the Investment Company Act), as a diversified, open-end, management investment company and it is in the interest of the Fund to offer its shares for sale continuously;
WHEREAS, the shares of the Fund may be divided into classes and/or series (all such shares being referred to herein as Shares) and the Fund currently is authorized to offer Class A, Class B, Class C shares;
WHEREAS, the Distributor is a broker-dealer registered under the Securities Exchange Act of 1934, as amended, and is engaged in the business of selling shares of registered investment companies either directly or through other broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into an agreement with each other, with respect to the continuous offering of the Fund's Shares from and after the date hereof in order to promote the growth of the Fund and facilitate the distribution of its Shares; and
WHEREAS, upon approval by the holders of the respective classes and/or series of Shares of the Fund it is contemplated that the Fund will adopt a plan (or plans) of distribution pursuant to Rule 12b-1 under the Investment Company Act with respect to certain of its classes and/or series of Shares (the Plans) authorizing payments by the Fund to the Distributor with respect to the distribution of such classes and/or series of Shares and the maintenance of related shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. APPOINTMENT OF THE DISTRIBUTOR
The Fund hereby appoints the Distributor as the principal underwriter and distributor of the Shares of the Fund to sell Shares to the public on behalf of the Fund and the Distributor hereby accepts such appointment and agrees to act hereunder. The
Fund hereby agrees during the term of this Agreement to sell Shares of the Fund through the Distributor on the terms and conditions set forth below.
Section 2. EXCLUSIVE NATURE OF DUTIES
The Distributor shall be the exclusive representative of the Fund to act as principal underwriter and distributor of the Fund's Shares, except that:
2.1 The exclusive rights granted to the Distributor to sell Shares of the Fund shall not apply to Shares of the Fund issued in connection with the merger or consolidation of any other investment company or personal holding company with the Fund or the acquisition by purchase or otherwise of all (or substantially all) the assets or the outstanding shares of any such company by the Fund.
2.2 Such exclusive rights shall not apply to Shares issued by the Fund pursuant to reinvestment of dividends or capital gains distributions or through the exercise of any conversion feature or exchange privilege.
2.3 Such exclusive rights shall not apply to Shares issued by the Fund pursuant to the reinstatement privilege afforded redeeming shareholders.
2.4 Such exclusive rights shall not apply to purchases made through the Fund's transfer and dividend disbursing agent in the manner set forth in the currently effective Prospectus of the Fund. The term "Prospectus" shall mean the Prospectus and Statement of Additional Information included as part of the Fund's Registration Statement, as such Prospectus and Statement of Additional Information may be amended or supplemented from time to time, and the term "Registration Statement" shall mean the Registration Statement filed by the Fund with the Securities and Exchange Commission and effective under the Securities Act of 1933, as amended (Securities Act), and the Investment Company Act, as such Registration Statement is amended from time to time.
Section 3. PURCHASE OF SHARES FROM THE FUND
3.1 The Distributor shall have the right to buy from the Fund on behalf of investors the Shares needed, but not more than the Shares needed (except for clerical errors in transmission) to fill unconditional orders for Shares placed with the Distributor by investors or registered and qualified securities dealers and other financial institutions (selected dealers).
3.2 The Shares shall be sold by the Distributor on behalf of the Fund and delivered by the Distributor or selected
dealers, as described in Section 6.4 hereof, to investors at the offering price as set forth in the Prospectus.
3.3 The Fund shall have the right to suspend the sale of any or all classes and/or series of its Shares at times when redemption is suspended pursuant to the conditions in Section 4.3 hereof or at such other times as may be determined by the Board of Directors. The Fund shall also have the right to suspend the sale of any or all classes and/or series of its Shares if a banking moratorium shall have been declared by federal or New York authorities.
3.4 The Fund, or any agent of the Fund designated in writing by the Fund, shall be promptly advised of all purchase orders for Shares received by the Distributor. Any order may be rejected by the Fund; provided, however, that the Fund will not arbitrarily or without reasonable cause refuse to accept or confirm orders for the purchase of Shares. The Fund (or its agent) will confirm orders upon their receipt, will make appropriate book entries and upon receipt by the Fund (or its agent) of payment therefor, will deliver deposit receipts for such Shares pursuant to the instructions of the Distributor. Payment shall be made to the Fund in New York Clearing House funds or federal funds. The Distributor agrees to cause such payment and such instructions to be delivered promptly to the Fund (or its agent).
Section 4. REPURCHASE OR REDEMPTION OF SHARES BY THE FUND
4.1 Any of the outstanding Shares may be tendered for redemption at any time, and the Fund agrees to repurchase or redeem the Shares so tendered in accordance with its Articles of Incorporation as amended from time to time, and in accordance with the applicable provisions of the Prospectus. The price to be paid to redeem or repurchase the Shares shall be equal to the net asset value determined as set forth in the Prospectus. All payments by the Fund hereunder shall be made in the manner set forth in Section 4.2 below.
4.2 The Fund shall pay the total amount of the redemption price as defined in the above paragraph pursuant to the instructions of the Distributor on or before the seventh day subsequent to its having received the notice of redemption in proper form. The proceeds of any redemption of Shares shall be paid by the Fund as follows: (I) in the case of Shares subject to a contingent deferred sales charge, any applicable contingent deferred sales charge shall be paid to the Distributor, and the balance shall be paid to or for the account of the redeeming shareholder, in each case in accordance with applicable provisions of the Prospectus; and (ii) in the case of all other Shares, proceeds shall be paid to or for the account of the redeeming shareholder, in each case in accordance with applicable provisions of the Prospectus.
4.3 Redemption of any class and/or series of Shares or payment may be suspended at times when the New York Stock Exchange is closed for other than customary weekends and holidays, when trading on said Exchange is restricted, when an emergency exists as a result of which disposal by the Fund of securities owned by it is not reasonably practicable or it is not reasonably practicable for the Fund fairly to determine the value of its net assets, or during any other period when the Securities and Exchange Commission, by order, so permits.
Section 5. DUTIES OF THE FUND
5.1 Subject to the possible suspension of the sale of Shares as provided herein, the Fund agrees to sell its Shares so long as it has Shares of the respective class and/or series available.
5.2 The Fund shall furnish the Distributor copies of all information, financial statements and other papers which the Distributor may reasonably request for use in connection with the distribution of Shares, and this shall include one certified copy, upon request by the Distributor, of all financial statements prepared for the Fund by independent public accountants. The Fund shall make available to the Distributor such number of copies of its Prospectus and annual and interim reports as the Distributor shall reasonably request.
5.3 The Fund shall take, from time to time, but subject to the necessary approval of the Board of Directors and the shareholders, all necessary action to fix the number of authorized Shares and such steps as may be necessary to register the same under the Securities Act, to the end that there will be available for sale such number of Shares as the Distributor reasonably may expect to sell. The Fund agrees to file from time to time such amendments, reports and other documents as may be necessary in order that there will be no untrue statement of a material fact in the Registration Statement, or necessary in order that there will be no omission to state a material fact in the Registration Statement which omission would make the statements therein misleading.
5.4 The Fund shall use its best efforts to qualify and maintain the qualification of any appropriate number of its Shares for sales under the securities laws of such states as the Distributor and the Fund may approve; provided that the Fund shall not be required to amend its Articles of Incorporation or By-Laws to comply with the laws of any state, to maintain an office in any state, to change the terms of the offering of its Shares in any state from the terms set forth in its Registration Statement, to qualify as a foreign corporation in any state or to consent to service of process in any state other than with respect to claims arising out of the offering of its Shares. Any such qualification
may be withheld, terminated or withdrawn by the Fund at any time in its discretion. As provided in Section 9 hereof, the expense of qualification and maintenance of qualification shall be borne by the Fund. The Distributor shall furnish such information and other material relating to its affairs and activities as may be required by the Fund in connection with such qualifications.
Section 6. DUTIES OF THE DISTRIBUTOR
6.1 The Distributor shall devote reasonable time and effort to effect sales of Shares, but shall not be obligated to sell any specific number of Shares. Sales of the Shares shall be on the terms described in the Prospectus. The Distributor may enter into like arrangements with other investment companies. The Distributor shall compensate the selected dealers as set forth in the Prospectus.
6.2 In selling the Shares, the Distributor shall use its best efforts in all respects duly to conform with the requirements of all federal and state laws relating to the sale of such securities. Neither the Distributor nor any selected dealer nor any other person is authorized by the Fund to give any information or to make any representations, other than those contained in the Registration Statement or Prospectus and any sales literature approved by appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the confirmation of sales to investors and selected dealers, the collection of amounts payable by investors and selected dealers on such sales and the cancellation of unsettled transactions, as may be necessary to comply with the requirements of the National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into selected dealer agreements with registered and qualified securities dealers and other financial institutions of its choice for the sale of Shares, provided that the Fund shall approve the forms of such agreements. Within the United States, the Distributor shall offer and sell Shares only to such selected dealers as are members in good standing of the NASD. Shares sold to selected dealers shall be for resale by such dealers only at the offering price determined as set forth in the Prospectus.
Section 7. PAYMENTS TO THE DISTRIBUTOR
7.1 With respect to classes and/or series of Shares which impose a front-end sales charge, the Distributor shall receive and may retain any portion of any front-end sales charge which is imposed on such sales and not reallocated to selected dealers as set forth in the Prospectus, subject to the limitations of Article III, Section 26 of the NASD Rules of Fair Practice.
Payment of these amounts to the Distributor is not contingent upon the adoption or continuation of any applicable Plans.
7.2 With respect to classes and/or series of Shares which impose a contingent deferred sales charge, the Distributor shall receive and may retain any contingent deferred sales charge which is imposed on such sales as set forth in the Prospectus, subject to the limitations of Article III, Section 26 of the NASD Rules of Fair Practice. Payment of these amounts to the Distributor is not contingent upon the adoption or continuation of any Plan.
Section 8. PAYMENT OF THE DISTRIBUTOR UNDER THE PLAN
8.1 The Fund shall pay to the Distributor as compensation for services under any Plans adopted by the Fund and this Agreement a distribution and service fee with respect to the Fund's classes and/or series of Shares as described in each of the Fund's respective Plans and this Agreement.
8.2 So long as a Plan or any amendment thereto is in effect, the Distributor shall inform the Board of Directors of the commissions and account servicing fees with respect to the relevant class and/or series of Shares to be paid by the Distributor to account executives of the Distributor and to broker-dealers and financial institutions which have dealer agreements with the Distributor. So long as a Plan (or any amendment thereto) is in effect, at the request of the Board of Directors or any agent or representative of the Fund, the Distributor shall provide such additional information as may reasonably be requested concerning the activities of the Distributor hereunder and the costs incurred in performing such activities with respect to the relevant class and/or series of Shares.
Section 9. ALLOCATION OF EXPENSES
The Fund shall bear all costs and expenses of the continuous offering of its Shares (except for those costs and expenses borne by the Distributor pursuant to a Plan and subject to the requirements of Rule 12b-1 under the Investment Company Act), including fees and disbursements of its counsel and auditors, in connection with the preparation and filing of any required Registration Statements and/or Prospectuses under the Investment Company Act or the Securities Act, and all amendments and supplements thereto, and preparing and mailing annual and periodic reports and proxy materials to shareholders (including but not limited to the expense of setting in type any such Registration Statements, Prospectuses, annual or periodic reports or proxy materials). The Fund shall also bear the cost of expenses of qualification of the Shares for sale, and, if necessary or advisable in connection therewith, of qualifying the Fund as a broker or dealer, in such states of the United States or other
jurisdictions as shall be selected by the Fund and the Distributor pursuant to
Section 5.4 hereof and the cost and expense payable to each such state for
continuing qualification therein until the Fund decides to discontinue such
qualification pursuant to Section 5.4 hereof. As set forth in Section 8 above,
the Fund shall also bear the expenses it assumes pursuant to any Plan, so long
as such Plan is in effect.
Section 10. INDEMNIFICATION
10.1 The Fund agrees to indemnify, defend and hold the Distributor, its officers and directors and any person who controls the Distributor within the meaning of Section 15 of the Securities Act, free and harmless from and against any and all claims, demands, liabilities and expenses (including the cost of investigating or defending such claims, demands or liabilities and any reasonable counsel fees incurred in connection therewith) which the Distributor, its officers, directors or any such controlling person may incur under the Securities Act, or under common law or otherwise, arising out of or based upon any untrue statement of a material fact contained in the Registration Statement or Prospectus or arising out of or based upon any alleged omission to state a material fact required to be stated in either thereof or necessary to make the statements in either thereof not misleading, except insofar as such claims, demands, liabilities or expenses arise out of or are based upon any such untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with information furnished in writing by the Distributor to the Fund for use in the Registration Statement or Prospectus; provided, however, that this indemnity agreement shall not inure to the benefit of any such officer, director, trustee or controlling person unless a court of competent jurisdiction shall determine in a final decision on the merits, that the person to be indemnified was not liable by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties, or by reason of its reckless disregard of its obligations under this Agreement (disabling conduct), or, in the absence of such a decision, a reasonable determination, based upon a review of the facts, that the indemnified person was not liable by reason of disabling conduct, by (a) a vote of a majority of a quorum of directors or trustees who are neither "interested persons" of the Fund as defined in Section 2(a)(19) of the Investment Company Act nor parties to the proceeding, or (b) an independent legal counsel in a written opinion. The Fund's agreement to indemnify the Distributor, its officers and directors or trustees and any such controlling person as aforesaid is expressly conditioned upon the Fund's being promptly notified of any action brought against the Distributor, its officers or directors or trustees, or any such controlling person, such notification to be given by letter or telegram addressed to the Fund at its principal business office. The Fund agrees promptly to notify the Distributor of the commencement of any litigation or proceedings against it or any of
its officers or directors in connection with the issue and sale of any Shares.
10.2 The Distributor agrees to indemnify, defend and hold the Fund, its officers and Directors and any person who controls the Fund, if any, within the meaning of Section 15 of the Securities Act, free and harmless from and against any and all claims, demands, liabilities and expenses (including the cost of investigating or defending against such claims, demands or liabilities and any reasonable counsel fees incurred in connection therewith) which the Fund, its officers and Directors or any such controlling person may incur under the Securities Act or under common law or otherwise, but only to the extent that such liability or expense incurred by the Fund, its Directors or officers or such controlling person resulting from such claims or demands shall arise out of or be based upon any alleged untrue statement of a material fact contained in information furnished in writing by the Distributor to the Fund for use in the Registration Statement or Prospectus or shall arise out of or be based upon any alleged omission to state a material fact in connection with such information required to be stated in the Registration Statement or Prospectus or necessary to make such information not misleading. The Distributor's agreement to indemnify the Fund, its officers and Directors and any such controlling person as aforesaid, is expressly conditioned upon the Distributor's being promptly notified of any action brought against the Fund, its officers and Directors or any such controlling person, such notification being given to the Distributor at its principal business office.
Section 11. DURATION AND TERMINATION OF THIS AGREEMENT
11.1 This Agreement shall become effective as of the date first above written and shall remain in force for two years from the date hereof and thereafter, but only so long as such continuance is specifically approved at least annually by (a) the Board of Directors of the Fund, or by the vote of a majority of the outstanding voting securities of the applicable class and/or series of the Fund, and (b) by the vote of a majority of those Directors who are not parties to this Agreement or interested persons of any such parties and who have no direct or indirect financial interest in this Agreement or in the operation of any of the Fund's Plans or in any agreement related thereto (Independent Directors), cast in person at a meeting called for the purpose of voting upon such approval.
11.2 This Agreement may be terminated at any time, without the payment of any penalty, by a majority of the Independent Directors or by vote of a majority of the outstanding voting securities of the applicable class and/or series of the Fund, or by the Distributor, on sixty (60) days' written notice to the other party. This Agreement shall automatically terminate in the event of its assignment.
11.3 The terms "affiliated person," "assignment," "interested person" and "vote of a majority of the outstanding voting securities", when used in this Agreement, shall have the respective meanings specified in the Investment Company Act.
Section 12. AMENDMENTS TO THIS AGREEMENT
This Agreement may be amended by the parties only if such amendment is specifically approved by (a) the Board of Directors of the Fund, or by the vote of a majority of the outstanding voting securities of the applicable class and/or series of the Fund, and (b) by the vote of a majority of the Independent Directors cast in person at a meeting called for the purpose of voting on such amendment.
Section 13. SEPARATE AGREEMENT AS TO CLASSES AND/OR SERIES
The amendment or termination of this Agreement with respect to any class and/or series shall not result in the amendment or termination of this Agreement with respect to any other class and/or series unless explicitly so provided.
Section 14. GOVERNING LAW
The provisions of this Agreement shall be construed and interpreted in accordance with the laws of the State of New York as at the time in effect and the applicable provisions of the Investment Company Act. To the extent that the applicable law of the State of New York, or any of the provisions herein, conflict with the applicable provisions of the Investment Company Act, the latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year above written.
Prudential Securities Incorporated
By: /s/ Robert F. Gunia
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Robert F. Gunia
Senior Vice President
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Prudential Government Income Fund, Inc.
By: /s/ Richard A. Redeker
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Richard A. Redeker
President
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CUSTODIAN CONTRACT
Between
EACH OF THE PARTIES INDICATED ON APPENDIX A
and
STATE STREET BANK AND TRUST COMPANY
TABLE OF CONTENTS
Page
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1. Employment of Custodian and Property to be Held by It...................-1-
2. Duties to the Custodian with Respect to Property of The Fund Held By the
Custodian in the United States..........................................-2-
2.1 Holding Securities................................................-2-
2.2 Delivery of Securities............................................-2-
2.3 Registration of Securities........................................-6-
2.4 Bank Accounts.....................................................-7-
2.5 Availability of Federal Funds.....................................-7-
2.6 Collection of Income..............................................-8-
2.7 Payment of Fund Monies............................................-8-
2.8 Liability for Payment in Advance of Receipt
of Securities Purchased . . . . . . . . . . . . . . . . . . -11-
2.9 Appointment of Agents............................................-11-
2.10 Deposit of Securities in Securities Systems......................-11-
2.10A Fund Assets Held in the Custodian's Direct Paper System..........-13-
2.11 Segregated Account...............................................-14-
2.12 Ownership Certificates for Tax Purposes..........................-15-
2.13 Proxies..........................................................-16-
2.14 Communications Relating to Fund Portfolio Securities.............-16-
2.15 Reports to Fund by Independent Public Accountants................-16-
3. Duties of the Custodian with Respect to Property of the Fund Held
Outside of the United States...........................................-17-
3.1 Appointment of Foreign Sub-Custodians.............................-17-
3.2 Assets to be Held.................................................-17-
3.3 Foreign Securities Depositories...................................-18-
3.4 Segregation of Securities.........................................-18-
3.5 Agreements with Foreign Banking Institutions......................-18-
3.6 Access of Independent Accountants of the Fund.....................-19-
3.7 Reports by Custodian..............................................-19-
3.9 Liability of Foreign Sub-Custodians...............................-20-
3.10 Liability of Custodian............................................-21-
3.11 Reimbursements for Advances.......................................-21-
3.12 Monitoring Responsibilities.......................................-22-
3.13 Branches of U.S. Banks............................................-22-
4. Payments for Repurchases or Redemptions and Sales of Shares
of the Fund............................................................-23-
-i-
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5. Proper Instructions....................................................-24-
6. Actions Permitted without Express Authority............................-24-
7. Evidence of Authority..................................................-25-
8. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income..........................-26-
9. Records................................................................-26-
10. Opinion of Fund's Independent Accountant...............................-27-
11. Compensation of Custodian..............................................-27-
12. Responsibility of Custodian............................................-27-
13. Effective Period, Termination and Amendment............................-29-
14. Successor Custodian....................................................-30-
15. Interpretative and Additional Provisions...............................-32-
16. Massachusetts Law to Apply.............................................-32-
17. Prior Contracts........................................................-32-
18. The Parties............................................................-32-
19. Limitation of Liability................................................-33-
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CUSTODIAN CONTRACT
This Contract between State Street Bank and Trust Company, a Massachusetts trust company, having its principal place of business at 225 Franklin Street, Boston, Massachusetts, 02110, hereinafter called the "Custodian", and each Fund listed on Appendix A which evidences its agreement to be bound hereby by executing a copy of this Contract (each such Fund individually hereinafter referred to as the "Fund").
WITNESSETH: That in consideration of the mutual covenants and agreements hereinafter contained, the parties hereto agree as follows:
1. EMPLOYMENT OF CUSTODIAN AND PROPERTY TO BE HELD BY IT
The Fund hereby employs the Custodian as the custodian of its assets, including securities it desires to be held in places within the United States ("domestic securities") and securities it desires to be held outside the United States ("foreign securities") pursuant to the provisions of the Articles of Incorporation/ Declaration of Trust. The Fund agrees to deliver to the Custodian all securities and cash owned by it, and all payments of income, payments of principal or capital distributions received by it with respect to all securities owned by the Fund from time to time, and the cash consideration received by it for such new or treasury shares of capital stock, ("Shares") of the Fund as may be issued or sold from time to time. The Custodian shall not be responsible for any property of the Fund held or received by the Fund and not delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article 5), the Custodian shall from time to time employ one or more sub-custodians located in the United States, but only in accordance with an applicable vote by the Board of Directors/ Trustees of the Fund, and provided
that the Custodian shall have the same responsibility or liability to the Fund on account of any actions or omissions of any sub-custodian so employed as any such sub-custodian has to the Custodian, provided that the Custodian agreement with any such domestic sub-custodian shall impose on such sub-custodian responsibilities and liabilities similar in nature and scope to those imposed by this Agreement with respect to the functions to be performed by such sub-custodian. The Custodian may employ as sub-custodians for the Fund's securities and other assets the foreign banking institutions and foreign securities depositories designated in Schedule "A" hereto but only in accordance with the provisions of Article 3.
2. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUND HELD BY THE CUSTODIAN IN THE UNITED STATES.
2.1 HOLDING SECURITIES. The Custodian shall hold and physically segregate
for the account of the Fund all non-cash property, to be held by it in the
United States, including all domestic securities owned by the Fund, other than
(a) securities which are maintained pursuant to Section 2.10 in a clearing
agency which acts as a securities depository or in a book-entry system
authorized by the U.S. Department of Treasury, collectively referred to herein
as "Securities System" and (b) commercial paper of an issuer for which State
Street Bank and Trust Company acts as issuing and paying agent ("Direct Paper")
which is deposited and/or maintained in the Direct Paper System of the Custodian
pursuant to Section 2.10A.
2.2 DELIVERY OF SECURITIES. The Custodian shall release and deliver domestic securities owned by the Fund held by the Custodian or in a Securities System account of the Custodian or in the Custodian's Direct Paper book-entry system account ("Direct Paper System") only upon receipt
of Proper Instructions, which may be continuing instructions when deemed appropriate by the parties, and only in the following cases:
(1) Upon sale of such securities for the account of the Fund and receipt of payment therefor;
(2) Upon the receipt of payment in connection with any repurchase agreement related to such securities entered into by the Fund;
(3) In the case of a sale effected through a Securities System, in accordance with the provisions of Section 2.10 hereof;
(4) To the depository agent in connection with tender or other similar offers for portfolio securities of the Fund;
(5) To the issuer thereof or its agent when such securities are called, redeemed, retired or otherwise become payable; provided that, in any such case, the cash or other consideration is to be delivered to the Custodian;
(6) To the issuer thereof, or its agent, for transfer into the name of the Fund or into the name of any nominee or nominees of the Custodian or into the name or nominee name of any agent appointed pursuant to Section 2.9 or into the name or nominee name of any sub-custodian appointed pursuant to Article 1; or for exchange for a different number of bonds, certificates or other evidence representing the same aggregate face amount or number of units; PROVIDED that, in any such case, the new securities are to be delivered to the Custodian;
(7) Upon the sale of such securities for the account of the Fund, to the broker or its clearing agent, against a receipt, for examination in accordance with "street
delivery" custom; provided that in any such case, the Custodian shall have no responsibility or liability for any loss arising from the delivery of such securities prior to receiving payment for such securities except as may arise from the Custodian's own negligence or willful misconduct;
(8) For exchange or conversation pursuant to any plan of merger, consolidation, recapitalization, reorganization or readjustment of the securities of the issuer of such securities, or pursuant to provisions for conversion contained in such securities, or pursuant to any deposit agreement; provided that, in any such case, the new securities and cash, if any, are to be delivered to the Custodian;
(9) In the case of warrants, rights or similar securities, the surrender thereof in the exercise of such warrants, rights or similar securities or the surrender of interim receipts or temporary securities for definitive securities; provided that, in any such case, the new securities and cash, if any, are to be delivered to the Custodian;
(10) For delivery in connection with any loans of securities made by the Fund, BUT ONLY against receipt of adequate collateral as agreed upon from time to time by the Custodian and the Fund, which may be in the form of cash or obligations issued by the United States government, its agencies or instrumentalities, except that in connection with any loans for which collateral is to be credited to the Custodian's account in the book-entry system authorized by the U.S. Department of the Treasury, the Custodian will not be
held liable or responsible for the delivery of securities owned by the Fund prior to the receipt of such collateral;
(11) For delivery as security in connection with any borrowings by the Fund requiring a pledge of assets by the Fund, BUT ONLY against receipt of amounts borrowed;
(12) For delivery in accordance with the provisions of any agreement among the Fund, the Custodian and a broker-dealer registered under the Securities Exchange Act of 1934 (the "Exchange Act") and a member of The National Association of Securities Dealers, Inc. ("NASD"), relating to compliance with the rules of The Options Clearing Corporation and of any registered national securities exchange, or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions by the Fund;
(13) For delivery in accordance with the provisions of any agreement among the Fund, the Custodian, and a Futures Commission Merchant registered under the Commodity Exchange Act, relating to compliance with the rules of the Commodity Futures Trading Commission and/or any Contract Market, or any similar organization or organizations, regarding account deposits in connection with transactions by the Fund;
(14) Upon receipt of instructions from the transfer agent ("Transfer Agent") for the Fund, for delivery to such Transfer Agent or to the holders of shares in connection with distributions in kind, as may be described from time to time in the Fund's currently effective prospectus and statement of additional
information ("prospectus"), in satisfaction of requests by holders of Shares for repurchase or redemption; and
(15) For any other proper business purpose, BUT ONLY upon receipt of, in addition to Proper Instructions, a certified copy of a resolution of the Board of Directors/Trustees or of the Executive Committee signed by an officer of the Fund and certified by the Secretary or an Assistant Secretary, specifying the securities to be delivered, setting forth the purpose for which such delivery is to be made, declaring such purpose to be a proper business purpose, and naming the person or persons to whom delivery of such securities shall be made.
2.3 REGISTRATION OF SECURITIES. Domestic securities held by the Custodian (other than bearer securities) shall be registered in the name of the Fund or in the name of any nominees of the Fund or of any nominee of the Custodian which nominee shall be assigned exclusively to the Fund, UNLESS the Fund has authorized in writing the appointment of a nominee to be used in common with other registered investment companies having the same investment adviser as the Fund, or in the name or nominee name of any agent appointed pursuant to Section 2.9 or in the name or nominee name of any sub-custodian appointed pursuant to Article 1. All securities accepted by the Custodian on behalf of the Fund under the terms of this Contract shall be in "street name" or other good delivery form. If, however, the Fund directs the Custodian to maintain securities in "street name", the Custodian shall utilize its best efforts to timely collect income due the Fund on such securities and to notify the Fund on a best efforts basis of relevant corporate actions including, without limitation, pendency of calls, maturities, tender or exchange offers.
2.4 BANK ACCOUNTS. The Custodian shall open and maintain a separate bank account or accounts in the United States in the name of the Fund, subject only to draft or order by the Custodian acting pursuant to the terms of this Contract, and shall hold in such account or accounts, subject to the provisions hereof, all cash received by it from or for the account of the Fund, other than cash maintained by the Fund, other than cash maintained by the Fund in a bank account established and used in accordance with Rule 17f-3 under the Investment Company Act of 1940. Funds held by the Custodian for the Fund may be deposited by it to its credit as Custodian in the Banking Department of the Custodian or in such other banks or trust companies as it may in its discretion deem necessary or desirable; PROVIDED, however, that every such bank or trust company shall be qualified to act as a custodian under the Investment Company Act of 1940 and that each such bank or trust company and the funds to be approved by vote of a majority of the Board of Directors/Trustees of the Fund. Such funds shall be deposited by the Custodian in its capacity as Custodian and shall be withdrawable by the Custodian only in that capacity.
2.5 AVAILABILITY OF FEDERAL FUNDS. Upon mutual agreement between the Fund and the Custodian, the Custodian shall, upon the receipt of Proper Instructions, make federal funds available to the Fund as of specified times agreed upon from time to time by the Fund and the Custodian in the amount of checks received in payment for Shares of the Fund which are deposited into the Fund's account.
2.6 COLLECTION OF INCOME. Subject to the provisions of Section 2.3, the Custodian shall collect on a timely basis all income and other payments with respect to registered securities held hereunder to which the Fund shall be entitled either by law or pursuant to custom in the securities business, and shall collect on a timely basis all income and other payments with respect to bearer
securities if, on the date of payment by the issuer, such securities are held by the Custodian or its agent thereof and shall credit such income, as collected, to the Fund's custodian account. Without limiting the generality of the foregoing, the Custodian shall detach and present for payment all coupons and other income items requiring presentation as and when they become due and shall collect interest when due on securities held hereunder. Income due the Fund on securities loaned pursuant to the provisions of Section 2.2 (10) shall be the responsibility of the Fund. The Custodian will have no duty or responsibility in connection therewith, other than to provide the Fund with such information or data as may be necessary to assist the Fund in arranging for the timely delivery to the Custodian of the income to which the Fund is properly entitled.
2.7 PAYMENT OF FUND MONIES. Upon receipt of Proper Instructions, which may be continuing instructions when deemed appropriate by the parties, the Custodian shall pay out monies of the Fund in the following cases only:
(1) Upon the purchase of securities held domestically, options,
futures contracts or options on futures contracts for the account
of the Fund but only (a) against the delivery of such securities,
or evidence of title to such options, futures contracts or
options on futures contracts, to the Custodian (or any bank,
banking firm or trust company doing business in the United States
or abroad which is qualified under the Investment Company Act of
1940, as amended, to act as a custodian and has been designated
by the Custodian as its agent for this purpose) registered in the
name of the Fund or in the name of a nominee of the Custodian
referred to in Section 2.3 hereof or in proper form for transfer;
(b) in the case of a purchase effected through a Securities
System, in accordance with the conditions set forth in Section
2.10 hereof; (c) in the case of a purchase involving the Direct
Paper System, in accordance with the conditions set forth in
Section 2.10A; (d) in the case of repurchase agreements entered
into between the Fund and the Custodian, or another bank, or a
broker-dealer which is a member of NASD, (i) against delivery of
the securities either in certificate form or through an entry
crediting the Custodian's account at the Federal Reserve Bank
with such securities or (ii) against delivery of the receipt
evidencing purchase by the Fund of securities owned by the
Custodian along with written evidence of the agreement by the
Custodian to repurchase such securities from the Fund or (e) for
transfer to a time deposit account of the Fund in any bank,
whether domestic or foreign; such transfer may be effected prior
to receipt of a confirmation from a broker and/or the applicable
bank pursuant to Proper Instructions from the Fund as defined in
Article 5;
(2) In connection with conversion, exchange or surrender of securities owned by the Fund as set forth in Section 2.2 hereof;
(3) For the redemption or repurchase of Shares issued by the Fund as set forth in Article 4 hereof;
(4) For the payment of any expense or liability incurred by the Fund, including but not limited to the following payments for the account of the Fund: interest, taxes, management, accounting, transfer agent and legal fees, and operating
expenses of the Fund whether or not such expenses are to be in whole or part capitalized or treated as deferred expenses;
(5) For the payment of any dividends declared pursuant to the governing documents of the Fund;
(6) For payment of the amount of dividends received in respect of securities sold short;
(7) For any other proper purpose, BUT ONLY upon receipt of, in addition to Proper Instructions, a certified copy of a resolution of Board of Directors/Trustees or of the Executive Committee of the Fund signed by an officer of the Fund and certified by its Secretary or an Assistant Secretary, specifying the amount of such payment, setting forth the purpose for which such payment is to be made, declaring such purpose to be a proper purpose, and naming the person or persons to whom such payment is to be made.
2.8 LIABILITY FOR PAYMENT IN ADVANCE OF RECEIPT OF SECURITIES PURCHASED. Except as specifically stated otherwise in this Contract, in any and every case where payment for purchase of securities for the account of the Fund is made by the Custodian in advance of receipt of the securities purchased in the absence of specific written instructions from the Fund to so pay in advance, the Custodian shall be absolutely liable to the Fund for such securities to the same extent as if the securities had been received by the Custodian.
2.9 APPOINTMENT OF AGENTS. The Custodian may at any time or times in its discretion appoint (and may at any time remove) any other bank or trust company which is itself qualified under the Investment Company Act of 1940, as amended, to act as a custodian, as its agent to carry out
such of the provisions of this Article 2 as the Custodian may from time to time direct; PROVIDED, however, that the appointment of any agent shall not relieve the Custodian of its responsibilities or liabilities hereunder.
2.10 DEPOSIT OF SECURITIES IN SECURITIES SYSTEMS. The Custodian may deposit and/or maintain domestic securities owned by the Fund in a clearing agency registered with the Securities and Exchange Commission under Section 17A of the Securities Exchange Act of 1934, which acts as a securities depository, or in the book-entry system authorized by the U.S. Department of the Treasury and certain federal agencies, collectively referred to herein as "Securities System" in accordance with applicable Federal Reserve Board and Securities and Exchange Commission rules and regulations, if any, and subject to the following provisions:
(1) The Custodian may keep domestic securities of the Fund in a Securities System provided that such securities are represented in an account ("Account") of the Custodian in the Securities System which shall not include any assets of the Custodian other than assets held as a fiduciary, custodian or otherwise for customers;
(2) The records of the Custodian with respect to domestic securities of the Fund which are maintained in a Securities System shall identify by book-entry those securities belonging to the Fund;
(3) The Custodian shall pay for domestic securities purchased for the account of the Fund upon (i) receipt of advice from the Securities System that such securities have been transferred to the Account, and (i.) the making of an entry on the records of the Custodian to reflect such payment and transfer for
the account of the Fund. The Custodian shall transfer domestic securities sold for the account of the Fund upon (i) receipt of advice from the Securities System that payment for such securities has been transferred to the Account, and (ii) the making of an entry on the records of the Custodian to reflect such transfer and payment for the account of the Fund. Copies of all advices from the Securities System of transfers of domestic securities for the account of the Fund shall identify the Fund, be maintained for the Fund by the Custodian and be provided to the Fund at its request. Upon request, the Custodian shall furnish the Fund confirmation of each transfer to or from the account of the Fund in the form of a written advice or notice and shall furnish promptly to the Fund copies of daily transaction sheets reflecting each day's transactions in the Securities System for the account of the Fund.
(4) The Custodian shall provide the Fund with any report obtained by the Custodian on the Securities System's accounting system, internal accounting control and procedures for safeguarding securities deposited in the Securities System;
(5) The Custodian shall have received the initial or annual certificate, as the case may be, required by Article 13 hereof;
(6) Anything to the contrary in this Contract notwithstanding, the Custodian shall be liable to the Fund for any loss or damage to the Fund resulting from use of the Securities System by reason of any negligence, misfeasance or misconduct of the Custodian or any of its agents or of any of its or their employees or
from failure of the Custodian or any such agent to enforce effectively such rights as it may have against the Securities System; at the election of the Fund, it shall be entitled to be subrogated to the rights of the Custodian with respect to any claim against the Securities System or any other person which the Custodian may have as a consequence of any such loss or damage if and to the extent that the Fund has not been made whole for any such loss or damage.
2.10A FUND ASSETS HELD IN THE CUSTODIAN'S DIRECT PAPER SYSTEM. The Custodian may deposit and/or maintain securities owned by the Fund in the Direct Paper System of the Custodian subject to the following provisions:
(1) No transaction relating to securities in the Direct Paper System will be effected in the absence of Proper Instructions;
(2) The Custodian may keep securities of the Fund in the Direct Paper System only if such securities are represented in an account ("Account") of the Custodian in the Direct Paper System which shall not include any assets of the Custodian other than assets held as a fiduciary, custodian or otherwise for customers;
(3) The records of the Custodian with respect to securities of the Fund which are maintained in the Direct Paper System shall identify by book-entry those securities belonging to the Fund;
(4) The Custodian shall pay for securities purchased for the account of the Fund upon the making of an entry on the records of the Custodian to reflect such payment and transfer of securities to the account of the Fund. The Custodian
shall transfer securities
sold for the account of the Fund upon the making of an entry on
the records of the Custodian to reflect such transfer and receipt
of payment for the account of the Fund;
(5) The Custodian shall furnish the Fund confirmation of each transfer to or from the account of the Fund, in the form of a written advice or notice, of Direct Paper on the next business day following such transfer and shall furnish to the Fund copies of daily transaction sheets reflecting each day's transaction in the Direct Paper System for the account of the Fund;
(6) The Custodian shall provide the Fund with any report on its system of internal accounting control as the Fund may reasonably request from time to time;
2.11 SEGREGATED ACCOUNT. The Custodian shall upon receipt of Proper Instructions establish and maintain a segregated account or accounts for and on behalf of the Fund, into which account or accounts may be transferred cash and/or securities, including securities maintained in an account by the Custodian pursuant to Section 2.10 hereof, (i) in accordance with the provisions of any agreement among the Fund, the Custodian and a broker-dealer registered under the Exchange Act and a member of the NASD (or any futures commission merchant registered under the Commodity Exchange Act), relating to compliance with the rules of The Options Clearing Corporation and of any registered national securities exchange (or the Commodity Futures Trading Commission or any registered contract market), or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions by the Fund, (ii) for purposes of segregating cash, government securities or liquid, high-grade debt obligations in connection with options purchased, sold or written by the Fund or commodity futures contracts or options thereon
purchased or sold by the Fund, (iii) for the purposes of compliance by the Fund with the procedures required by Investment Company Act Release No. 10666, or any subsequent release or releases of the Securities and Exchange Commission relating to the maintenance of segregated accounts by registered investment companies and (iv) for other proper corporate purposes, BUT ONLY, in the case of clause (iv), upon receipt of, in addition to Proper Instructions, a certified copy of a resolution of the Board of Directors/Trustees or of the Executive Committee signed by an officer of the Fund and certified by the Secretary or an Assistant Secretary, setting forth the purpose or purposes of such segregated account and declaring such purposes to be proper corporate purposes.
2.12 OWNERSHIP CERTIFICATES FOR TAX PURPOSES. The Custodian shall execute ownership and other certificates and affidavits for all federal and state tax purposes in connection with receipt of income or other payments with respect to domestic securities of the Fund held by it and in connection with transfers of such securities.
2.13 PROXIES. The Custodian shall, with respect to the domestic securities held hereunder, cause to be promptly executed by the registered holder of such securities, if the securities are registered otherwise than in the name of the Fund or a nominee of the Fund, all proxies, without indication of the manner in which such proxies are to be voted, and shall promptly deliver to the Fund such proxies, all proxy soliciting materials and all notices relating to such securities.
2.14 COMMUNICATIONS RELATING TO FUND PORTFOLIO SECURITIES. Subject to the provisions of Section 2.3, the Custodian shall transmit promptly to the Fund all written information (including, without limitation, pendency of calls and maturities of securities held domestically and expirations of rights in connection therewith and notices of exercise of call and put options written by the Fund and the maturity of futures contracts purchased or sold by the Fund) received by the Custodian from
issuers of the securities being held for the Fund. With respect to tender or exchange offers, the Custodian shall transmit promptly to the Fund all written information received by the Custodian from issuers of the securities whose tender or exchange is sought and from the party (or his agents) making the tender or exchange offer. If the Fund desires to take action with respect to any tender offer, exchange offer or any other similar transaction, the Fund shall notify the Custodian at least three business days prior to the date of which the Custodian is to take such action.
2.15 REPORTS TO FUND BY INDEPENDENT PUBLIC ACCOUNTANTS. The Custodian shall provide the Fund, at such times as the Fund may reasonably require, with reports by independent public accountants on the accounting system, internal accounting control and procedures for safeguarding securities, futures contracts and options on futures contracts, including securities deposited and/or maintained in a Securities System, relating to the services provided by the Custodian under this Contract; such reports shall be of sufficient scope and in sufficient detail, as may reasonably be required by the Fund to provide reasonable assurance that any material inadequacies would be disclosed by such examination, and, if there are no such inadequacies, the reports shall so state.
3. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUND HELD OUTSIDE OF THE UNITED STATES
3.1 APPOINTMENT OF FOREIGN SUB-CUSTODIANS. The Fund hereby authorizes and instructs the Custodian to employ as sub-custodians for the Fund's securities and other assets maintained outside the United States the foreign banking institutions and foreign securities depositories designated on Schedule A hereto ("foreign sub-custodians"). Upon receipt of "Proper Instructions", as defined in Section 5 of this Contract, together with a certified resolution of the Fund's Board of Directors/Trustees, the Custodian and the Fund may agree to amend Schedule A hereto from time
to time to designate additional foreign banking institutions and foreign securities depositories to act as sub-custodian. Upon receipt of Proper Instructions, the Fund may instruct the Custodian to cease the employment of any one or more such sub-custodians for maintaining custody of the Fund's assets.
3.2 ASSETS TO BE HELD. The Custodian shall limit the securities and other assets maintained in the custody of the foreign sub-custodians to: (a) "foreign securities", as defined in paragraph (c)(1) of Rule 17f-5 under the Investment Company Act of 1940, and (b) cash and cash equivalents in such amounts as the Custodian or the Fund may determine to be reasonably necessary to effect the Fund's foreign securities transactions.
3.3 FOREIGN SECURITIES DEPOSITORIES. Except as may otherwise be agreed upon in writing by the Custodian and the Fund, assets of the Fund shall be maintained in foreign securities depositories only through arrangements implemented by the foreign banking institutions serving as sub-custodians pursuant to the terms hereof. Where possible, such arrangements shall include entry into agreements containing the provisions set forth in Section 3.5 hereof.
3.4 SEGREGATION OF SECURITIES. The Custodian shall identify on its books as belonging to the Fund, the foreign securities of the Fund held by each foreign sub-custodian. Each agreement pursuant to which the Custodian employs a foreign banking institution shall require that such institution establish a custody account for the Custodian on behalf of the Fund and physically segregate in that account, securities and other assets of the Fund, and, in the event that such institution deposits the Fund's securities in a foreign securities depository, that it shall identify on its books as belonging to the Custodian, as agent for the Fund, the securities so deposited.
3.5 AGREEMENTS WITH FOREIGN BANKING INSTITUTIONS. Each agreement with a foreign banking institution shall be substantially in the form set forth in Exhibit I hereto and shall provide that
(a) the Fund's assets will not be subject to any right, charge, security interest, lien or claim of any kind in favor of the foreign banking institution or its creditors or agent, except a claim of payment for their safe custody or administration; (b) beneficial ownership of the Fund's assets will be freely transferable without the payment of money or value other than for custody or administration; (c) adequate records will be maintained identifying the assets as belonging to the Fund; (d) officers of or auditors employed by, or other representatives of the Custodian, including to the extent permitted under applicable law the independent public accountants for the Fund, will be given access to the books and records of the foreign banking institution relating to its actions under its agreement with the Custodian; and (e) assets of the Fund held by the foreign sub-custodian will be subject only to the instructions of the Custodian or its agents.
3.6 ACCESS OF INDEPENDENT ACCOUNTANTS OF THE FUND. Upon request of the Fund, the Custodian will use its best efforts to arrange for the independent accountants of the Fund to be afforded access to the books and records of any foreign banking institution employed as a foreign sub-custodian insofar as such books and records relate to the performance of such foreign banking institution under its agreement with the Custodian.
3.7 REPORTS BY CUSTODIAN. The Custodian will supply to the Fund from time to time, as mutually agreed upon, statements in respect of the securities and other assets of the Fund held by foreign sub-custodians, including but not limited to an identification of entities having possession of the Fund's securities and other assets and advices or notifications of any transfers of securities to or from each custodial account maintained by a foreign banking institution for the Custodian on behalf of the Fund indicating, as to securities acquired for the Fund, the identity of the entity having physical possession of such securities.
3.8 TRANSACTIONS IN FOREIGN CUSTODY ACCOUNT
(a) Except as otherwise provided in paragraph (b) of this Section 3.8, the provision of Sections 2.2 and 2.7 of this Contract shall apply, in their entirety to the foreign securities of the Fund held outside the United States by foreign sub-custodians.
(b) Notwithstanding any provision of this Contract to the contrary, settlement and payment for securities received for the account of the Fund and delivery of securities maintained for the account of the Fund may be effected in accordance with the customary established securities trading or securities processing practices and procedures in the jurisdiction or market in which the transaction occurs, including, without limitation, delivering securities to the purchaser thereof or to a dealer therefore (or an agent for such purchaser or dealer) against a receipt with the expectation of receiving later payment for such securities from such purchaser or dealer.
(c) Securities maintained in the custody of a foreign sub-custodian may be maintained in the name of such entity's nominee to the same extent as set forth in Section 2.3 of this Contract, and the Fund agrees to hold any such nominee harmless from any liability as a holder of record of such securities.
3.9 LIABILITY OF FOREIGN SUB-CUSTODIANS. Each agreement pursuant to which the Custodian employs a foreign banking institution as a foreign sub-custodian shall require the institution to exercise reasonable care in the performance of its duties and to indemnify, and hold harmless, the Custodian and each Fund from and against any loss, damage, cost, expense, liability or claim arising out of or in connection with the institution's performance of such obligations. At the election of the Fund, it shall be entitled to be subrogated to the rights of the Custodian with respect to any claims against a foreign banking institution as a consequence of any such loss, damage, cost, expense,
liability or claim if and to the extent that the Fund has not been made whole for any such loss, damage, cost, expense, liability or claim.
3.10 LIABILITY OF CUSTODIAN. The Custodian shall be liable for the acts or omissions of a foreign banking institution to the same extent as set forth with respect to sub-custodians generally in this Contract and, regardless of whether assets are maintained in the custody of a foreign banking institution, a foreign securities depository or a branch of a U.S. bank as contemplated by paragraph 3.13 hereof, the Custodian shall not be liable for any loss, damage, cost, expense, liability or claim resulting from nationalization, expropriation, currency restrictions, or acts of war or terrorism or any loss where the sub-custodian has otherwise exercised reasonable care. Notwithstanding the foregoing provisions of this paragraph 3.10, in delegating custody duties to State Street London Ltd., the Custodian shall not be relieved of any responsibility to the Fund for any loss due to such delegation, except such loss as may result from (a) political risk (including, but not limited to, exchange control restrictions, confiscation, expropriation, nationalization, insurrection, civil strife or armed hostilities) or (b) other losses (excluding a bankruptcy or insolvency of State Street London Ltd. not caused by political risk) due to Acts of God, nuclear incident or other losses under circumstances where the Custodian and State Street London Ltd. have exercised reasonable care.
3.11 REIMBURSEMENT FOR ADVANCES. If the Fund requires the Custodian to advance cash or securities for any purpose including the purchase or sale of foreign exchange or of contracts for foreign exchange, or in the event that the Custodian or its nominees shall incur or be assessed any taxes, charges, expenses, assessments, claims or liabilities in connection with the performance of this Contract, except such as amy arise from its or its nominee's own negligent action, negligent failure to act or wilful misconduct, any property at any time held for the account of the Fund shall be security
therefor and should the Fund fail to repay the Custodian promptly, the Custodian shall be entitled to utilize available cash and to dispose of the Fund assets to the extent necessary to obtain reimbursement.
3.12 MONITORING RESPONSIBILITIES. The Custodian shall furnish annually to the Fund, during the month of June, information concerning the foreign sub-custodians employed by the Custodian. Such information shall be similar in kind and scope to that furnished to the Fund in connection with the initial approval of this Contract. In addition, the Custodian will promptly inform the Fund in the event that the Custodian learns of a material adverse change in the financial condition of a foreign sub-custodian or any material loss of the assets of the Fund or in the case of any foreign sub-custodian not the subject of an exemptive order from the Securities and Exchange Commission is notified by such foreign sub-custodian that there appears to be a substantial likelihood that its shareholders equity will decline below $200 million (U.S. dollars or the equivalent thereof) or that its shareholders equity has declined below $200 million (in each case computed in accordance with generally accepted U.S. accounting principles).
3.13 BRANCHES OF U.S. BANKS
(a) Except as otherwise set forth in this Contract, the provisions of
Article 3 shall not apply where the custody of the Fund assets are maintained in
a foreign branch of a banking institution which is a "bank" as defined by
Section 2(a)(5) of the Investment Company Act of 1940 meeting the qualification
set forth in Section 26(a) of said Act. The appointment of any such branch as a
sub-custodian shall be governed by paragraph 1 of this Contract.
(b) Cash held for the Fund in the United Kingdom shall be maintained in an interest bearing account established for the Fund with the Custodian's London branch, which account shall be subject to the direction of the Custodian, State Street London Ltd. or both.
4. PAYMENTS FOR REPURCHASES OR REDEMPTIONS AND SALES OF SHARES OF THE FUND. From such funds as may be available for the purpose but subject to the limitations of the Articles of Incorporation/Declaration of Trust and any applicable votes of the Board of Directors/Trustees of the Fund pursuant thereto, the Custodian shall, upon receipt of instructions from the Transfer Agent, make funds available for payment to holders of Shares who have delivered to the Transfer Agent a request for redemption or repurchase of their Shares. In connection with the redemption or repurchase of Shares of the Fund, the Custodian is authorized upon receipt of instructions from the Transfer Agent to wire funds to or through a commercial bank designated by the redeeming shareholders. In connection with the redemption or repurchase of Shares of the Fund, the Custodian shall honor checks drawn on the Custodian by a holder of Shares, which checks have been furnished by the Fund to the holder of Shares, when presented to the Custodian in accordance with such procedures and controls as are mutually agreed upon from time to time between the Fund and the Custodian.
The Custodian shall receive from the distributor for the Fund's Shares or from the Transfer Agent of the Fund and deposit into the Fund's account such payments as are received for Shares of the Fund issued or sold from time to time by the Fund. The Custodian will provide timely notification to the Fund and the Transfer Agent of any receipt by it of payments for Shares of the Fund.
5. PROPER INSTRUCTIONS.
Proper Instructions as used herein means a writing signed or initialled by one or more person or persons as the officers of the Fund shall have from time to time authorized. Each such writing shall set forth the specific transaction or type of transaction involved, including a specific statement of the purpose for which such action is requested. Oral instructions will be considered Proper Instructions if the Custodian reasonably believes them to have been given by a person authorized to give such instructions with respect to the transaction involved. The Fund shall cause all oral instructions to be confirmed in writing. It is understood and agreed that the Board of Directors/Directors/Trustees has authorized (i) Prudential Mutual Fund Management, Inc., as Manager of the Fund, and (ii) The Prudential Investment Corporation (or Prudential-Bache Securities Inc.), as Subadviser to the Fund, to deliver proper instructions with respect to all matters for which proper instructions are required by this Article 5. The Custodian may rely upon the certificate of an officer of the Manager or Subadviser, as the case may be, with respect to the person or persons authorized on behalf of the Manager and Subadviser, respectively, to sign, initial or give proper instructions for the purpose of this Article 5. Proper Instructions may include communications effected directly between electro-mechanical or electronic devices provided that the Fund and the Custodian are satisfied that such procedures afford adequate safeguards for the Fund's assets. For purposes of this Section, Proper Instructions shall include instructions received by the Custodian pursuant to any three-party agreement which requires a segregated asset account in accordance with Section 2.11.
6. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY.
The Custodian may in its discretion, without express authority from the Fund:
(1) make payments to itself or others for minor expenses of handling securities or other similar items relating to its duties under this Contract, PROVIDED that all such payments shall be accounted for to the Fund;
(2) surrender securities in temporary form for securities in definitive form;
(3) endorse for collection, in the name of the Fund, checks, drafts and other negotiable instruments; and
(4) in general, attend to all non-discretionary details in connection with the sale, exchange, substitution, purchase, transfer and other dealings with the securities and property of the Fund except as otherwise directed by the Board of Directors/Trustees of the Fund.
7. EVIDENCE OF AUTHORITY
The Custodian shall be protected in acting upon any instructions, notice, request, consent, certificate or other instrument or paper believed by it to be genuine and to have been properly executed by or on behalf of the Fund. The Custodian may receive and accept a certified copy of a vote of the Board of Directors/Trustees of the Fund as conclusive evidence (a) of the authority of any person to act in accordance with such vote or (b) of any determination or of any action by the Board of Directors/ Trustees pursuant to the Articles of Incorporation/Declaration of Trust as described in such vote, and such vote may be considered as in full force and effect until receipt by the Custodian of written notice to the contrary.
8. DUTIES OF CUSTODIAN WITH RESPECT TO THE BOOKS OF ACCOUNT AND CALCULATION OF NET ASSET VALUE AND NET INCOME.
The Custodian shall cooperate with and supply necessary information to the entity or entities appointed by the Board of Directors/Trustees of the Fund to keep the books of account of the Fund and/or compute the net asset value per share of the outstanding shares of the Fund or, if directed in writing to do so by the Fund, shall itself keep such books of account and/or compute such net asset value per share. If so directed, the Custodian shall also calculate daily the net income of the Fund as described in the Fund's currently effective prospectus and shall advise the Fund and the Transfer Agent daily of the total amounts of such net income and, if instructed in writing by an office of the Fund to do so, shall advise the Transfer Agent periodically of the division of such net income among its various components. The calculations of the net asset value per share and the daily income of the Fund shall be made at the time or times described from time to time in the Fund's currently effective prospectus.
9. RECORDS
The Custodian shall create and maintain all records relating to its activities and obligations under this Contract in such manner as will meet the obligations of the Fund under the Investment Company Act of 1940, with particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder. All such records shall be the property of the Fund and shall at all times during the regular business hours of the Custodian be open for inspection by duly authorized officers, employees or agents of the Fund and employees and agents of the Securities and Exchange Commission. The Custodian shall, at the Fund's request, supply the Fund with a tabulation of securities owned by the Fund and held by the Custodian and shall, when requested to do so by the Fund and for such
compensation as shall be agreed upon between the Fund and the Custodian, include certificate numbers in such tabulations.
10. OPINION OF FUND'S INDEPENDENT ACCOUNTANT
The Custodian shall take all reasonable action, as the Fund may from time to time request, to obtain from year to year favorable opinions from the Fund's independent accountants with respect to its activities hereunder in connection with the preparation of the Fund's Form N-1A, Form N-2 (in the case of a closed end Fund) and Form N-SAR or other periodic reports to the Securities and Exchange Commission and with respect to any other requirements of such Commission.
11. COMPENSATION OF CUSTODIAN
The Custodian shall be entitled to reasonable compensation for its services and expenses as Custodian, as agreed upon from time to time between the Fund and the Custodian.
12. RESPONSIBILITY OF CUSTODIAN
So long as and to the extent that it is in the exercise of reasonable care, the Custodian shall not be responsible for the title, validity or genuineness of any property or evidence of title thereto received by it or delivered by it pursuant to this Contract and shall be held harmless in acting upon any notice, request, consent, certificate or other instrument reasonably believed by it to be genuine and to be signed by the proper party or parties, including any futures commission merchant acting pursuant to the terms of a three-party futures or options agreement. The Custodian shall be held to the exercise of reasonable care in carrying out the provisions of this Contract but shall be kept indemnified by and shall be without liability to the Fund for any action taken or omitted by it in good faith without negligence. It shall be entitled to rely on and may act upon advice of counsel (who may be counsel for the Fund) on all matters, and shall be without liability for any action reasonably taken
or omitted pursuant to such advice. Notwithstanding the foregoing, the responsibility of the Custodian with respect to redemptions effected by check shall be in accordance with a separate Agreement entered into between the Custodian and the Fund.
The Custodian shall be liable for the acts or omissions of a foreign banking institution appointed pursuant to the provisions of Article 3 to the same extent as set forth in Article 1 hereof with respect to sub-custodians located in the United States and, regardless of whether assets are maintained in the custody of a foreign banking institution, a foreign securities depository or a branch of a U.S. bank as contemplated by paragraph 3.11 hereof, the Custodian shall not be liable for any loss, damage, cost, expense, liability or claim resulting from, or caused by, the direction of or authorization by the Fund to maintain custody or any securities or cash of the Fund in a foreign country including, but not limited to, losses resulting from nationalization, expropriation, currency restrictions, or acts of war or terrorism.
If the Fund requires the Custodian to take any action with respect to securities, which action involves the payment of money or which action may, in the opinion of the Custodian, result in the Custodian or its nominee assigned to the Fund being liable for the payment of money or incurring liability of some other form, the Fund, as a prerequisite to requiring the Custodian to take such action, shall provide indemnity to the Custodian in an amount and form satisfactory to it.
If the Fund requires the Custodian to advance cash or securities for any purpose or in the event that the Custodian or its nominee shall incur or be assessed any taxes, charges, expenses, assessments, claims or liabilities in connection with the performance of this Contract, except such as may arise from its or its nominee's own negligent action, negligent failure to act or wilful misconduct, any property at any time held for the account of the Fund shall be security therefor and should the
Fund fail to repay the Custodian promptly, the Custodian shall be entitled to utilize available cash and to dispose of the Fund assets to the extent necessary to obtain reimbursement provided, however that, prior to disposing of Fund assets hereunder, the Custodian shall give the Fund notice of its intention to dispose of assets identifying such assets and the Fund shall have one business day from receipt of such notice to notify the Custodian if the Fund wishes the Custodian to dispose of Fund assets of equal value other than those identified in such notice.
13. EFFECTIVE PERIOD, TERMINATION AND AMENDMENT
This Contract shall become effective as of its execution, shall continue in full force and effect until terminated as hereinafter provided, may be amended at any time by mutual agreement of the parties hereto and may be terminated by either party by an instrument in writing delivered or mailed, postage prepaid to the other party, such termination to take effect not sooner than sixty (60) days after the date of such delivery or mailing; PROVIDED, however that the Custodian shall not act under Section 2.10 hereof in the absence of receipt of an initial certificate of the Secretary or an Assistant Secretary that the Board of Directors/Trustees of the Fund has approved the initial use of a particular Securities System and the receipt of an annual certificate of the Secretary or an Assistant Secretary that the Board of Directors/Trustees has reviewed the use by the Fund of such Securities System, as required in each case by Rule 17f-4 under the Investment Company Act of 1940, as amended and that the Custodian shall not act under Section 2.10A hereof in the absence of receipt of an initial certificate of the Secretary or an Assistant Secretary that the Board of Directors/Trustees has approved the initial use of the Direct Paper System and the receipt of an annual certificate of the Secretary or an Assistant Secretary that the Board of Directors/Trustees has reviewed the use by the Fund of the Direct Paper System; PROVIDED FURTHER, however, that the Fund shall not amend or
terminate this Contract in contravention of any applicable federal or state regulations, or any provision of the Articles of Incorporation/Declaration of Trust, and further, provided, that the Fund may at any time by action of its Board of Directors/Trustees (i) substitute another bank or trust company for the Custodian by giving notice as described above to the Custodian, or (ii) immediately terminate this Contract in the event of the appointment of a conservator or receiver for the Custodian by the Comptroller of the Currency or upon the happening of a like event at the direction of an appropriate regulatory agency or court of competent jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian such compensation as may be due as of the date of such termination and shall likewise reimburse the Custodian for its costs, expenses and disbursements.
14. SUCCESSOR CUSTODIAN
If a successor custodian shall be appointed by the Board of Directors/Trustees of the Fund, the Custodian shall, upon termination, deliver to such successor custodian at the office of the Custodian, duly endorsed and in the form for transfer, all securities then held by it hereunder and shall transfer to an account of the successor custodian all of the Fund's securities held in a Securities System.
If no such successor custodian shall be appointed, the Custodian shall, in like manner, upon receipt of a certified copy of a vote of the Board of Directors/Trustees of the Fund, deliver at the office of the Custodian and transfer such securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or certified copy of a vote of the Board of Directors/Trustees shall have been delivered to the Custodian on or before the date
when such termination shall become effective, then the Custodian shall have the right to deliver to a bank or trust company, which is a "bank" as defined in the Investment Company Act of 1940, doing business in Boston, Massachusetts, of its own selection, having an aggregate capital, surplus, and undivided profits, as shown by its last published report, of not less than $25,000,000, all securities, funds and other properties held by the Custodian and all instruments held by the Custodian relative thereto and all other property held by it under this Contract and to transfer to an account of such successor custodian all of the Fund's securities held in any Securities System. Thereafter, such bank or trust company shall be the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the possession of the Custodian after the date of termination hereof owing to failure of the Fund to procure the certified copy of the vote referred to or of the Board of Directors/Trustees to appoint a successor custodian, the Custodian shall be entitled to fair compensation for its services during such period as the Custodian retains possession of such securities, funds and other properties and the provisions of this Contract relating to the duties and obligations of the Custodian shall remain in full force and effect.
15. INTERPRETATIVE AND ADDITIONAL PROVISIONS
In connection with the operation of this Contract, the Custodian and the Fund may from time to time agree on such provisions interpretive of or in addition to the provisions of this Contract as may in their joint opinion be consistent with the general tenor of this Contract. Any such interpretive or additional provisions shall be in a writing signed by both parties and shall be annexed hereto, PROVIDED that no such interpretative or additional provisions shall contravene any applicable federal or state regulations or any provision of the Articles of Incorporation/ Declaration of Trust of the
Fund. No interpretative or additional provisions made as provided in the preceding sentence shall be deemed to be an amendment of this Contract.
16. MASSACHUSETTS LAW TO APPLY
This Contract shall be construed and the provisions thereof interpreted under and in accordance with laws of the Commonwealth of Massachusetts.
17. PRIOR CONTRACTS
This Contract supersedes and terminates, as of the date hereof, all prior contracts between the Fund and the Custodian relating to the custody of the Fund's assets.
18. THE PARTIES
All references herein to the "Fund" are to each of the Funds listed on Appendix A individually, as if this Contract were between such individual Fund and the Custodian. With respect to any Fund listed on Appendix A which is organized as a Massachusetts Business Trust, references to Board of Directors and Articles of Incorporation shall be deemed a reference to Board of Directors/Trustees and Articles of Incorporation/Declaration of Trust respectively and reference to shares of capital stock shall be deemed a reference to shares of beneficial interest.
19. LIMITATION OF LIABILITY
Each Fund listed on Appendix A that is referenced as a Massachusetts Business Trust is the designation of the Directors/Trustees under a Articles of Incorporation/Declaration of Trust, dated (see Appendix A) and all persons dealing with the Fund must look solely to the property of the Fund for the enforcement of any claims against the Fund as neither the Directors/Trustees, officers, agents or shareholders assume any personal liability for obligations entered into on behalf of the Fund.
IN WITNESS WHEREOF, each of the parties has caused this instrument to be executed in its name and behalf by its duly authorized representative and its seal to be hereunder affixed as of the dates set forth on Appendix A.
ATTEST STATE STREET BANK AND TRUST COMPANY
By
- ------------------------- ---------------------------------
Assistant Secretary Vice President
ATTEST EACH OF THE FUNDS LISTED ON APPENDIX A
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SPECIAL CUSTODY ACCOUNT AGREEMENT
(Options and Short Sales)
Agreement, dated __________, 1985, by and among State Street Bank and Trust Company, a Massachusetts banking corporation ("Bank"), Prudential-Bache Government Plus Fund, Inc., a Maryland corporation ("Customer"), and __________ a ___________ ("Broker").
WHEREAS, Bank acts as the custodian ("Custodian") of Customer pursuant to a Custodian Agreement dated _________, 1985; and
WHEREAS, Broker, a member of a national securities exchange, is a clearing member of the Options Clearing Corporation ("OCC"); and
WHEREAS, Customer desires from time to time to write, purchase and sell through Broker, Options as hereinafter defined, as permitted by Customer's investment policies; and
WHEREAS, to facilitate Customer's transactions in certain OCC option
contracts, Customer and Broker desire to establish procedures for the compliance
by Broker with the provisions of Regulation T of the Board of Governors for the
Federal Reserve System and other requirements and for the compliance by Customer
with the provisions of Regulation X of the Board of Governors of the Federal
Reserve System and other requirements.
NOW, THEREFORE, be it agreed as follows:
1. As used herein, the following terms have the following meanings:
"Adequate Margin" in respect of transactions in Options shall
mean such Collateral as is adequate under applicable law, regulations
(including said Regulations X and T) and the internal policies of
Broker.
"Advice from Broker" or "Advice" means a written notice sent to
Customer and Bank or transmitted by a facsimile sending device, except
that Advices for initial or additional collateral may be given orally.
In the event of a purchase or sale transaction, or the exercise of an
Option, the Advice from Broker shall mean a standard confirmation in
use by Broker and sent or transmitted to Customer and bank. With
respect to substitutions or releases of Collateral, Advice from Broker
means a written notice signed by an official of the operations
department of Broker and sent or transmitted to Customer and Bank.
When used herein, the term "Advise" shall refer to a communication
involving an Advice from Broker. An authorized person of Broker will
certify to Bank the names and signatures of those persons authorized
to sign Advices from broker, which certification may be amended from
time to time.
"Closing Transaction" is a transaction in which Customer
purchases an Option of the same Series as an Option previously written
by it or in which Customer sells an Option of the same Series as an
Option previously purchased by it.
"Collateral" shall mean cash or U.S. Government securities or
other securities acceptable to Broker.
"Instructions from Customer" or "Instructions" means a request,
direction or certification in writing signed in the name of Customer
and delivered to Bank or transmitted by a facsimile sending device.
An officer of Customer will certify to
Bank the names and signatures of those persons (who may be officers or
employees of Customer or of The Prudential Insurance Company of
America ("Adviser"), Customer's investment adviser) authorized to sign
the instructions from Customer, which certification may be amended
from time to time. When used herein, the term "Instruct" shall refer
to a communication involving an Instruction from Customer.
"Option" shall mean a put option ("Put") or call option ("Call")
which is cleared by Broker and issued by the OCC.
"Receipt of Payment" means receipt by Bank, as Customer's
Custodian, of (1) a certified or official bank check, (2) a written or
telegraphic advice from a registered clearing agency that funds have
been or will be credited to the account of Bank, or (3) a transfer of
funds from any of Broker's accounts maintained at Bank.
"Receipt of Securities" means receipt by Bank, as Customer's
Custodian, of (1) securities in proper form for transfer or (2) a
written or telegraphic advice from a registered clearing agency that
securities have been credited to the account of Bank.
"Series", as applied to Options, means Options of the same type
(I.E., Put or Call) covering the same underlying security and with the
same exercise price, expiration time and unit of trading.
2. Bank shall open an account on its books entitled "Special Custody
Account for ________ as pledgee of Prudential-Bache Government Plus Fund, Inc."
(referred to herein as "Special Custody Account") and shall hold therein for
Broker as agent for Broker all cash, securities and similar property as shall be
received and accepted by it therein pursuant to the terms
of this Special Custody Account Agreement ("Agreement"). Cash, securities and
similar property held in such Account are Collateral hereunder and shall be
released only in accordance with this Agreement. Bank agrees to release
Collateral to Customer from the pledge hereunder only upon receipt of Advice
from Broker. Customer can substitute or exchange the cash, securities or
similar property in the Special Custody Account only after Customer notifies
Broker of the contemplated substitution or exchange and Broker Advises Bank that
such substitution or exchange is acceptable. Customer hereby grants a
continuing security interest to Broker in the Collateral and the proceeds
thereof to secure its obligations to Broker under this Agreement.
3. At or prior to the time that Customer shall sell a Put through
Broker other than in a Closing Transaction, Customer shall give Instructions to
Bank, acting as Customer's custodian, to transfer from Customer's custodian
account to the Special Custody Account such Collateral as shall be necessary to
equal or exceed the amount Broker shall Advise is necessary to constitute
Adequate Margin or such greater amounts as Customer shall otherwise from time to
time Advise. Customer instructs Bank to maintain in the Special Custody Account
such Collateral as Broker shall, from time to time, Advise Customer is necessary
to constitute Adequate Margin for the Put. [At or prior to the time that
Customer shall sell a Call through Broker other than in a Closing Transaction,
Customer shall give Instructions to Bank, acting as Customer's custodian, to
transfer from Customer's custodian account to the Special Custody Account
Collateral consisting of the U.S. Government securities underlying the Call.]
4. As of the opening of business on each business day, Broker shall
Advise Bank and Customer of any excess of Collateral in the Special Custody
Account. Such excess shall be transferred therefrom upon Advice from Broker to
Customer's custody account with Bank as Custodian and, upon request of Customer,
Broker agrees so to Advise the Bank. Customer represents and warrants to Broker
that securities included at any time in the Collateral
shall be in good deliverable form (or Bank shall have the unrestricted power to
put such securities into good deliverable form) in accordance with the
requirements of such exchanges as may be the primary market or markets for such
securities.
5. Bank will maintain accounts and records for the Collateral in the
Special Custody Account separate from the accounts and records for other
property of Customer in the custody of Bank under the Custodian Agreement and
other property in which Broker has an interest. The Collateral shall at all
times remain the property of Customer subject only to the extent of the interest
and rights therein of Broker as the pledgee thereof and, except as required to
be released hereunder to Broker or its involuntary successors (including a
trustee), shall not be available to creditors of Broker or Bank.
6. (a) In the event Broker Advises Bank and Customer that an
exercise notice filed with OCC in respect of one or more Calls sold by Customer
has been assigned to Customer through Broker, Bank will deliver the securities
underlying such Call from the Special Custody Account to Broker, against Bank's
Receipt of Payment of the exercise price of such Call, less applicable
commissions and other charges, unless (1) on the same day (prior to three p.m.)
the Advice is received from Broker, Customer, after notification by Bank to
Customer of its intention to comply with the exercise notice, notifies Broker
and Bank that Bank acting as Customer's Custodian is given Instructions to make
delivery of other securities then held in the regular custody account of
Customer to Broker, and identical to the securities underlying the Call, against
Bank's Receipt of Payment of such net exercise price, or (2) on the same day
(prior to three p.m.) the Advice is received from Broker, Customer Instructs
Bank to purchase the securities underlying such Call from such assets of
Customer as Customer may Instruct Bank to utilize and to deliver such securities
to Broker.
(b) In the event Broker Advises Bank and Customer that an
exercise notice filed with OCC in respect of one or more Puts sold by Customer
has been assigned to Customer through Broker, Bank will sell such portion of the
non-cash Collateral as Broker may Advise in order that the Special Custody
Account holds cash equal to the exercise price of such Put plus applicable
commissions and other charges and pay such amount of cash to Broker, against
Bank's Receipt of the securities underlying such Put, unless, on the same day
(prior to three p.m.) the Advice is received from Broker, Customer after
notification by Bank to Customer of its intention to comply with the exercise
notice notifies Broker and Bank that Bank acting as Customer's Custodian is
given Instructions to make payment from such assets of Customer as Customer may
instruct Bank to utilize of the gross exercise price against Bank's Receipt of
Securities underlying the Put.
7. From time to time, Customer may place orders with Broker for the
short sale "against the box" of securities or other properties. Prior to the
acceptance of such orders Broker will advise Customer of broker's ability to
borrow such securities or other properties and acceptance of short sale orders
will be contingent upon same. At or prior to the execution of the short sale
"against the box", Customer shall give Instructions to Bank, acting as
Customer's Custodian, to transfer from Customer's custodian account to the
Special Custody Account as Collateral the securities sold short "against the
box".
8. Debit balances of the Special Custody Account shall be charged
with interest, in accordance with Broker's usual custom, and with any increases
in rates caused by money market conditions, and with such other charges as
Broker may make to cover Broker's facilities and extra services.
9. In case of the short sale of any security by Broker at the
direction of Customer and Broker's inability to deliver the same to the
purchaser by reason of failure of
Customer to supply Broker therewith, then and in such event Customer authorizes
Broker to borrow any security or other property necessary to make delivery
thereof, and Customer hereby agrees to be responsible for any loss which Broker
may sustain thereby and any premiums which broker may be required to pay
thereon, and for any loss which Broker may sustain by reason of Broker's
inability to borrow the security or other property sold.
10. It is understood and agreed that Customer when placing with
Broker any sell order for short account, will designate it as such and hereby
authorizes Broker to mark such order as being "short", and when placing with
Broker any order for long account, will designate it as such and hereby
authorizes Broker to mark such order as being "long". Any sell order which
Customer shall designate as being for long account as above provided is for
securities then owned by Customer and, if such securities are not then
deliverable by Broker from any account of Customer, the placing of such order
shall constitute a representation by Customer that it is impracticable for
Customer then to deliver such securities to Broker but that customer will
deliver then as soon as it is possible for Customer to do so without undue
inconvenience or expense.
11. As between Bank on the one hand, and Broker and OCC on the other
hand, the obligations of Bank under this Agreement represent obligations of Bank
generally, rather than an obligation of Bank in any particular capacity or as a
fiduciary with respect to any particular account.
12. Bank shall be paid as compensation for its services pursuant to
this Agreement such compensation as may from time to time be agreed upon in
writing between Customer and Bank. All such compensation shall be paid by
Customer.
13. Bank shall not be liable for any action taken with reasonable
care in accordance with this Agreement, upon any Instruction from Customer or
Advice from Broker herein described.
14. Broker is hereby authorized in the event of a default by Customer
in the transfer of Collateral to the Special Custody Account after Advice to the
Customer from the Broker that such transfer is required to provide Adequate
Margin in the Special Custody Account, upon one business day's notice to
Customer, to sell any or all of the securities in the Special Custody Account,
or other accounts maintained by Customer with Broker, or to buy in any
securities of which the accounts may be short. Bank shall deliver Collateral
free of payment solely upon Advice from Broker signed by a person authorized to
sign for the Broker and stating that, pursuant to this Agreement, the condition
precedent to Broker's right to receive such Collateral free of payment has
occurred. The Bank will provide immediate telephone notice to Customer of any
receipt by Bank of Advice from Broker to deliver Collateral free of payment.
Such sale or purchase may be made according to Broker's judgment and may be made
at Broker's discretion, on the principal exchange or other market for such
securities, or in the event such principal market is closed, in a manner
commercially reasonable for such securities.
15. Customer agrees to indemnify and hold harmless Broker from all
claims and liabilities incurred by Broker in connection with the performance of
this Agreement except such as may arise from Broker's own negligence, willful
misconduct or reckless disregard of its duties hereunder.
16. Bank shall transfer upon receipt by Bank all income earned on the
Collateral held in the Special Custody Account to Customer's custodian account
at Bank unless Broker deems such income necessary for there to be Adequate
Margin in the Special Custody Account and so Advises Bank and Customer.
17. Bank will confirm in writing to Broker and Customer all pledges,
releases or substitutions of Collateral. Bank will also advise Broker upon
request, at any time, of the kind and amount of Collateral pledged to Broker.
It is agreed that, notwithstanding any language to
(2) if to Customer with respect to any other matters to:
(3) In each case, with copies to:
Mr. Robert F. Gunia
Prudential-Bache Government Plus Fund, Inc.
One Seaport Plaza
New York, New York 10292
(c) if to Broker, to:
21. This Agreement will be governed by the laws of the State of New York applicable to transactions entered into and to be performed wholly within the State of New York.
STATE STREET BANK AND TRUST COMPANY
By: _____________________
Authorized Signature
PRUDENTIAL-BACHE GOVERNMENT PLUS FUND, INC.
By: _____________________
Authorized Signature
[BROKER]
By: _____________________
EXHIBIT 8(c)
PLEDGE AGREEMENT
Agreement dated _____________________, 1985 among Prudential-Bache Government Plus Fund, Inc. ("Fund"),_______________ ("Broker"), and State Street Bank and Trust Company ("State Street"), hereinafter collectively known as the "Parties".
WHEREAS, the rules and regulations of the Chicago Mercantile Exchange, the Chicago Board of Trade, and such other exchanges on which Broker may effect, or caused to be effected, Contract transactions for the Fund ("Exchange" or "Exchanges") may require the Fund to deposit with Broker certain collateral with respect to each Contract; and
WHEREAS, Broker understands that State Street is the custodian of the Fund's securities and other assets pursuant to a custody agreement, dated _______, 1985 and that in accordance therewith State Street will open and maintain such separate custody accounts as the Fund may in writing direct, such accounts to be subject to the terms of this Pledge Agreement among the Parties ("Pledge Account" or "Pledge Accounts").
Therefore, it is agreed as follows:
1. As used herein the following terms shall have the following meanings:
"Initial Margin" means the margin required to enter into a
Contract by any Exchange on which transactions are effected by Broker
as broker for the Fund.
"Instructions from Broker" means a request, direction or
certification in writing signed in the name of Broker by a person
authorized to sign for Broker as certified in writing to State Street
by an officer of Broker. Such instructions shall be hand-delivered or
transmitted to it by facsimile sending device and may be amended from
time to time.
"Instructions from the Fund" means a request direction or certification in writing signed in the name of the Fund by a person authorized to sign for the Fund as provided in Section 2.17 of the Custody Agreement dated ___________________, 1985 between the Fund and State Street ("Custody Agreement") and delivered to State Street or transmitted to it by a facsimile sending device, except that instructions to
transfer cash or eligible U.S. Government securities to the Pledge Account may be given by telephone and thereafter confirmed in writing signed in the name of the Fund by a person authorized to sign for the Fund as provided in Section 2.17 of the Custody Agreement.
"Notice by Broker to the Fund" or "Notice by State Street to the Fund" means notice by telephone to a person designated by the Fund in writing as eligible to receive such notice or, in the event no such person is available, to any officer of the Fund.
"Notice by Broker to State Street" means notice, in writing, hand delivered or transmitted by a facsimile sending device to a person designated by State Street in writing as eligible to receive such notice or in the event no such person is available to any officer of the Custody and Shareholder Services Department of State Street.
"One Business Day" means a period commencing at the time the required notice has been given on a day on which the Fund is open for business and concluding at the same time on the next following day that the Fund is open for business.
2. The Fund hereby gives Instructions from the Fund to State Street to open and maintain a Pledge Account for Broker as pledgee of the Fund with respect to the Trading Account established by the Fund with Broker. The account shall be entitled "______________________________, Pledgee of Prudential-Bache Government Plus Fund, Inc. (Customer Segregated Account)." The designation "Customer Segregated Account" in the account title is intended to indicate the status of the account under the Commodities Exchange Act and Commodity Futures Trading Commission regulations; however, the provisions of this agreement shall be controlling as to the rights of the Parties in the Collateral designated in the Account.
3. The Fund shall deposit in the Pledge Account cash or eligible U.S. Government securities, or any combination thereof (hereinafter called "Collateral") in the amount of Initial Margin required with respect to any Contract for the Trading Account for which the Pledge Account is maintained. Such Collateral shall be maintained in the Pledge Account until termination or satisfaction of the Contract. The Fund may deposit, or maintain on deposit, Collateral in the Pledge Account in excess of such requirements ("Excess Margin"). In determining whether Collateral is sufficient to satisfy Initial Margin requirements of any exchange, eligible U.S. Government securities will be valued at the current market value less 10% of the principal value thereof.
4. Collateral held in the Pledge Account (i) will be held by State Street as agent of Broker subject to the terms and conditions of the Custody Agreement, as modified by this Agreement, which shall be controlling with respect to the Pledge Account in the event of
conflicting provisions, (ii) may be released, transferred or sold only in accordance with the terms of this Agreement and (iii) except as provided herein, shall not be made available to Broker or to any person claiming through Broker including creditors of Broker. The Fund hereby grants to Broker a continuing security interest in the Collateral and the proceeds thereof, but not such portion of the Collateral which constitutes Excess Margin, subject to the terms and conditions of this Agreement, which security interest will terminate at the earlier of (a) release of the Collateral by Broker as provided herein or (b) such time as the Collateral becomes Excess Margin. The Collateral shall at all times remain the property of the Fund subject only to the interest and rights therein of Broker as pledgee and secured party thereof as provided in this Agreement.
5. State Street agrees to transfer upon Instructions of the Fund, or release to the Fund, Collateral held in the Pledge Account only upon Instructions from Broker.
6. The Fund may substitute as Collateral eligible U.S. Government securities or cash of equal or greater value. Broker agrees to give Instructions from Broker to State Street to release from a Pledge Account cash or eligible U.S. Government securities of an equal Value, or such lesser amount as may be directed by the Fund, upon receipt of substitute Collateral.
7. Broker shall at the Fund's request promptly notify the Fund of the amount of any Excess Margin in the Pledge Account. Upon request of the Fund, Broker shall give Instructions from Broker to State Street to release to the Fund cash or eligible U.S. Government securities selected by the Fund, the value of which in the aggregate does not exceed the amount of any such Excess Margin. In the event such Excess Margin shall at any time exceed $50,000, State Street shall release to the Fund cash or eligible U.S. Government securities selected by the Fund, the value of which in the aggregate does not exceed the amount of any such Excess Margin, without the need to receive Instructions from Broker.
8. Subject to Section 10, interest on securities held in the Pledge Account will be automatically credited by State Street in Federal funds to such demand deposit account or accounts designated in Instructions from the Fund on the date that such funds become due and payable. Amounts due on securities which mature or are redeemed will be credited to the Pledge Account in Federal funds on the date funds are received.
9. State Street shall promptly give Notice by State Street to the Fund and Broker of, and transmit to both written confirmation of, each transfer into or out of a Pledge Account and shall transmit to Broker monthly a summary of such transfers.
10. Broker shall have access to the Collateral only in accordance with the following:
(a) If notice by Broker is given that additional margin is required by any Exchange on which transactions are effected by Broker on behalf of the Fund due to variation in the value of one or more Contracts purchased or sold by the Fund ("Variation
Margin") prior to 11:30 a.m. New York time on a day on which the Fund is open for business, which Variation Margin shall first have been satisfied from any amounts currently credited to the Fund's Trading Account with Broker in connection with which the Variation Margin is required, the Fund shall transfer to Broker such Variation Margin not later than 3:00 p.m. on the same day. If Notice by Broker to the Fund is given of the need for Variation Margin subsequent to 11:30 a.m. but prior to 4:00 p.m. New York time on a day on which the Fund is open for business, the Fund shall provide such Variation Margin to Broker not later than 10:30 a.m. New York time of the next succeeding day on which the Fund is open for business. Notice by Broker to the Fund of the receipt of Variation Margin shall be given promptly.
(b) If Broker has not received the requested Variation Margin within the time period as provided in Paragraph (a), Notice by Broker to the Fund of the failure to receive the Variation Margin shall be given immediately.
(c) If Broker does not receive the Variation Margin within one Business Day from the time of giving Notice by Broker to the Fund of the failure to receive the Variation Margin, Broker may give (i) Notice by Broker to State Street of the Fund's failure to provide Variation Margin and the amount of Variation Margin required, which Notice shall indicate the Pledge Account relating to the Trading Account in which the Variation Margin is required, and (ii) Notice by Broker to the Fund that such Notice has been given to State Street. Immediately upon receipt of Notice by Broker to State Street but without prejudice to any rights of Broker hereunder, State Street shall give Notice by State Street to the Fund of its receipt of such Notice by Broker.
(d) No sooner than one Business Day after such Notice by Broker
to State Street, and only if the Fund has failed to transfer the required
Variation Margin to Broker during such period, Broker may give Notice by
Broker to State Street of the Fund's failure to provide Variation Margin
and may give Instructions from Broker to State Street (i) to transfer
eligible U.S. Government securities from such Pledge Account to Broker,
(ii) to sell at the prevailing market price such of the Collateral in the
Pledge Account relating to the Trading Account in which the Variation
Margin is required, in each case as necessary to provide for payment to
Broker of the amount of Variation Margin that Broker shall have specified
in the Notice, or (iii) with respect to Collateral in the form of cash,
Broker may give Instructions from Broker to State Street to immediately
transfer cash in the amount of the Variation Margin that Broker shall have
specified in such Notice from such Pledge Account to the account of Broker.
Any Notice pursuant to this paragraph 10(d) must state that all conditions
precedent to Broker's right to direct the disposition of the Fund's assets
in such Pledge Account have been met. State Street shall immediately give
Notice by State Street to the Fund of its receipt of such Instructions from
Broker and, upon taking any action pursuant to such Instructions, shall
immediately give Notice by State Street to the Fund of such actions.
Subject to the notice provisions set forth above, State Street shall take
Instructions solely from Broker with respect to the
sale of securities and/or the transfer of cash to Broker. In the event that
Broker receives eligible U.S. Government Securities pursuant to this paragraph
(d), it shall have the right to sell or otherwise dispose of such securities and
shall remit to the Fund any proceeds of such sale or disposition in excess of
the amount of Variation Margin specified in Instructions from Broker to State
Street.
(e) State Street shall release from the Pledge Account to the Fund's custodial account any Collateral in excess of the amount of Variation Margin specified in Instructions from Broker to State Street including any proceeds from sale of securities in excess of such amount.
11. Neither Broker nor any person claiming through Broker shall have access to Collateral in the Pledge Account established and maintained pursuant to this Agreement other than the Pledge Account which relates to the Trading Account in which the Variation Margin is required and only in accordance with the provisions of this Agreement.
12. If State Street, upon receipt of Instructions from Broker to release Collateral, fails to take the action specified in such Instructions as provided herein in a timely fashion and the Fund incurs a loss by reason thereof, State Street shall indemnify the Fund for such loss.
13. No amendment of this Agreement shall be effective unless in writing and signed by persons thereunto duly authorized.
14. Written communications hereunder shall be, except as otherwise required hereunder, hand-delivered or mailed first class postage prepaid, except that written notice of termination shall be sent by certified mail addressed:
(a) if to State Street, to:
Custody and Shareholder Services
State Street Bank and Trust Company
1776 Heritage Drive
North Quincy, Massachussets
(b) (1) if to the Fund to:
The Prudential Insurance Company of America
Prudential Plaza
Newark, New Jersey 07101
(2) With copies to:
Robert F. Gunia
Prudential-Bache Government Plus Fund, Inc.
One Seaport Plaza
New York, New York l0292
15. Except as specifically provided herein, this agreement does not in any way affect any other agreements entered into among the parties hereto and any actions taken or omitted by any party hereunder shall not affect any rights of any other party hereunder.
16. Any of the parties hereto may terminate this Agreement upon 30 days written Notice to both of the other parties hereto; provided, however, that Collateral which has not been released by Broker at or prior to the time of termination shall be transferred to a substitute custodian designated by the Fund and acceptable to Broker.
17. This Agreement shall be construed according to, and the rights and liabilities of the parties hereto shall be governed by the laws of the State of New York.
STATE STREET BANK AND TRUST COMPANY
By :_________________________________________________ Authorized Signature
PRUDENTIAL-BACHE GOVERNMENT SECURITIES FUND, INC.
By :_________________________________________________ Authorized Signature
[BROKER]
By :_________________________________________________ Authorized Signature
____________________________________________ ("Broker") and Prudential-Bache Government Plus Fund, Inc. ("Customer") agree as follows:
1. Customer has opened a trading account ("Trading Account") with Broker for the purpose of trading in contracts for the future delivery of commodities traded on duly registered boards of trade or commodities exchanges, including options on such contracts ("Contracts").
2. Customer authorizes Broker to purchase and sell Contracts for Customer's account in accordance with Customer's telephone instructions. Customer hereby waives any defense that any such instruction was not in writing as may be required by the Statute of Frauds or any other law, rule or regulation.
3. Customer shall, in connection with Contract transactions, pay Broker (1) commission charges as agreed upon by Broker and Customer from time to time, (2) any charges imposed on any transaction undertaken for Customer by the exchange or clearinghouse through which it is executed and any tax, fees or charges imposed on such transactions by any competent authority, (3) any margin required by any exchange on which Contract transactions are effected by Broker for Customer due to the variations in value of one or more outstanding Contracts purchased or sold by Customer ("Variation Margin") in accordance with item 7 hereof and (4) interest and service charges on any Customer deficit balances at the rates customarily charged by the Broker, together with Broker's costs and attorney's fees incurred in collecting any such deficit. Such payments shall be made in Federal funds to Broker at _____________________________________________ _______________.
4. Broker shall promptly credit to the Trading Account any margin due to Customer resulting from the variation in value of one or more Contracts purchased or sold by Customer in accordance with the rules of any exchange on which Contract transactions are effected by Broker for Customer. At Customer's direction, Broker shall transfer Trading Account balances to Customer in Federal funds to State Street Bank and Trust Company or such bank account in Customer's name as Customer shall otherwise direct. Customer shall give such directions to Broker by telephone, confirmed thereafter in writing.
5. A detailed statement of all Contract transactions for or on the Customer's behalf shall be furnished to Customer on a daily basis.
6. Customer shall timely deposit and maintain in a Pledge Account at all times Initial Margin, as defined in Item 1 of the Pledge Agreement among Broker, Customer and State Street Bank and Trust Company executed simultaneously herewith ("Pledge Agreement"). As used herein, a timely deposit is one which is effected within one Business Day, as defined in Item
1 of the Pledge Agreement, following telephone notice by Broker to a person authorized in writing by Customer to receive such notice ("Authorized Person of Customer") of the requirement for Initial Margin.
7. If any Variation Margin is required to be paid by Customer, such Variation Margin requirement shall first be satisfied by reducing the balance, if any, currently credited, in accordance with Item 4 above, with respect to the Trading Account with Broker in which the. Variation Margin is required. Any remaining Variation Margin ("Net Variation Margin") shall be paid by Customer to Broker within the time periods set forth in Item 10 of the Pledge Agreement.
8. Customer shall make timely delivery of or payment for financial instruments in compliance with the terms of the Contracts purchased or sold by Customer through Broker unless such Contracts have been terminated by an offsetting purchase or sale prior to the delivery date. Customer shall, upon request of Broker, advise Broker of its intentions with respect to the delivery of or payment for such financial instruments, and Broker shall be entitled to receive appropriate assurances with respect thereto.
9. In the event that Customer shall (a) become insolvent (as defined below) (b) fail to deposit Initial Margin before the expiration of One Business Day following telephone notice by Broker to an Authorized Person of Customer of the failure to deposit Initial Margin in the Pledge Account within the time period specified in Item 6 of this Agreement or (c) fail to make payment of Net Variation Margin before the expiration of all notice periods specified in Item 10 of the Pledge Agreement, Broker may close out Customer's open Contracts in whole or in part, and cancel any outstanding Contract orders and commitments made by a Broker on behalf of Customer. Broker may take action pursuant to clause (b) or (c) hereof only with respect to the particular Trading Account in which the fail occurred. In the case of failure by Customer to make delivery of a financial instrument in accordance with Item 8 hereof, Broker may borrow or buy any property necessary to make such delivery, Any sale, purchase or cancellation pursuant to this paragraph may be made at Broker's discretion on the exchange or other market or through the clearinghouse where such business is then transacted, at public auction or at private sale, without prior tender, demand or call upon Customer. Customer shall remain liable for and shall pay to Broker the amount of any deficiency resulting from any transaction described above. As used above, the term insolvent means that (A) an order, judgment or decree has been entered under the bankruptcy, reorganization, compromise, arrangement, insolvency, readjustment of debt, dissolution or liquidation or similar law (herein called the "bankruptcy Law") of any jurisdiction adjudicating the Customer insolvent; or (B) the Customer has petitioned or applied to any tribunal for, or consented to, the appointment of, or taking possession by, a trustee, receiver, liquidator or similar official, of the Customer, or commenced a voluntary case under the bankruptcy law of the United States or any proceedings relating to the Customer under the bankruptcy Law of any other jurisdiction, whether now or hereafter in effect; or (C) any such petition or application has been filed, or any such proceedings commenced, against the Customer and the Customer by any act has indicated its approval thereof, consent thereto or acquiescence therein, or an order for relief has been entered in an involuntary case against Customer under the bankruptcy Law of the United
States, as now or hereafter constituted, or an order, judgment or decree has been entered therein appointing any such trustee, receiver, liquidator or similar official, or approving the petition in any such proceedings, and such order, judgment or decree remains unstayed and in effect for more than 60 days.
10. All communications, except notice pursuant to Item 6 hereof, shall be sent to
(a) (1) if to Customer, to:
The Prudential Insurance Company of America
Prudential Plaza
Newark, New Jersey 07101
(2) With copies to:
Robert F. Gunia
Prudential-Bache Government Plus Fund, Inc.
One Seaport Plaza
New York, New York 10292
(b) if to Broker, to
or to such other address as Customer may hereafter direct Broker in writing to use.
11. This Agreement and the Pledge Agreement contain the entire agreement between the parties and supersede any prior agreements between the parties as to the subject matter of this Agreement. No provision of this Agreement shall be amended except by an instrument in writing signed by a duly authorized officer of Customer and a duly authorized officer of Broker.
12. This Agreement shall be construed according to, and the rights and liabilities of the parties hereto shall be governed by, the laws of the State of New York.
13. This Agreement shall be binding on Broker, its successors and assigns, and shall be binding upon Customer and Customer's successors and assigns.
PRUDENTIAL-BACHE GOVERNMENT PLUS FUND, INC.
By :_______________________________________ Authorized Signature
[BROKER]
By :_______________________________________ Authorized Signature
EXHIBIT 99.9
TRANSFER AGENCY AND SERVICE AGREEMENT
between
PRUDENTIAL-BACHE GOVERNMENT PLUS FUND, INC.
and
PRUDENTIAL MUTUAL FUND SERVICES, INC.
TABLE OF CONTENTS
Article 1 Terms of Appointment; Duties of the Agent...... 1
Article 2 Fees and Expenses.............................. 4
Article 3 Representations and Warranties of the Agent.... 5
Article 4 Representations of Warranties of the Fund...... 5
Article 5 Duty of Care and Indemnification............... 6
Article 6 Documents and Covenants of the Fund and the
Agent.......................................... 9
Article 7 Termination of Agreement.......................10
Article 8 Assignment.....................................11
Article 9 Affiliations...................................11
Article 10 Amendment......................................12
Article 11 Applicable Law.................................12
Article 12 Miscellaneous..................................12
Article 13 Merger of Agreement............................13
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TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the 1st day of January, 1988 by and between PRUDENTIAL-BACHE GOVERNMENT PLUS FUND, INC., a Maryland corporation, having its principal office and place of business at One Seaport Plaza, New York, New York 10292 (the Fund), and PRUDENTIAL MUTUAL FUND SERVICES, INC., a New Jersey corporation, having its principal office and place of business at Raritan Plaza One, Edison, New Jersey 08837 (the Agent or PMFS).
WHEREAS, the Fund desires to appoint PMFS as its transfer agent, dividend disbursing agent and shareholder servicing agent in connection with certain other activities, and PMFS desires to accept such appointment;
NOW THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows:
Article 1 TERMS OF APPOINTMENT; DUTIES OF PMFS
1.01 Subject to the terms and conditions set forth in this Agreement, the Fund hereby employs and appoints PMFS to act as, and PMFS agrees to act as, the transfer agent for the authorized and issued shares of the common stock of each series of the Fund, $.01 par value (Shares), dividend disbursing agent and shareholder servicing agent in connection with any accumulation, open-account or similar plans provided to the shareholders of the Fund or any series thereof (Shareholders) and set out in the currently effective prospectus and statement of additional
information (prospectus) of the Fund, including without limitation any periodic investment plan or periodic withdrawal program.
1.02 PMFS agrees that it will perform the following services:
(a) In accordance with procedures established from time to time by agreement between the Fund and PMFS, PMFS shall:
(i) Receive for acceptance, orders for the purchase of Shares, and promptly deliver payment and appropriate documentation therefor to the Custodian of the Fund authorized pursuant to the Articles of Incorporation of the Fund (the Custodian);
(ii) Pursuant to purchase orders, issue the appropriate number of Shares and hold such Shares in the appropriate Shareholder account;
(iii) Receive for acceptance redemption requests and redemption directions and deliver the appropriate documentation therefor to the Custodian;
(iv) At the appropriate time as and when it receives monies paid to it by the Custodian with respect to any redemption, pay over or cause to be paid over in the appropriate manner such monies as instructed by the redeeming Shareholders;
(v) Effect transfers of Shares by the registered owners thereof upon receipt of appropriate instructions;
(vi) Prepare and transmit payments for dividends and distributions declared by the Fund;
(vii) Calculate any sales charges payable by a Shareholder on purchases and/or redemptions of Shares of the Fund as such charges may be reflected in the prospectus;
(viii) Maintain records of account for and advise the Fund and its Shareholders as to the foregoing; and
(ix) Record the issuance of Shares of the Fund and maintain pursuant to Rule 17Ad-10(e) under the Securities Exchange Act of 1934 (1934 Act) a record of the total number of Shares of the Fund which are authorized, based upon data provided to it by the Fund, and issued and outstanding. PMFS shall also provide to the Fund on a regular basis the total number of Shares which are authorized, issued and outstanding and shall notify the Fund in case any proposed issue of Shares by the Fund would result in an overissue. In case any issue of Shares would result in an overissue, PMFS shall refuse to issue such Shares and shall not countersign and issue any certificates requested for such Shares. When recording the issuance of Shares, PMFS shall have no obligation to take cognizance of any Blue Sky laws relating to the issue or sale of such Shares, which functions shall be the sole responsibility of the Fund.
(b) In addition to and not in lieu of the services set forth in the above paragraph (a), PMFS shall: (i) perform all of the customary services of a transfer agent, dividend disbursing agent and, as relevant, shareholder servicing agent in connection with accumulation, open-account or similar plans (including without limitation any periodic investment plan or periodic withdrawal program), including but not limited to, maintaining all Shareholder accounts, preparing Shareholder meeting lists, mailing proxies, receiving and tabulating proxies, mailing Shareholder reports and prospectuses to current Shareholders, withholding taxes
on non-resident alien accounts, preparing and filing appropriate forms required
with respect to dividends and distributions by federal tax authorities for all
Shareholders, preparing and mailing confirmation forms and statements of account
to Shareholders for all purchases and redemptions of Shares and other
confirmable transactions in Shareholder accounts, preparing and mailing activity
statements for Shareholders and providing Shareholder account information and
(ii) provide a system which will enable the Fund to monitor the total number of
Shares sold in each State or other jurisdiction.
(c) In addition, the Fund shall (i) identify to PMFS in writing those transactions and assets to be treated as exempt from Blue Sky reporting for each State and (ii) verify the establishment of transactions for each State on the system prior to activation and thereafter monitor the daily activity for each State. The responsibility of PMFS for the Fund's registration status under the Blue Sky or securities laws of any State or other jurisdiction is solely limited to the initial establishment of transactions subject to Blue Sky compliance by the Fund and the reporting of such transactions to the Fund as provided above and as agreed from time to time by the Fund and PMFS.
PMFS may also provide such additional services and functions not specifically described herein as may be mutually agreed between PMFS and the Fund and set forth in Schedule B hereto.
Procedures applicable to certain of these services may be established from time to time by agreement between the Fund and PMFS.
Article 2 FEES AND EXPENSES
2.01 For performance by PMFS pursuant to this Agreement, the Fund
agrees to pay PMFS an annual maintenance fee for each Shareholder account and
certain transactional fees as set out in the fee schedule attached hereto as
Schedule A. Such fees and out-of-pocket expenses and advances identified under
Section 2.02 below may be changed from time to time subject to mutual written
agreement between the Fund and PMFS.
2.02 In addition to the fees paid under Section 2.01 above, the Fund agrees to reimburse PMFS for out-of-pocket expenses or advances incurred by PMFS for the items set out in Schedule A attached hereto. In addition, any other expenses incurred by PMFS at the request or with the consent of the Fund will be reimbursed by the Fund.
2.03 The Fund agrees to pay all fees and reimbursable expenses within a reasonable period of time following the mailing of the respective billing notice. Postage for mailing of dividends, proxies, Fund reports and other mailings to all Shareholder accounts shall be advanced to PMFS by the Fund upon request prior to the mailing date of such materials.
Article 3 REPRESENTATIONS AND WARRANTIES OF PMFS
PMFS represents and warrants to the Fund that:
3.01 It is a corporation duly organized and existing and in good standing under the laws of New Jersey and it is duly qualified to carry on its business in New Jersey.
3.02 It is and will remain registered with the U.S. Securities and Exchange Commission (SEC) as a Transfer Agent
pursuant to the requirements of Section 17A of the 1934 Act.
3.03 It is empowered under applicable laws and by its charter and By-Laws to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to authorize it to enter into and perform this Agreement.
3.05 It has and will continue to have access to the necessary facilities, equipment and personnel to perform its duties and obligations under this Agreement.
Article 4 REPRESENTATIONS AND WARRANTIES OF THE FUND
The Fund represents and warrants to PMFS that:
4.01 It is a corporation duly organized and existing and in good standing under the laws of Maryland.
4.02 It is empowered under applicable laws and by its Articles of Incorporation and By-Laws to enter into and perform this Agreement.
4.03 All corporate proceedings required by said Articles of Incorporation and By-Laws have been taken to authorize it to enter into and perform this Agreement.
4.04 It is an investment company registered with the SEC under the Investment Company Act of 1940, as amended (the 1940 Act).
4.05 A registration statement under the Securities Act of 1933 (the 1933 Act) is currently effective and will remain effective, and appropriate state securities law filings have been made and will continue to be made, with respect to all Shares of the Fund being offered for sale.
Article 5 DUTY OF CARE AND INDEMNIFICATION
5.01 PMFS shall not be responsible for, and the Fund shall indemnify and hold PMFS harmless from and against, any and all losses, damages, costs, charges, counsel fees, payments, expenses and liability arising out of or attributable to:
(a) All actions of PMFS or its agents or subcontractors required to be taken pursuant to this Agreement, provided that such actions are taken in good faith and without negligence or willful misconduct.
(b) The Fund's refusal or failure to comply with the terms of this Agreement, or which arise out of the Fund's lack of good faith, negligence or willful misconduct or which arise out of the breach of any representation or warranty of the Fund hereunder.
(c) The reliance on or use by PMFS or its agents or subcontractors of information, records and documents which (i) are received by PMFS or its agents or subcontractors and furnished to it by or on behalf of the Fund, and (ii) have been prepared and/or maintained by the Fund or any other person or firm on behalf of the Fund.
(d) The reliance on, or the carrying out by PMFS or its agents or subcontractors of, any instructions or requests of the Fund.
(e) The offer or sale of Shares in violation of any requirement under the federal securities laws or regulations or the securities or Blue Sky laws of any State or other jurisdiction that such Shares be registered in such State or other jurisdiction or in violation of any stop order or other determination or ruling by any
federal agency or any State or other jurisdiction with respect to the offer or sale of such Shares in such State or other jurisdiction.
5.02 PMFS shall indemnify and hold the Fund harmless from and against any and all losses, damages, costs, charges, counsel fees, payments, expenses and liability arising out of or attributable to any action or failure or omission to act by PMFS as a result of PMFS' lack of good faith, negligence or willful misconduct.
5.03 At any time PMFS may apply to any officer of the Fund for instructions, and may consult with legal counsel, with respect to any matter arising in connection with the services to be performed by PMFS under this Agreement, and PMFS and its agents or subcontractors shall not be liable and shall be indemnified by the Fund for any action taken or omitted by it in reliance upon such instructions or upon the opinion of such counsel. PMFS, its agents and subcontractors shall be protected and indemnified in acting upon any paper or document furnished by or on behalf of the Fund, reasonably believed to be genuine and to have been signed by the proper person or persons, or upon any instruction, information, data, records or documents provided to PMFS or its agents or subcontractors by machine readable input, telex, CRT data entry or other similar means authorized by the Fund, and shall not be held to have notice of any change of authority of any person, until receipt of written notice thereof from the Fund. PMFS, its agents and subcontractors shall also be protected and indemnified in recognizing stock certificates which are reasonably believed to
bear the proper manual or facsimile signature of the officers of the Fund, and the proper countersignature of any former transfer agent or registrar, or of a co-transfer agent or co-registrar.
5.04 In the event either party is unable to perform its obligations under the terms of this Agreement because of acts of God, strikes, equipment or transmission failure or damage reasonably beyond its control, or other causes reasonably beyond its control, such party shall not be liable for damages to the other for any damages resulting from such failure to perform or otherwise from such causes.
5.05 Neither party to this Agreement shall be liable to the other party for consequential damages under any provision of this Agreement or for any act or failure to act hereunder.
5.06 In order that the indemnification provisions contained in this Article 5 shall apply, upon the assertion of a claim for which either party may be required to indemnify the other, the party seeking indemnification shall promptly notify the other party of such assertion, and shall keep the other party advised with respect to all developments concerning such claim. The party who may be required to indemnify shall have the option to participate with the party seeking indemnification in the defense of such claim. The party seeking indemnification shall in no case confess any claim or make any compromise in any case in which the other party may be required to indemnify it except with the other party's prior written consent.
Article 6 DOCUMENTS AND COVENANTS OF THE FUND AND PMFS
6.01 The Fund shall promptly furnish to PMFS the following:
(a) A certified copy of the resolution of the Board of Directors of the Fund authorizing the appointment of PMFS and the execution and delivery of this Agreement;
(b) A certified copy of the Articles of Incorporation and By-Laws of the Fund and all amendments thereto;
(c) The current registration statements and any amendments and supplements thereto filed with the SEC pursuant to the requirements of the 1933 Act and the 1940 Act;
(d) A specimen of the certificate for Shares of the Fund in the form approved by the Board of Directors, with a certificate of the Secretary of the Fund as to such approval;
(e) All account application forms or other documents relating to Shareholder accounts and/or relating to any plan program or service offered or to be offered by the Fund; and
(f) Such other certificates, documents or opinions as the Agent deems to be appropriate or necessary for the proper performance of its duties.
6.02 PMFS hereby agrees to establish and maintain facilities and procedures reasonably acceptable to the Fund for safekeeping of stock certificates, check forms and facsimile signature imprinting devices, if any; and for the preparation or use, and for keeping account of, such certificates, forms and devices.
6.03 PMFS shall prepare and keep records relating to the services to be performed hereunder, in the form and manner as it may deem advisable. To the extent required by Section 31 of the 1940 Act, and the Rules and Regulations thereunder, PMFS agrees
that all such records prepared or maintained by PMFS relating to the services to be performed by PMFS hereunder are the property of the Fund and will be preserved, maintained and made available in accordance with such Section 31 of the 1940 Act, and the Rules and Regulations thereunder, and will be surrendered promptly to the Fund on and in accordance with its request.
6.04 PMFS and the Fund agree that all books, records, information and data pertaining to the business of the other party which are exchanged or received pursuant to the negotiation or the carrying out of this Agreement shall remain confidential and shall not be voluntarily disclosed to any other person except as may be required by law or with the prior consent of PMFS and the Fund.
6.05 In case of any requests or demands for the inspection of the Shareholder records of the Fund, PMFS will endeavor to notify the Fund and to secure instructions from an authorized officer of the Fund as to such inspection. PMFS reserves the right, however, to exhibit the Shareholder records to any person whenever it is advised by its counsel that it may be held liable for the failure to exhibit the Shareholder records to such person.
Article 7 TERMINATION OF AGREEMENT
7.01 This Agreement may be terminated by either party upon one hundred twenty (120) days written notice to the other.
7.02 Should the Fund exercise its right to terminate, all out-of-pocket expenses associated with the movement of records and other materials will be borne by the Fund. Additionally, PMFS reserves the right to charge for any other reasonable fees and expenses associated with such termination.
Article 8 ASSIGNMENT
8.01 Except as provided in Section 8.03 below, neither this Agreement nor any rights or obligations hereunder may be assigned by either party without the written consent of the other party.
8.02 This Agreement shall inure to the benefit of and be binding upon the parties and their respective permitted successors and assigns.
8.03 PMFS may, in its sole discretion and without further consent by
the Fund, subcontract, in whole or in part, for the performance of its
obligations and duties hereunder with any person or entity including but not
limited to: (i) Prudential Securities Incorporated (Prudential Securities), a
registered broker-dealer, (ii) The Prudential Insurance Company of America
(Prudential), (iii) Pruco Securities Corporation, a registered broker-dealer,
(iv) any Prudential Securities or Prudential subsidiary or affiliate duly
registered as a broker-dealer and/or a transfer agent pursuant to the 1934 Act
or (vi) any other Prudential Securities or Prudential affiliate or subsidiary;
provided, however, that PMFS shall be as fully responsible to the Fund for the
acts and omissions of any agent or subcontractor as it is for its own acts and
omissions.
Article 9 AFFILIATIONS
9.01 PMFS may now or hereafter, without the consent of or notice to the Fund, function as Transfer Agent and/or Shareholder Servicing Agent for any other investment company registered with the SEC under the 1940 Act, including without
limitation any investment company whose adviser, administrator, sponsor or principal underwriter is or may become affiliated with Prudential Securities and/or Prudential or any of its or their direct or indirect subsidiaries or affiliates.
9.02 It is understood and agreed that the directors, officers, employees, agents and Shareholders of the Fund, and the directors, officers, employees, agents and shareholders of the Fund's investment adviser and/or distributor, are or may be interested in the Agent as directors, officers, employees, agents, shareholders or otherwise, and that the directors, officers, employees, agents or shareholders of the Agent may be interested in the Fund as directors, officers, employees, agents, Shareholders or otherwise, or in the investment adviser and/or distributor as officers, directors, employees, agents, shareholders or otherwise.
Article 10 AMENDMENT
10.01 This Agreement may be amended or modified by a written agreement executed by both parties and authorized or approved by a resolution of the Board of Directors of the Fund.
Article 11 APPLICABLE LAW
11.01 This Agreement shall be construed and the provisions thereof interpreted under and in accordance with the laws of the State of New Jersey.
Article 12 MISCELLANEOUS
12.01 In the event of an alleged loss or destruction of any Share certificate, no new certificate shall be issued in lieu thereof, unless there shall first be furnished to PMFS an affidavit of loss or non-receipt by the holder of Shares with respect to which a certificate has been lost or destroyed, supported by an appropriate bond satisfactory to PMFS and the Fund issued by a surety company satisfactory to PMFS, except that PMFS may accept an affidavit of loss and indemnity agreement executed by the registered holder (or legal representative) without surety in such form as PMFS deems appropriate indemnifying PMFS and the Fund for the issuance of a replacement certificate, in cases where the alleged loss is in the amount of $1000 or less.
12.02 In the event that any check or other order for payment of money on the account of any Shareholder or new investor is returned unpaid for any reason, PMFS will (a) give prompt notification to the Fund's distributor (Distributor) of such non-payment; and (b) take such other action, including imposition of a reasonable processing or handling fee, as PMFS may, in its
sole discretion, deem appropriate or as the Fund and the Distributor may instruct PMFS.
12.03 Any notice or other instrument authorized or required by this Agreement to be given in writing to the Fund or to PMFS shall be sufficiently given if addressed to that party and received by it at its office set forth below or at such other place as it may from time to time designate in writing.
To the Fund:
Prudential-Bache Government Plus Fund, Inc.
One Seaport Plaza
New York, NY 10292
Attention: President
To PMFS:
Prudential Mutual Fund Services, Inc.
Raritan Plaza One
Edison, NJ 08837
Attention: President
Article 13 MERGER OF AGREEMENT
13.01 This Agreement constitutes the entire agreement between the parties hereto and supersedes any prior agreement with respect to the subject matter hereof whether oral or written.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in their names and on their behalf under their seals by and through their duly authorized officers, as of the day and year first above written.
PRUDENTIAL-BACHE GOVERNMENT PLUS
FUND, INC.
BY: /s/ Robert F. Gunia
------------------------
ATTEST:
/s/ S. Jane Rose
- -----------------------
PRUDENTIAL MUTUAL FUND
SERVICES, INC.
BY: /s/ Fred Fiandaca
-----------------
ATTEST:
/s/ Lynda M. Puglesi
- --------------------
|
Exhibit 10
SHEREFF, FRIEDMAN, HOFFMAN & GOODMAN, LLP
919 THIRD AVENUE
NEW YORK, NEW YORK 10022-9998
(212) 758-9500
May 1, 1997
Prudential Government Income Fund, Inc.
Gateway Center Three
100 Mulberry Street, 9th Floor
Newark, New Jersey 07102-4077
Gentlemen and Ladies:
Prudential Government Income Fund, Inc. (the "Fund"), is filing with the Securities and Exchange Commission Post-Effective Amendment No. 24 to its Registration Statement under the Securities Act of 1933, as amended (the "1933 Act") on Form N-1A (File Nos. 2-82976 and 811-3712), relating to the registration under the 1933 Act of 15,949,378 additional shares of its Common Stock, par value $.01 per share (the "Shares"), which are to be offered and sold by the Fund in the manner and on the terms set forth in the prospectus of the Fund current and effective under the 1933 Act at the time of sale. The Shares are previously outstanding shares of the Fund's Common Stock, par value $.01 per share, which were redeemed by the Fund during its fiscal year ended February 28, 1997. According to Post-Effective Amendment No. 24 to the Fund's Registration Statement, none of the Shares have previously been used by the Fund for reduction pursuant to paragraph (a) of Rule 24e-2 under the Investment Company Act of 1940, as amended (the "1940 Act") in previous filings of post-effective amendments to the Fund's Registration Statement during the current fiscal year, or for the reduction pursuant to paragraph (c) of Rule 24f-2 under the 1940 Act during the Fund's current fiscal year, of the registration fee payable by the Fund for the registration of shares for sale under the 1933 Act.
We have, as counsel, participated in various proceedings relating to the Fund and to the proposed issuance of the Shares. We have examined copies, either certified or otherwise proven to our satisfaction to be genuine, of the Fund's Articles of Incorporation and By-laws, as currently in effect, and a certificate dated April 22, 1997 issued by the State Department of Assessments and Taxation of the State of Maryland, certifying the existence and good standing of the Fund. We are generally familiar with the corporate affairs of the Fund.
Based upon the foregoing, it is our opinion that:
Prudential Government Income Fund, Inc.
May 1, 1997
1. The Fund has been duly organized and is validly existing under the laws of the State of Maryland.
2. The Fund is authorized to issue two billion (2,000,000,000) shares of Common Stock, par value $.01 per share. Under Maryland law, (a) the number of authorized shares may be increased or decreased by action of the Board of Directors and (b) shares which are issued and subsequently redeemed by the Fund are, by virtue of such redemption, restored to the status of authorized and unissued shares.
3. Subject to the effectiveness of the above-mentioned Post-Effective Amendment No. 24 to the Fund's Registration Statement and compliance with applicable state securities laws, upon the issuance of the Additional Shares for a consideration not less than the par value thereof as required by the laws of Maryland, and not less than the net asset value thereof as required by the 1940 Act and in accordance with the terms of the Registration Statement, such shares will be legally issued and outstanding and fully paid and non-assessable.
We hereby consent to the filing of this opinion with the Securities and Exchange Commission as a part of the above-mentioned Post-Effective Amendment No. 24 to the Registration Statement and with any state securities commission where such filing is required. In giving this consent we do not admit that we come within the category of persons whose consent is required under Section 7 of the 1933 Act.
We are members of the Bar of the State of New York and do not hold ourselves out as being conversant with the laws of any jurisdiction other than those of the United States of America and the State of New York. We note that we are not licensed to practice law in the State of Maryland, and to the extent that any opinion herein involves the laws of the State of Maryland, such opinion should be understood to be based solely upon our review of the documents referred to above, the published statutes of the State of Maryland and, where applicable, published cases, rules or regulations of regulatory bodies of that State.
Very truly yours,
/s/ Shereff, Friedman, Hoffman & Goodman, LLP Shereff, Friedman, Hoffman & Goodman, LLP |
EXHIBIT 99.11
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Post-Effective Amendment No. 24 to Registration Statement No. 2-82976 of Prudential Government Income Fund, Inc. of our report dated April 11, 1997, appearing in the Statement of Additional Information, which is a part of such Registration Statement, and to the references to us under the headings "Financial Highlights" in the Prospectus, which is a part of such Registration Statement, and "Custodian, Transfer and Dividend Disbursing Agent and Independent Accountants" in the Statement of Additional Information.
Deloitte & Touche LLP
New York, New York
April 28, 1997
Exhibit 99.13
FORM OF PURCHASE AGREEMENT
Prudential-Bache Government Plus Fund, Inc. (the Fund), an open-end, diversified management investment company and a Maryland Corporation, and Prudential Mutual Fund Management LLP, a New York limited liability company (PMF), intending to be legally bound, hereby agree as follows:
1. In order to provide the Fund with its initial capital, the Fund hereby sells to PMF, and PMF hereby purchases, ________ shares of common stock (the Shares) of the Fund. The Shares are apportioned as follows: ________ Shares of Class A, ________ Shares of Class B, ________ Shares of Class C and ________ Shares of Class Z, each at the net asset value of ____ per share. The Fund hereby acknowledges receipt from PMF of funds in the amount of $________ in full payment for the Shares.
2. PMF represents and warrants to the Fund that the Shares are being acquired for investment and not with a view to distribution thereof and that PMF has no present intention to redeem and dispose of any of the Shares.
3. PMF hereby agrees that it will not redeem any of the Shares except in direct proportion to the amortization of organizational expenses by the Fund. In the event that the Fund liquidates before deferred organizational expenses are fully amortized, then the Shares shall bear their proportionate share of such unamortized organizational expenses.
IN WITNESS THEREOF, the parties have executed this agreement as of the ___th day of ____________, 199
Prudential-Bache Government Plus Fund, Inc.
Prudential Mutual Fund Management, Inc.
By
EXHIBIT 99.16(a)
PRUDENTIAL GOVERNMENT PLUS FUND, INC.
CLASS "A"
EXHIBIT
AGGREGATE TOTAL RETURN
CALCULATION
ERV - P
T = -----------
P
P = hypothetical initial payment of $1,000
ERV = ending redeemable value
T = Aggregate total return
1 Year Inception
ended through
February 28 February 28
1993 1993
----------- -----------
P = $1,000 $1,000
ERV = $1,115 $1,384
T = 11.50% 38.40%
|
EXHIBIT 99.16(b)
PRUDENTIAL GOVERNMENT PLUS FUND, INC.
CLASS "B"
EXHIBIT
AGGREGATE TOTAL RETURN
CALCULATION
ERV - P
T = ----------
P
P = hypothetical initial payment of $1,000
ERV = ending redeemable value
T = Aggregate total return
1 Year 5 Years Inception
ended ended through
February 28 February 28 February 28
1993 1993 1993
----------- ----------- -----------
P = $1,000 $1,000 $1,000
ERV = $1,106 $1,520 $2,020
T = 10.57% 52.03% 101.97%
|
EXHIBIT 99.16(d)
PRUDENTIAL GOVERNMENT PLUS FUND, INC.
CLASS "Z"
EXHIBIT
AGGREGATE TOTAL RETURN
CALCULATION
ERV - P
T = -----------
P
P = hypothetical initial payment of $1,000
ERV = ending redeemable value
T = Aggregate total return
1 Year
ended
February 28
1997
-----------
P = $1,000
ERV = $1,032
T = 3.2%
|
| ARTICLE 6 |
| CIK: 0000717819 |
| NAME: PRUDENTIAL GOVERNMENT INCOME FUND |
| SERIES: |
| NUMBER: 001 |
| NAME: GOVERNMENT INCOME FUND (CLASS A) |
| PERIOD TYPE | YEAR |
| FISCAL YEAR END | FEB 28 1997 |
| PERIOD END | FEB 28 1997 |
| INVESTMENTS AT COST | 1,389,415,976 |
| INVESTMENTS AT VALUE | 1,396,981,953 |
| RECEIVABLES | 54,699,769 |
| ASSETS OTHER | 32,835,329 |
| OTHER ITEMS ASSETS | 0 |
| TOTAL ASSETS | 0 |
| PAYABLE FOR SECURITIES | 39,791,648 |
| SENIOR LONG TERM DEBT | 0 |
| OTHER ITEMS LIABILITIES | 46,438,193 |
| TOTAL LIABILITIES | 0 |
| SENIOR EQUITY | 0 |
| PAID IN CAPITAL COMMON | 1,530,756,561 |
| SHARES COMMON STOCK | 159,503,002 |
| SHARES COMMON PRIOR | 175,773,428 |
| ACCUMULATED NII CURRENT | 0 |
| OVERDISTRIBUTION NII | 0 |
| ACCUMULATED NET GAINS | (140,035,328) |
| OVERDISTRIBUTION GAINS | 0 |
| ACCUM APPREC OR DEPREC | 7,565,977 |
| NET ASSETS | (335,276,430) |
| DIVIDEND INCOME | 0 |
| INTEREST INCOME | 112,985,956 |
| OTHER INCOME | 0 |
| EXPENSES NET | 16,920,437 |
| NET INVESTMENT INCOME | 96,065,519 |
| REALIZED GAINS CURRENT | (20,189,194) |
| APPREC INCREASE CURRENT | (26,314,444) |
| NET CHANGE FROM OPS | 49,561,881 |
| EQUALIZATION | 0 |
| DISTRIBUTIONS OF INCOME | 0 |
| DISTRIBUTIONS OF GAINS | 0 |
| DISTRIBUTIONS OTHER | (96,065,519) |
| NUMBER OF SHARES SOLD | 326,332,216 |
| NUMBER OF SHARES REDEEMED | (528,279,294) |
| SHARES REINVESTED | 57,955,409 |
| NET CHANGE IN ASSETS | (190,495,307) |
| ACCUMULATED NII PRIOR | 0 |
| ACCUMULATED GAINS PRIOR | (119,846,134) |
| OVERDISTRIB NII PRIOR | 0 |
| OVERDIST NET GAINS PRIOR | 0 |
| GROSS ADVISORY FEES | 7,351,081 |
| INTEREST EXPENSE | 0 |
| GROSS EXPENSE | 16,920,437 |
| AVERAGE NET ASSETS | 884,862,000 |
| PER SHARE NAV BEGIN | 9.04 |
| PER SHARE NII | 0.32 |
| PER SHARE GAIN APPREC | 0 |
| PER SHARE DIVIDEND | 0 |
| PER SHARE DISTRIBUTIONS | (0.6) |
| RETURNS OF CAPITAL | 0 |
| PER SHARE NAV END | 8.76 |
| EXPENSE RATIO | 0.9 |
| AVG DEBT OUTSTANDING | 0 |
| AVG DEBT PER SHARE | 0 |
| ARTICLE 6 |
| CIK: 0000717819 |
| NAME: PRUDENTIAL GOVERNMENT INCOME FUND |
| SERIES: |
| NUMBER: 002 |
| NAME: GOVERNMENT INCOME FUND (CLASS B) |
| PERIOD TYPE | YEAR |
| FISCAL YEAR END | FEB 28 1997 |
| PERIOD END | FEB 28 1997 |
| INVESTMENTS AT COST | 1,389,415,976 |
| INVESTMENTS AT VALUE | 1,396,981,953 |
| RECEIVABLES | 54,699,769 |
| ASSETS OTHER | 32,835,329 |
| OTHER ITEMS ASSETS | 0 |
| TOTAL ASSETS | 0 |
| PAYABLE FOR SECURITIES | 39,791,648 |
| SENIOR LONG TERM DEBT | 0 |
| OTHER ITEMS LIABILITIES | 45,438,193 |
| TOTAL LIABILITIES | 0 |
| SENIOR EQUITY | 0 |
| PAID IN CAPITAL COMMON | 1,530,756,561 |
| SHARES COMMON STOCK | 159,503,002 |
| SHARES COMMON PRIOR | 175,773,428 |
| ACCUMULATED NII CURRENT | 0 |
| OVERDISTRIBUTION NII | 0 |
| ACCUMULATED NET GAINS | (140,035,328) |
| OVERDISTRIBUTION GAINS | 0 |
| ACCUM APPREC OR DEPREC | 7,565,977 |
| NET ASSETS | (335,276,430) |
| DIVIDEND INCOME | 0 |
| INTEREST INCOME | 112,985,956 |
| OTHER INCOME | 0 |
| EXPENSES NET | 16,920,437 |
| NET INVESTMENT INCOME | 96,065,519 |
| REALIZED GAINS CURRENT | (20,189,194) |
| APPREC INCREASE CURRENT | (26,314,444) |
| NET CHANGE FROM OPS | 49,561,881 |
| EQUALIZATION | 0 |
| DISTRIBUTIONS OF INCOME | 0 |
| DISTRIBUTIONS OF GAINS | 0 |
| DISTRIBUTIONS OTHER | (96,065,519) |
| NUMBER OF SHARES SOLD | 326,332,216 |
| NUMBER OF SHARES REDEEMED | (528,279,294) |
| SHARES REINVESTED | 57,955,409 |
| NET CHANGE IN ASSETS | (190,495,307) |
| ACCUMULATED NII PRIOR | 0 |
| ACCUMULATED GAINS PRIOR | (119,846,134) |
| OVERDISTRIB NII PRIOR | 0 |
| OVERDIST NET GAINS PRIOR | 0 |
| GROSS ADVISORY FEES | 7,351,081 |
| INTEREST EXPENSE | 0 |
| GROSS EXPENSE | 16,920,437 |
| AVERAGE NET ASSETS | 543,796,000 |
| PER SHARE NAV BEGIN | 9.04 |
| PER SHARE NII | 0.27 |
| PER SHARE GAIN APPREC | 0 |
| PER SHARE DIVIDEND | 0 |
| PER SHARE DISTRIBUTIONS | (0.54) |
| RETURNS OF CAPITAL | 0 |
| PER SHARE NAV END | 8.77 |
| EXPENSE RATIO | 1.57 |
| AVG DEBT OUTSTANDING | 0 |
| AVG DEBT PER SHARE | 0 |
| ARTICLE 6 |
| CIK: 0000717819 |
| NAME: PRUDENTIAL GOVERNMENT INCOME FUND |
| SERIES: |
| NUMBER: 003 |
| NAME: GOVERNMENT INCOME FUND (CLASS C) |
| PERIOD TYPE | YEAR |
| FISCAL YEAR END | FEB 28 1997 |
| PERIOD END | FEB 28 1997 |
| INVESTMENTS AT COST | 1,389,415,976 |
| INVESTMENTS AT VALUE | 1,396,981,953 |
| RECEIVABLES | 54,699,769 |
| ASSETS OTHER | 32,835,329 |
| OTHER ITEMS ASSETS | 0 |
| TOTAL ASSETS | 0 |
| PAYABLE FOR SECURITIES | 39,791,648 |
| SENIOR LONG TERM DEBT | 0 |
| OTHER ITEMS LIABILITIES | 46,438,193 |
| TOTAL LIABILITIES | 0 |
| SENIOR EQUITY | 0 |
| PAID IN CAPITAL COMMON | 1,530,756,561 |
| SHARES COMMON STOCK | 159,503,002 |
| SHARES COMMON PRIOR | 175,773,428 |
| ACCUMULATED NII CURRENT | 0 |
| OVERDISTRIBUTION NII | 0 |
| ACCUMULATED NET GAINS | (140,035,328) |
| OVERDISTRIBUTION GAINS | 0 |
| ACCUM APPREC OR DEPREC | 7,565,977 |
| NET ASSETS | (335,276,430) |
| DIVIDEND INCOME | 0 |
| INTEREST INCOME | 112,985,956 |
| OTHER INCOME | 0 |
| EXPENSES NET | 16,920,437 |
| NET INVESTMENT INCOME | 96,065,519 |
| REALIZED GAINS CURRENT | (20,189,194) |
| APPREC INCREASE CURRENT | (26,314,444) |
| NET CHANGE FROM OPS | 49,561,881 |
| EQUALIZATION | 0 |
| DISTRIBUTIONS OF INCOME | 0 |
| DISTRIBUTIONS OF GAINS | 0 |
| DISTRIBUTIONS OTHER | (96,065,519) |
| NUMBER OF SHARES SOLD | 326,332,216 |
| NUMBER OF SHARES REDEEMED | (528,279,294) |
| SHARES REINVESTED | 57,955,409 |
| NET CHANGE IN ASSETS | (190,495,307) |
| ACCUMULATED NII PRIOR | 0 |
| ACCUMULATED GAINS PRIOR | (119,846,134) |
| OVERDISTRIB NII PRIOR | 0 |
| OVERDIST NET GAINS PRIOR | 0 |
| GROSS ADVISORY FEES | 7,351,081 |
| INTEREST EXPENSE | 0 |
| GROSS EXPENSE | 16,920,437 |
| AVERAGE NET ASSETS | 2,440,000 |
| PER SHARE NAV BEGIN | 9.04 |
| PER SHARE NII | 0.27 |
| PER SHARE GAIN APPREC | 0 |
| PER SHARE DIVIDEND | 0 |
| PER SHARE DISTRIBUTIONS | (0.54) |
| RETURNS OF CAPITAL | 0 |
| PER SHARE NAV END | 8.77 |
| EXPENSE RATIO | 1.5 |
| AVG DEBT OUTSTANDING | 0 |
| AVG DEBT PER SHARE | 0 |
| ARTICLE 6 |
| CIK: 0000717819 |
| NAME: PRUDENTIAL GOVERNMENT INCOME FUND |
| SERIES: |
| NUMBER: 004 |
| NAME: GOVERNMENT INCOME FUND (CLASS Z) |
| PERIOD TYPE | YEAR |
| FISCAL YEAR END | FEB 28 1997 |
| PERIOD END | FEB 28 1997 |
| INVESTMENTS AT COST | 1,389,415,976 |
| INVESTMENTS AT VALUE | 1,396,981,953 |
| RECEIVABLES | 54,699,769 |
| ASSETS OTHER | 32,835,329 |
| OTHER ITEMS ASSETS | 0 |
| TOTAL ASSETS | 0 |
| PAYABLE FOR SECURITIES | 39,791,648 |
| SENIOR LONG TERM DEBT | 0 |
| OTHER ITEMS LIABILITIES | 46,438,193 |
| TOTAL LIABILITIES | 0 |
| SENIOR EQUITY | 0 |
| PAID IN CAPITAL COMMON | 1,530,756,561 |
| SHARES COMMON STOCK | 159,503,002 |
| SHARES COMMON PRIOR | 175,773,428 |
| ACCUMULATED NII CURRENT | 0 |
| OVERDISTRIBUTION NII | 0 |
| ACCUMULATED NET GAINS | (140,035,328) |
| OVERDISTRIBUTION GAINS | 0 |
| ACCUM APPREC OR DEPREC | 7,565,977 |
| NET ASSETS | (335,276,430) |
| DIVIDEND INCOME | 0 |
| INTEREST INCOME | 112,985,956 |
| OTHER INCOME | 0 |
| EXPENSES NET | 16,920,437 |
| NET INVESTMENT INCOME | 96,065,519 |
| REALIZED GAINS CURRENT | (20,189,194) |
| APPREC INCREASE CURRENT | (26,314,444) |
| NET CHANGE FROM OPS | 49,561,881 |
| EQUALIZATION | 0 |
| DISTRIBUTIONS OF INCOME | 0 |
| DISTRIBUTIONS OF GAINS | 0 |
| DISTRIBUTIONS OTHER | (96,065,519) |
| NUMBER OF SHARES SOLD | 326,332,216 |
| NUMBER OF SHARES REDEEMED | (528,279,294) |
| SHARES REINVESTED | 57,955,409 |
| NET CHANGE IN ASSETS | (190,495,307) |
| ACCUMULATED NII PRIOR | 0 |
| ACCUMULATED GAINS PRIOR | (119,846,134) |
| OVERDISTRIB NII PRIOR | 0 |
| OVERDIST NET GAINS PRIOR | 0 |
| GROSS ADVISORY FEES | 7,351,081 |
| INTEREST EXPENSE | 0 |
| GROSS EXPENSE | 16,920,437 |
| AVERAGE NET ASSETS | 39,551,000 |
| PER SHARE NAV BEGIN | 9.13 |
| PER SHARE NII | 0.24 |
| PER SHARE GAIN APPREC | 0 |
| PER SHARE DIVIDEND | 0 |
| PER SHARE DISTRIBUTIONS | (0.61) |
| RETURNS OF CAPITAL | 0 |
| PER SHARE NAV END | 8.76 |
| EXPENSE RATIO | 0.75 |
| AVG DEBT OUTSTANDING | 0 |
| AVG DEBT PER SHARE | 0 |