Prudential Mortgage Income
Fund, Inc.
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PROSPECTUS DATED MARCH 3, 1998
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Prudential Mortgage Income Fund, Inc. (the Fund), formerly the Prudential GNMA
Fund, Inc., is an open-end, diversified, management investment company whose
investment objective is to achieve a high level of income over the long term
consistent with providing reasonable safety in the value of each shareholder's
investment. In pursuing this objective, the Fund will invest primarily in
mortgage-related instruments, including mortgage-backed securities guaranteed as
to timely payment of principal and interest by the Government National Mortgage
Association (GNMA), other mortgage-backed securities issued or guaranteed by
agencies or instrumentalities of the U.S. Government, and non-agency mortgage
instruments, along with obligations using mortgages as collateral. The Fund may
utilize other derivatives, including writing covered call and put options on
U.S. Government securities and entering into closing purchase and sale
transactions with respect to certain of such options. To hedge against changes
in interest rates, the Fund may also purchase put options and engage in
transactions involving interest rate futures contracts, options on such
contracts and interest rate swap transactions. There can be no assurance that
the Fund's investment objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies." The Fund's address is Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, 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 and is available at the Web
site of the Prudential Insurance Company of America (http://www.prudential.com).
Additional information about the Fund has been filed with the Securities and
Exchange Commission (the Commission) in a Statement of Additional Information,
dated March 3, 1998, which information is incorporated herein by reference (is
legally considered to be a part of this Prospectus) and is available without
charge upon request to the Fund at the address or telephone number noted above.
The Commission maintains a Web site (http://www.sec.gov) that contains the
Statement of Additional Information, material incorporated by reference and
other information regarding the Fund.
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INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION 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 MORTGAGE INCOME FUND, INC.?
Prudential Mortgage 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 achieve a high level of income over
the long term consistent with providing reasonable safety in the value of
each shareholder's investment. It seeks to achieve this objective by
investing primarily in mortgage-related instruments, including securities
guaranteed as to timely payment of principal and interest by the Government
National Mortgage Association (GNMA), other mortgage-backed securities
issued or guaranteed by agencies or instrumentalities of the U.S.
Government, and non-agency mortgage instruments, along with obligations
using mortgages as collateral. There can be no assurance that the Fund's
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 will invest at least 65% of its total assets in mortgage-backed
securities which may decrease in value as a result of increases in interest
rates and may benefit less than other fixed-income securities from declining
interest rates because of the risk of prepayment of the principal on the
underlying mortgage loans.
In seeking to achieve its investment objective, the Fund may also write
covered call and put options on U.S. Government securities and enter into
closing purchase and sale transactions with respect to certain of such
options. To hedge against changes in interest rates, the Fund may also
purchase put options and engage in transactions involving interest rate
futures contracts and options on such contracts and engage in interest rate
swap transactions. See "How the Fund Invests-- Investment Objective and
Policies" at page 9. These various hedging and return enhancement
strategies, including the use of derivatives, may be considered speculative
and may result in higher risks and costs to the Fund. See "How the Fund
Invests--Hedging and Return Enhancement Strategies--Risks of Hedging and
Return Enhancement Strategies" at page 14. 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 (the Manager) is the Manager of
the Fund and is compensated for its services at an annual rate of 0.50 of 1%
of the Fund's average daily net assets. As of January 31, 1998, PIFM served
as manager or administrator to 64 investment companies, including 42 mutual
funds, with aggregate assets of approximately $63 billion. The Prudential
Investment Corporation (PIC), doing business as Prudential Investments (the
Subadviser), 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 16.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Securities Incorporated (Prudential Securities or the
Distributor), 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 the rate of 0.15 of 1% of the average daily net
assets of the Class A shares, an annual distribution and service fee at the
rate of 0.75 of 1% of the average daily net assets of the Class B shares and
an annual distribution and service fee which is currently being charged at
the rate of 0.75 of 1% of the average daily net assets of the Class C
shares. The Distributor 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 17.
2
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000 for Class A and Class B shares
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 23 and "Shareholder Guide--Shareholder Services" at page 33.
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 (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 NAV without any sales
charge. See "How the Fund Values its Shares" at page 19 and "Shareholder
Guide--How to Buy Shares of the Fund" at page 23.
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.
Class C shares are subject to higher ongoing
distribution-related expenses than Class A shares but,
unlike Class B shares, do not convert to another class.
- Class Z Shares:
Sold without either an initial sales charge or CDSC to a
limited group of investors. Class Z shares are not
subject to any ongoing service or distribution expenses.
See "Shareholder Guide--Alternative Purchase Plan" at page 24.
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
27. Participants in programs sponsored by Prudential Retirement Services
should contact their client representative for more information about
selling their Class Z shares.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to declare daily and pay monthly dividends of net
investment income, if any, 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 20.
3
FUND EXPENSES
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- ------------------------------ --------------------------- --------------
SHAREHOLDER TRANSACTION EXPENSES+
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 made None
decreasing by 1% annually to within one year of purchase
1% in the fifth and sixth
years and 0% the seventh year*
Redemption Fees.................... None None None None
Exchange Fee....................... None None None None
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- ---------------
ANNUAL FUND OPERATING EXPENSES**
(as a percentage of average net assets)
Management Fees..................... .50% .50% .50% .50%
12b-1 Fees (After Reduction)........ .15%++ .75% .75%++ None
Other Expenses...................... .45% .45% .45% .45%
------ --- ------ ---
Total Fund Operating Expenses (After
Reduction)......................... 1.10% 1.70% 1.70% .95%
------ --- ------ ---
------ --- ------ ---
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
EXAMPLE
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............................ $ 51 $ 74 $ 98 $ 169
Class B............................ $ 67 $ 84 $ 102 $ 177
Class C............................ $ 27 $ 54 $ 92 $ 201
Class Z**.......................... $ 10 $ 30 $ 53 $ 117
You would pay the following expenses on
the same investment, assuming no
redemption:
Class A............................ $ 51 $ 74 $ 98 $ 169
Class B............................ $ 17 $ 54 $ 92 $ 177
Class C............................ $ 17 $ 54 $ 92 $ 201
Class Z............................ $ 10 $ 30 $ 53 $ 117
The above example is based on data for the Fund's fiscal year ended
December 31, 1997. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
The purpose of this table is to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear, whether
directly or indirectly. For more complete descriptions of the various
costs and expenses, see "How the Fund is Managed." "Other Expenses"
includes operating expenses of the Fund, such as Directors' and
professional fees, registration fees, reports to shareholders, transfer
agency and custodian fees and franchise taxes.
- ---------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."
** The expense information in the table has been restated to reflect current
fees. Effective September 1, 1997, PIFM eliminated its management fee
waiver (.20 of 1%).
+ 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 shares 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 and Class C Distribution and Service Plans provide that
the Fund may pay a distribution fee of up to 0.30 of 1% and 1% per annum
of the average daily net assets of the Class A and Class C shares,
respectively, the Distributor has agreed to limit its distribution fees
with respect to Class A and Class C shares of the Fund to no more than
0.15 of 1% and 0.75 of 1% of the average daily net assets of the Class A
and Class C shares, respectively, for the fiscal year ending December 31,
1998. Total Fund Operating Expenses without such limitation would be
1.25% and 1.95% for the Class A and Class C shares, respectively. See
"How the Fund is Managed--Distributor."
4
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS A SHARES)
The following financial highlights, with respect to each of the five years in
the period ended December 31, 1997, have been been audited by
PricewaterhouseCoopers LLP, independent accountants, whose report thereon was
unqualified. This information should be read in conjunction with the financial
statements and notes thereto, which appear in the Statement of Additional
Information. The following financial highlights contain selected data for a
share of Class A common stock outstanding, total return, ratios to average net
assets and other supplemental data for the periods indicated. The information
is 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."
CLASS A
------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1997 1996 1995 (a) 1994 (a) 1993 (a) 1992 (a) 1991 (a)
-------- -------- -------- -------- -------- ------- -------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 14.25 $ 14.61 $ 13.50 $ 14.75 $ 15.07 $15.30 $14.84
-------- -------- -------- -------- -------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .95(e) .93(e) .89 .90 .95 1.10 1.14
Net realized and unrealized gain (loss) on
investment transactions......................... .23 (.39) 1.18 (1.19) (.21) (.15) .61
-------- -------- -------- -------- -------- ------- -------
Total from investment operations.................. 1.18 .54 2.07 (.29) .74 .95 1.75
-------- -------- -------- -------- -------- ------- -------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.90) (.90) (.89) (.90) (.95) (1.10) (1.14)
Dividends to shareholders in excess of net
investment income............................... -- -- (.07) -- (.11) (.08) (.15)
Tax return of capital distributions............... -- -- -- (.06) -- -- --
-------- -------- -------- -------- -------- ------- -------
Total distributions............................... (.90) (.90) (.96) (.96) (1.06) (1.18) (1.29)
-------- -------- -------- -------- -------- ------- -------
Net asset value, end of period.................... $ 14.53 $ 14.25 $ 14.61 $ 13.50 $ 14.75 $15.07 $15.30
-------- -------- -------- -------- -------- ------- -------
-------- -------- -------- -------- -------- ------- -------
TOTAL RETURN (D).................................. 8.57% 4.12% 15.53% (2.01)% 4.97% 6.42% 12.48%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $ 90,639 $ 93,555 $99,183 $ 8,762 $10,863 $9,045 $6,268
Average net assets (000).......................... $ 91,094 $ 93,766 $90,854 $ 9,874 $10,199 $6,651 $3,035
Ratios to average net assets:
Expenses, including distribution fees........... .96%(e) 1.12%(e) 1.27% 1.13% 1.00% 1.00% 1.11%
Expenses, excluding distribution fees........... .81%(e) .97%(e) 1.12% .98% .85% .85% .96%
Net investment income (loss).................... 6.65%(e) 6.56%(e) 6.27% 6.42% 6.42% 7.26% 7.81%
Portfolio turnover................................ 178% 65% 193% 560% 134% 33% 118%
JANUARY 22,
1990 (b)
THROUGH
SEPTEMBER 30,
1990 (a)
-------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 14.73
------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. 1.17
Net realized and unrealized gain (loss) on
investment transactions......................... .15
------
Total from investment operations.................. 1.32
------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (1.17)
Dividends to shareholders in excess of net
investment income............................... (.04)
Tax return of capital distributions............... --
------
Total distributions............................... (1.21)
------
Net asset value, end of period.................... $ 14.84
------
------
TOTAL RETURN (D).................................. 9.41%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $ 1,604
Average net assets (000).......................... $ 756
Ratios to average net assets:
Expenses, including distribution fees........... 1.15%(c)
Expenses, excluding distribution fees........... .99%(c)
Net investment income (loss).................... 9.16%(c)
Portfolio turnover................................ 481%
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(a) Based on average shares outstanding, by class.
(b) Commencement of offering of Class A shares.
(c) Annualized.
(d) 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.
(e) Net of management fee waiver.
5
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS B SHARES)
The following financial highlights, with respect to each of the five years in
the period ended December 31, 1997, have been audited by PricewaterhouseCoopers
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a share of Class B
common stock outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is 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."
CLASS B
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
1997 1996 1995 (a) 1994 (a) 1993 (a) 1992 (a) 1991 (a) 1990 (a) 1989 (a)
-------- -------- -------- -------- -------- -------- -------- -------- --------
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of year...... $ 14.22 $ 14.57 $ 13.47 $ 14.71 $ 15.04 $ 15.27 $ 14.81 $ 14.86 $ 14.29
-------- -------- -------- -------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income.... .88(d) .85(d) .82 .82 .87 1.02 1.06 1.15 1.19
Net realized and
unrealized gain (loss)
on investment
transactions........... .21 (.39) 1.15 (1.19) (.23) (.16) .60 (.01) .59
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations............. 1.09 .46 1.97 (.37) .64 .86 1.66 1.14 1.78
-------- -------- -------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends to shareholders
from net investment
income................. (.81) (.81) (.82) (.82) (.87) (1.02) (1.06) (1.15) (1.19)
Dividends to shareholders
in excess of net
investment income...... -- -- (.05) -- (.10) (.07) (.14) (.04) (.02)
Tax return of capital
distributions.......... -- -- -- (.05) -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total distributions...... (.81) (.81) (.87) (.87) (.97) (1.09) (1.20) (1.19) (1.21)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
year $ 14.50 $ 14.22 $ 14.57 $ 13.47 $ 14.71 $ 15.04 $ 15.27 $ 14.81 $ 14.86
-------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- --------
TOTAL RETURN (C):........ 7.84% 3.53% 14.78% (2.57)% 4.29% 5.80% 11.82% 8.10% 12.93%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(000).................. $ 73,666 $ 96,016 $125,463 $245,437 $319,401 $325,969 $272,661 $226,605 $221,938
Average net assets
(000).................. $ 83,848 $109,812 $146,240 $279,946 $332,731 $295,255 $243,749 $218,749 $223,251
Ratios to average net
assets:
Expenses, including
distribution fees..... 1.56%(d) 1.72%(d) 1.87% 1.73% 1.60% 1.60% 1.71% 1.74% 1.56%
Expenses, excluding
distribution fees..... .81%(d) .97%(d) 1.12% .98% .85% .85% .96% .99% .98%
Net investment
income................ 6.05%(d) 5.95%(d) 5.82% 5.82% 5.82% 6.66% 7.21% 7.96% 8.16%
Portfolio turnover....... 178% 65% 193% 560% 134% 33% 118% 481% 200%
1988 (a)/(b)
--------
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of year...... $ 14.76
--------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income.... 1.17
Net realized and
unrealized gain (loss)
on investment
transactions........... (.48 )
--------
Total from investment
operations............. .69
--------
LESS DISTRIBUTIONS
Dividends to shareholders
from net investment
income................. (1.16 )
Dividends to shareholders
in excess of net
investment income...... --
Tax return of capital
distributions.......... --
--------
Total distributions...... (1.16 )
--------
Net asset value, end of
year $ 14.29
--------
--------
TOTAL RETURN (C):........ 4.80%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(000).................. $236,626
Average net assets
(000).................. $252,814
Ratios to average net
assets:
Expenses, including
distribution fees..... 1.52%
Expenses, excluding
distribution fees..... .91%
Net investment
income................ 7.83%
Portfolio turnover....... 216%
- ---------------
(a) Based on average shares outstanding, by class.
(b) On May 2, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as investment adviser and
since then has acted as manager of the Fund.
(c) 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.
(d) Net of management fee waiver.
6
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS C SHARES)
The following financial highlights have been audited by PricewaterhouseCoopers
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
following 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. The information is 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."
CLASS C
----------------------------------------------
AUGUST 1,
1994 (c)
YEAR ENDED DECEMBER 31, THROUGH
------------------------------ DECEMBER 31,
1997 1996 1995 (a) 1994 (a)
-------- -------- -------- -------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 14.22 $ 14.57 $13.47 $ 14.01
-------- -------- -------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .87(e) .85(e) .81 .30
Net realized and unrealized gain (loss) on
investment transactions......................... .22 (.39) 1.16 (.49)
-------- -------- -------- ------
Total from investment operations.................. 1.09 .46 1.97 (.19)
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.81) (.81) (.81) (.30)
Distributions to shareholders in excess of net
investment income............................... -- -- (.06) --
Tax return of capital distributions............... -- -- -- (.05)
-------- -------- -------- ------
Total distributions............................... (.81) (.81) (.87) (.35)
-------- -------- -------- ------
Net asset value, end of period.................... $ 14.50 $ 14.22 $14.57 $ 13.47
-------- -------- -------- ------
-------- -------- -------- ------
TOTAL RETURN (D):................................. 7.84% 3.53% 14.78% (1.32)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $ 904 $ 854 $ 655 $ 515
Average net assets (000).......................... $ 857 $ 746 $ 599 $ 460
Ratios to average net assets:
Expenses, including distribution fees........... 1.56%(e) 1.72%(e) 1.87% 1.82%(b)
Expenses, excluding distribution fees........... .81%(e) .97%(e) 1.12% 1.08%(b)
Net investment income........................... 6.05%(e) 5.95%(e) 5.72% 5.32%(b)
Portfolio turnover................................ 178% %65 193% 560%
- ---------------
(a) Based on average shares outstanding, by class.
(b) Annualized.
(c) Commencement of offering of Class C shares.
(d) 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.
(e) Net of management fee waiver.
7
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS Z SHARES)
The following financial highlights have been audited by PricewaterhouseCoopers
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
following 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 periods indicated. The information is 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."
CLASS Z
--------
MARCH
18,
1997 (b)
THROUGH
DECEMBER
31, 1997
--------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $14.13
--------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .74(d)
Net realized and unrealized gain (loss) on
investment transactions......................... .39
--------
Total from investment operations.................. 1.13
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.72)
--------
Net asset value, end of period.................... $14.54
--------
--------
TOTAL RETURN (C):................................. 8.18%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $ 39
Average net assets (000).......................... $ 9
Ratios to average net assets:
Expenses........................................ .81%(a)/(d)
Net investment income........................... 6.88%(a)/(d)
Portfolio turnover................................ 178%
- ---------------
(a) Annualized.
(b) Commencement of offering of Class Z shares.
(c) 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.
(d) Net of management fee waiver.
8
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
THE FUND'S INVESTMENT OBJECTIVE IS TO ACHIEVE A HIGH LEVEL OF INCOME OVER THE
LONG TERM CONSISTENT WITH PROVIDING REASONABLE SAFETY IN THE VALUE OF EACH
SHAREHOLDER'S INVESTMENT. IN PURSUING THIS OBJECTIVE, THE FUND WILL INVEST
PRIMARILY IN READILY MARKETABLE FIXED-INCOME SECURITIES THAT PROVIDE ATTRACTIVE
YIELDS BUT DO NOT INVOLVE SUBSTANTIAL RISK OF LOSS OF CAPITAL THROUGH DEFAULT,
PRINCIPALLY MORTGAGE-RELATED INSTRUMENTS, INCLUDING SECURITIES GUARANTEED AS TO
TIMELY PAYMENT OF PRINCIPAL AND INTEREST BY GNMA, OTHER MORTGAGE-BACKED
SECURITIES ISSUED OR GUARANTEED BY AGENCIES OR INSTRUMENTALITIES OF THE U.S.
GOVERNMENT, AND NON-AGENCY MORTGAGE INSTRUMENTS, ALONG WITH OBLIGATIONS USING
MORTGAGES AS COLLATERAL. THERE CAN BE NO ASSURANCE THAT SUCH 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.
Under normal market conditions, the Fund will invest at least 65% of its total
assets in mortgage-backed securities. The Fund will invest the remainder of its
assets in U.S. Government securities, corporate bonds, notes and debentures and
high quality money market instruments and engage in the hedging and return
enhancement strategies described below. See "Hedging and Return Enhancement
Strategies" below. The Fund may invest up to 35% of its net assets in securities
rated at least A by Moody's Investors Service (Moody's) or Standard & Poor's
Ratings Group (S&P) or similarly rated by another nationally recognized
statistical rating organization (NRSRO) or in non-rated securities which, in the
view of the Subadviser, are of comparable quality. The remainder of the
portfolio will be rated at least Aa by Moody's or AA by S&P or similarly rated
by another NRSRO or, if not so rated, of comparable quality in the view of the
investment adviser. A description of security ratings is contained in an
Appendix to the Statement of Additional Information.
THE FUND MAY VARY THE PROPORTION OF ITS HOLDINGS OF LONG- AND SHORT-TERM DEBT
SECURITIES IN ORDER TO REFLECT ITS ASSESSMENT OF PROSPECTIVE CHANGES IN INTEREST
RATES EVEN IF SUCH ACTION MAY ADVERSELY AFFECT CURRENT INCOME. For example, if,
in the opinion of the Subadviser, interest rates generally are expected to
decline, the Fund may sell its shorter term securities and purchase longer term
securities in order to benefit from greater expected relative price
appreciation; the securities sold may have a higher current yield than those
being purchased. The success of this strategy will depend on the Subadviser's
ability to forecast changes in interest rates. Moreover, the Fund intends to
manage its portfolio actively by taking advantage of trading opportunities such
as sales of portfolio securities and purchases of higher yielding securities of
similar quality due to distortions in normal yield differentials.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities are securities that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
secured by real property. There are currently three basic types of
mortgage-backed securities: (i) those issued or guaranteed by the U.S.
Government or one of its agencies or instrumentalities, such as GNMA, Federal
National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation
(FHLMC); (ii) those issued by private issuers that represent an interest in or
are collateralized by mortgage-backed securities issued or guaranteed by the
U.S. Government or one of its agencies or instrumentalities; and (iii) those
issued by private issuers that represent an interest in or are collateralized by
whole
9
mortgage loans or mortgage-backed securities without a government guarantee but
usually having some form of private credit enhancement. See "Private Mortgage
Pass-Through Securities" below. The Fund may invest in adjustable rate and fixed
rate mortgage securities.
The Fund may invest in mortgage-backed securities and other derivative
mortgage products, including those representing an undivided ownership interest
in a pool of mortgages, E.G., GNMA, FNMA and FHLMC certificates where the U.S.
Government or its agencies or instrumentalities guarantees the payment of
interest and principal of these securities. These guarantees do not extend to
the yield or value of the securities or the Fund's shares. See "Investment
Objective and Policies--Mortgage-Backed Securities--Non-Agency Mortgage-Backed
Securities" in the Statement of Additional Information. These certificates are
in most cases pass-through instruments, through which the holder receives a
share of all interest and principal payments from the mortgages underlying the
certificate, net of certain fees. The value of these securities is likely to
vary inversely with fluctuations in interest rates.
Mortgage-backed securities are subject to the risk that the principal on the
underlying mortgage loans may be prepaid at any time. Although the extent of
prepayments on a pool of mortgage loans depends on various economic and other
factors, as a general rule prepayments on fixed rate mortgage loans will
increase during a period of falling interest rates and decrease during a period
of rising interest rates. Accordingly, amounts available for reinvestment by the
Fund are likely to be greater during a period of declining interest rates and,
as a result, likely to be reinvested at lower interest rates than during a
period of rising interest rates. Mortgage-backed securities may decrease in
value as a result of increases in interest rates and may benefit less than other
fixed income securities from declining interest rates because of the risk of
prepayment. 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 mortgage-backed securities. A
decline in the rate of repayment 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.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES
A collateralized mortgage obligation (CMO) is a security issued by a
corporation or U.S. Government agency or instrumentality which is backed by a
portfolio of mortgages or mortgage-backed securities. The issuer's obligation to
make interest and principal payments is secured by the underlying portfolio of
mortgages or mortgage-backed securities. Multiclass pass-through securities are
equity interests in a trust composed of mortgages or mortgage-backed securities.
Payments of principal of and interest on the underlying mortgage assets, and any
reinvestment income thereon, provide the funds to pay debt service on the CMOs
or make scheduled distributions on the multiclass pass-through securities. CMOs
may be issued by agencies or instrumentalities of the U.S. Government, or by
private originators of, or investors in, mortgage loans, including depository
institutions, mortgage banks, investment banks and special purpose subsidiaries
of the foregoing. The issuer of a series of CMOs may elect to be treated as a
Real Estate Mortgage Investment Conduit (REMIC). All future references to CMOs
include securities issued by REMICs and multiclass pass-through securities.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a tranche, is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the underlying mortgage assets may cause the CMOs
to be retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on classes of the CMOs on a
monthly, quarterly or semi-annual basis. The principal of and interest on the
underlying mortgage assets may be allocated among the several classes of a CMO
series in a number of different ways. Generally, the purpose of the allocation
of the cash flow of a CMO to the various classes is to obtain a more predictable
cash flow to the individual tranches than exists with the underlying collateral
of the CMO. As a general rule, the more predictable the cash flow is on a CMO
tranche, the lower the anticipated yield will be on that tranche at the time of
issuance relative to prevailing market yields on mortgage-backed securities.
Certain classes of CMOs may have priority over others with respect to the
receipt of prepayments.
10
In reliance on rules and interpretations of the Commission, the Fund's
investments in certain qualifying CMOs and REMICs are not subject to the
Investment Company Act's limitation on acquiring interests in other investment
companies. See "Investment Objective and Policies--Mortgage-Backed
Securities--Collateralized Mortgage Obligations" in the Statement of Additional
Information.
STRIPPED MORTGAGE-BACKED SECURITIES
The Fund may also invest in mortgage-backed security strips (MBS strips) (i)
issued by the U.S. Government or its agencies or instrumentalities or (ii)
issued by private originators of, or investors in, mortgage loans, including
depository institutions, mortgage banks, investment banks and special purpose
subsidiaries of the foregoing (derivative multiclass mortgage securities). MBS
strips are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of stripped mortgage security will have one class
receiving some of the interest and most of the principal from the mortgage
assets, while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will receive all
of the interest (the interest-only or IO class), while the other class will
receive all of the principal (the principal-only or PO class). The yields to
maturity on IOs and POs are sensitive to the expected or anticipated rate of
principal payments (including prepayments) on the related underlying mortgage
assets, and principal payments may have a material effect on yield to maturity.
If the underlying mortgage assets experience greater than anticipated
prepayments of principal, the Fund may not fully recoup its initial investment
in IOs. Conversely, if the underlying mortgage assets experience less than
anticipated prepayments of principal, the yield on POs could be materially
adversely affected. See "Investment Objective and Policies--Mortgage-Backed
Securities" in the Statement of Additional Information. Derivative
mortgage-backed securities such as MBS strips are highly sensitive to changes in
prepayment and interest rates.
PRIVATE MORTGAGE PASS-THROUGH SECURITIES
Private mortgage pass-through securities are structured similarly to the GNMA,
FNMA and FHLMC mortgage pass-through securities and are issued by originators of
and investors in mortgage loans, including depository institutions, mortgage
banks, investment banks and special purpose subsidiaries of the foregoing. These
securities usually are backed by a pool of conventional fixed rate or adjustable
rate mortgage loans. Since private mortgage pass-through securities typically
are not guaranteed by an entity having the credit status of GNMA, FNMA and
FHLMC, such securities generally are structured with one or more types of credit
enhancement.
OTHER FIXED-INCOME OBLIGATIONS
IN ADDITION TO MORTGAGE-BACKED SECURITIES, THE FUND MAY INVEST IN U.S.
GOVERNMENT AND CORPORATE BONDS, NOTES AND DEBENTURES AND MONEY MARKET
INSTRUMENTS. The value of fixed-income securities generally fluctuates with
changes in the creditworthiness of issuers and inversely with changes in
interest rates. There are risks in any investment, including fixed-income
securities, and there can be no assurance that the Fund will be able to achieve
its investment objective.
Obligations issued or guaranteed as to principal and interest by the U.S.
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 U.S. 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.
Other fixed-income obligations that the Fund may invest in include certain
U.S. dollar denominated debt securities of foreign issuers, provided that such
investments do not, in the judgment of the Fund's Subadviser, entail substantial
additional risk to the Fund. See "Investment Restrictions" in the Statement of
Additional Information. Securities of foreign issuers may involve considerations
and risks not present in domestic securities, such as the risk to the issuer of
nationalization, confiscation or other
11
national restrictions. There may be less information about foreign issuers
publicly available than is generally the case with respect to domestic issuers.
Furthermore, foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to domestic issuers.
ASSET-BACKED SECURITIES
The Fund may invest in asset-backed securities. Through the use of trusts and
special purpose corporations, various types of assets, primarily automobile and
credit card receivables and home equity loans, have been securitized in
pass-through structures similar to the mortgage pass-through structures or in a
pay-through structure similar to the CMO structure. The Fund may invest in these
and other types of asset-backed securities that may be developed in the future.
Unlike mortgage-backed securities, asset-backed securities do not have the
benefit of a security interest in the related collateral. Credit card
receivables, for example, are generally unsecured and the debtors are entitled
to the protection of a number of state and federal consumer credit laws, some of
which may reduce the ability to obtain full payment. In the case of automobile
receivables, the security interests in the underlying automobiles are often not
transferred when the pool is created, with the resulting possibility that the
collateral could be resold. In general, these types of loans are of shorter
average life than mortgage loans and are less likely to have substantial
prepayments. In many instances, asset-backed securities are over-collateralized
to ensure the relative stability of their credit quality.
ADJUSTABLE RATE SECURITIES
The Fund is permitted to invest in adjustable rate or floating rate debt
securities, including corporate securities, securities issued by U.S. Government
agencies and mortgage-backed securities, whose interest rate is calculated by
reference to a specified index such as the constant maturity Treasury rate, the
T-bill rate or LIBOR (London Interbank Offered Rate) and is reset periodically.
Adjustable rate securities allow the Fund to participate in increases in
interest rates through these periodic adjustments. The value of adjustable or
floating rate securities will, like other debt securities, generally vary
inversely with changes in prevailing interest rates. The value of adjustable or
floating rate securities is unlikely to rise in periods of declining interest
rates to the same extent as fixed rate instruments of similar maturities. In
periods of rising interest rates, changes in the coupon will lag behind changes
in the market rate resulting in a lower net asset value until the coupon resets
to market rates.
HEDGING AND RETURN ENHANCEMENT STRATEGIES
THE FUND ALSO MAY ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING THE USE OF
DERIVATIVES, TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO
ENHANCE RETURN, BUT NOT FOR SPECULATION. THE FUND, AND THUS ITS INVESTORS, MAY
LOSE MONEY THROUGH ANY UNSUCCESSFUL USE OF THESE STRATEGIES. These strategies
currently include the use of options on U.S. Government securities and futures
contracts and options thereon. The Fund's ability to use these strategies may be
limited by market conditions, and regulatory limits, and there can be no
assurance that any of these strategies will succeed. See "Investment Objective
and Policies" in the Statement of Additional Information. New financial products
and risk management techniques continue to be developed and the Fund may use
these new investments and techniques to the extent consistent with its
investment objective and policies.
OPTIONS TRANSACTIONS
THE FUND MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON U.S.
GOVERNMENT SECURITIES THAT ARE TRADED ON NATIONAL SECURITIES EXCHANGES OR IN THE
OVER-THE-COUNTER MARKET WITH PRIMARY GOVERNMENT SECURITIES DEALERS RECOGNIZED BY
THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM TO ENHANCE INCOME OR TO
HEDGE THE FUND'S PORTFOLIO. THE FUND, AND THUS ITS INVESTORS, MAY LOSE MONEY
THROUGH ANY UNSUCCESSFUL USE OF THESE STRATEGIES. The Fund may write covered put
and call options to attempt to generate additional income through the receipt of
premiums, purchase put options in an effort to protect the value of a security
that it owns against a decline in market value and purchase call options in
12
an effort to protect against an increase in the price of securities it intends
to purchase. The Fund may also purchase put and call options to offset
previously written put and call options of the same series. See "Investment
Objective and Policies--Option Writing and Related Risks" in the Statement of
Additional Information.
A CALL OPTION GIVES THE PURCHASER, IN EXCHANGE FOR A PREMIUM PAID, THE RIGHT,
FOR A SPECIFIED PERIOD OF TIME, TO PURCHASE THE SECURITIES SUBJECT TO THE OPTION
AT A SPECIFIED PRICE (THE EXERCISE PRICE OR STRIKE PRICE). The writer of a call
option, in return for the premium, has the obligation, upon exercise of the
option, to deliver, depending upon the terms of the option contract, the
underlying securities or a specified amount of cash to the purchaser upon
receipt of the exercise price. The premium paid by the purchaser of an option
will reflect, among other things, the relationship of the exercise price to the
market price and volatility of the underlying security, the remaining term of
the option, supply and demand and interest rates. When the Fund writes a call
option, the Fund gives up the potential for gain on the underlying securities in
excess of the exercise price of the option during the period that the option is
open.
A PUT OPTION GIVES THE PURCHASER, IN RETURN FOR A PREMIUM, THE RIGHT, FOR A
SPECIFIED PERIOD OF TIME, TO SELL THE SECURITIES SUBJECT TO THE OPTION TO THE
WRITER OF THE PUT AT THE SPECIFIED EXERCISE PRICE. The writer of the put option,
in return for the premium, has the obligation, upon exercise of the option, to
acquire the securities underlying the option at the exercise price. The Fund
might, therefore, be obligated to purchase the underlying securities for more
than their current market price.
THE FUND WILL WRITE ONLY COVERED OPTIONS. An option is covered if, so long as
the Fund is obligated under the option, it owns an offsetting position in the
underlying security or maintains cash or other liquid assets, marked-to-market
daily, with a value sufficient at all times to cover its obligations in a
segregated account. See "Investment Objective and Policies--Option Writing and
Related Risks" in the Statement of Additional Information.
THERE IS NO LIMITATION ON THE AMOUNT OF CALL OPTIONS THE FUND MAY WRITE. THE
FUND WILL NOT PURCHASE AN OPTION IF, AS A RESULT OF SUCH PURCHASE, MORE THAN 10%
OF ITS TOTAL ASSETS WOULD BE INVESTED IN PREMIUMS FOR OPTIONS.
FUTURES CONTRACTS AND OPTIONS THEREON
THE FUND MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS AND OPTIONS THEREON
WHICH ARE TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE FOR CERTAIN HEDGING
AND RISK MANAGEMENT PURPOSES AND TO ATTEMPT TO ENHANCE RETURN IN ACCORDANCE WITH
REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION. THE FUND, AND THUS ITS
INVESTORS, MAY LOSE MONEY THROUGH ANY UNSUCCESSFUL USE OF THESE STRATEGIES.
These futures contracts and options thereon will be on financial indices
(including futures linked to LIBOR) and U.S. Government securities.
A FINANCIAL FUTURES CONTRACT IS AN AGREEMENT TO PURCHASE OR SELL AN AGREED
AMOUNT OF SECURITIES AT A SET PRICE FOR DELIVERY IN THE FUTURE.
UNDER REGULATIONS OF THE COMMODITY EXCHANGE ACT, INVESTMENT COMPANIES
REGISTERED UNDER THE INVESTMENT COMPANY ACT ARE EXEMPT FROM THE DEFINITION OF
COMMODITY POOL OPERATOR, SUBJECT TO COMPLIANCE WITH CERTAIN CONDITIONS. THE
EXEMPTION IS CONDITIONED UPON THE FUND'S PURCHASING AND SELLING FUTURES
CONTRACTS AND OPTIONS THEREON FOR BONA FIDE HEDGING PURPOSES, EXCEPT THAT THE
FUND MAY PURCHASE AND SELL FUTURES CONTRACTS AND OPTIONS THEREON FOR ANY OTHER
PURPOSE TO THE EXTENT THAT THE AGGREGATE INITIAL MARGIN AND OPTION PREMIUMS DO
NOT EXCEED 5% OF THE LIQUIDATION VALUE OF THE FUND'S TOTAL ASSETS. ALTHOUGH
THERE ARE NO OTHER LIMITS APPLICABLE TO FUTURES CONTRACTS, THE VALUE OF ALL
FUTURES CONTRACTS SOLD WILL NOT EXCEED THE TOTAL MARKET VALUE OF THE FUND'S
PORTFOLIO.
THE FUND'S SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON DEPENDS
UPON THE SUBADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET AND IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. The correlation between movements in the
price of a futures contract and the price of the securities being hedged is
imperfect and there is a risk that the value of the securities being hedged may
increase or decrease at a greater rate than the related futures contract,
resulting in losses to the
13
Fund. Certain futures exchanges or boards of trade have established daily limits
on the amount that the price of a futures contract or option thereon may vary,
either up or down, from the previous day's settlement price. These daily limits
may restrict the Fund's ability to purchase or sell certain futures contracts or
options thereon on any particular day.
RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES
PARTICIPATION IN THE OPTIONS AND FUTURES MARKETS INVOLVES INVESTMENT RISKS AND
TRANSACTION COSTS TO WHICH THE FUND WOULD NOT BE SUBJECT ABSENT THE USE OF THESE
STRATEGIES. THE FUND, AND THUS ITS INVESTORS, MAY LOSE MONEY THROUGH ANY
UNSUCCESSFUL USE OF THESE STRATEGIES. If the Subadviser's predictions of
movements in the direction of the securities and interest rate markets are
inaccurate, the adverse consequences to the Fund may leave the Fund in a worse
position than if such strategies were not used. Risks inherent in the use of
options and futures contracts and options on futures contracts include (1)
dependence on the Subadviser's ability to predict correctly movements in the
direction of interest rates and securities prices; (2) imperfect correlation
between the price of options and futures contracts and options thereon and
movements in the prices of the securities being hedged; (3) the fact that skills
needed to use these strategies are different from those needed to select
portfolio securities; (4) the possible absence of a liquid secondary market for
any particular instrument at any time; and (5) the possible inability of the
Fund to purchase or sell a portfolio security at a time that otherwise would be
favorable for it to do so, or the possible need for the Fund to sell a portfolio
security at a disadvantageous time, due to the need for the Fund to maintain
cover or to segregate securities in connection with hedging techniques.
OTHER INVESTMENTS AND POLICIES
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 Subadviser 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-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase or sell securities on a when-issued or delayed delivery
basis. When-issued or delayed delivery transactions arise when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future in order to secure what is considered to be an advantageous price and
yield to the Fund at the time of entering into the transaction. The Fund will
maintain, in a segregated account, cash or other liquid assets, having a value
equal to or greater than the Fund's purchase commitments. The value of
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 NAV.
REPURCHASE AGREEMENTS
The Fund may on occasion enter into repurchase agreements, whereby the seller
of a security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few
14
days, although it may not be for a number of months. The resale price is in
excess of the purchase price, reflecting an agreed-upon rate of return effective
for the period of time the Fund's money is invested in the repurchase agreement.
The 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 the instruments declines, the Fund will
require additional collateral. If the seller defaults and the value of the
collateral securing the repurchase agreement declines, the Fund may incur a
loss. The Fund participates in a joint repurchase account with other investment
companies managed by PIFM pursuant to an order of the Commission. See
"Investment Objective and Policies--Repurchase Agreements" in the Statement of
Additional Information.
DOLLAR ROLLS
The Fund may enter into dollar rolls in which the Fund sells securities to be
issued and delivered in the current month and simultaneously contracts to
repurchase substantially similar (same type and coupon) securities on a
specified future date from the same party. During the roll period, the Fund
forgoes principal and interest paid on the securities. The Fund is compensated
by the difference between the current sales price and the forward price for the
future purchase (often referred to as the drop) as well as by the interest
earned on the cash proceeds of the initial sale.
A covered roll is a specific type of dollar roll for which there is an
offsetting cash position or a cash equivalent security position which matures on
or before the forward settlement date of the dollar roll transaction. Dollar
rolls (other than covered rolls) are considered borrowings by the Fund for
purposes of the percentage limitations applicable to borrowings. Covered rolls,
however, are not treated as borrowings or other senior securities and will be
excluded from the calculation of the Fund's borrowings and other senior
securities.
The Fund will establish a segregated account in which it will maintain cash or
other liquid assets, equal in value to its obligations in respect of dollar
rolls.
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. See "Investment Objective and Policies--Lending of
Portfolio Securities" in the Statement of Additional Information.
BORROWING
The Fund may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) from banks for temporary,
extraordinary or emergency purposes or for the clearance of transactions. The
Fund may pledge up to 20% of its total assets to secure these borrowings.
INTEREST RATE SWAPS
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. The risk of loss
with respect to interest rate swaps is limited to the net amount of interest
payments that the Fund is contractually obligated to make and will not exceed 5%
of the Fund's net assets.
15
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. See "Investment Objective and Policies--Interest
Rate Transactions" in the Statement of Additional Information.
PORTFOLIO TURNOVER
Although the Fund has no fixed policy with respect to portfolio turnover, it
may sell portfolio securities without regard to the length of time that they
have been held in order to take advantage of new investment opportunities or
yield differentials, or because the Fund desires to preserve gains or limit
losses due to changing economic conditions. Accordingly, it is possible that the
portfolio turnover rate of the Fund may reach, or even exceed, 350%. The
portfolio turnover rate is computed by dividing the lesser of the amount of the
securities purchased or securities sold (excluding all securities whose
maturities at acquisition were one year or less) by the average monthly value of
such securities owned during the year. A higher rate of turnover results in
increased transaction costs to the Fund. See "Investment Objective and
Policies--Portfolio Turnover" in the Statement of Additional Information.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its
investment objectives, constitute fundamental policies. Such fundamental
policies are those which 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. PIFM CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended December 31, 1997, the Fund's total expenses as a
percentage of average net assets for the Fund's Class A, Class B and Class C
shares were .96%, 1.56% and 1.56%, respectively. For the period from March 18,
1997 (commencement of offering of Class Z shares) through December 31, 1997, the
Fund's total expenses (annualized) as a percentage of average net assets for the
Fund's Class Z shares was .81%. See "Financial Highlights."
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS THE MANAGER
OF THE FUND AND IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF 0.50 OF 1%
OF THE FUND'S AVERAGE DAILY NET ASSETS. PIFM is organized in New York as a
limited liability company. For the fiscal year ended December 31, 1997, the Fund
paid management fees to PIFM of 0.37 of 1% of the Fund's average net assets. See
"Manager" in the Statement of Additional Information.
16
As of January 31, 1998, PIFM served as the manager to 42 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 $63 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, THE MANAGER MANAGES THE
INVESTMENT OPERATIONS OF THE FUND AND ALSO ADMINISTERS THE FUND'S CORPORATE
AFFAIRS. SEE "MANAGER" IN THE STATEMENT OF ADDITIONAL INFORMATION.
UNDER A SUBADVISORY AGREEMENT BETWEEN THE MANAGER AND THE SUBADVISER, THE
SUBADVISER FURNISHES INVESTMENT ADVISORY SERVICES IN CONNECTION WITH THE
MANAGEMENT OF THE FUND AND IS REIMBURSED BY THE MANAGER FOR ITS REASONABLE COSTS
AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. The Manager continues to have
responsibility for all investment advisory services pursuant to the Management
Agreement and supervises The Subadviser'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 the Subadviser. Ms. Fera is responsible for day-to-day
management for the Fund under the supervision of Ms. Kenworthy, who remains
responsible for overall portfolio strategy for the Fund. Ms. Kenworthy has
managed the Fund's portfolio since May 1995. Ms. Kenworthy joined the Subadviser
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 portfolio
manager of Prudential Diversified Bond Fund, Inc. and co-portfolio manager of
Prudential Balanced Fund. In addition, she and Ms. Fera co-manage Prudential
Government Income Fund, Inc. and Prudential Government Securities Trust --
Short-Intermediate Term Series. 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, Ms. Fera 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).
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 THE DISTRIBUTOR),
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), THE DISTRIBUTOR INCURS THE EXPENSES OF DISTRIBUTING THE
FUND'S CLASS A, CLASS B AND CLASS C SHARES. The Distributor also incurs the
expenses of distributing the Fund's Class Z shares under the Distribution
Agreement, none of which is 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 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.
17
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 expenses
exceed its distribution and service fees, the Fund will not be obligated to pay
any additional expenses. If the Distributor 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 THE DISTRIBUTOR FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE
OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES. The
Class A Plan provides that (i) up to 0.25 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 0.25 of 1%) may not exceed 0.30 of 1% of the
average daily net assets of the Class A shares. It is expected that in the case
of Class A shares, proceeds from the distribution fee will be used primarily to
pay account servicing fees to financial advisers. The Distributor has agreed to
limit its distribution-related fees payable under the Class A Plan to 0.15 of 1%
of the average daily net assets of the Class A shares for the fiscal year ending
December 31, 1998.
UNDER THE CLASS B AND CLASS C PLANS, THE FUND MAY PAY THE DISTRIBUTOR FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C SHARES AT AN
ANNUAL RATE OF UP TO 0.75 OF 1% AND UP TO 1% OF THE AVERAGE DAILY NET ASSETS OF
THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan provides for the
payment to Prudential Securities of (i) an asset-based sales charge of up to
0.75 of 1% of the average daily net assets of the Class B shares, and (ii) a
service fee of up to 0.25 of 1% of the average daily net assets of the Class B
shares; provided that the total distribution-related fee does not exceed 0.75 of
1%. The Class C Plan provides for the payment to the Distributor of (i) an
asset-based sales charge of up to 0.75 of 1% of the average daily net assets of
the Class C shares, and (ii) a service fee of up to 0.25 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. The Distributor
has agreed to limit its distribution-related fees payable under the Class C Plan
to 0.75 of 1% of the average daily net assets of the Class C shares for the
fiscal year ending December 31, 1998. The Distributor also receives CDSCs from
certain redeeming shareholders. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges."
For the fiscal year ended December 31, 1997, the Fund paid distribution
expenses of 0.15%, 0.75% and 0.75% of the average daily net assets of the Class
A, Class B and Class C shares, respectively. The Fund records all payments made
under the Plans as expenses in the calculation of net investment income. See
"Distributor" in the Statement of Additional Information.
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, PIFM (or one of its affiliates) may make payments
out of its own resources to dealers (including Prudential Securities) and other
persons which distribute shares of the Fund (including Class Z shares). Such
payments may be calculated by reference to the NAV sold by such persons or
otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (NASD), governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
18
FEE WAIVERS
The Distributor has agreed to limit its distribution fee for the Class A and
Class C shares as described above under "Distributor." Fee waivers will increase
the Fund's total return. See "Performance Information" in the Statement of
Additional Information and "Fund Expenses" above.
PIFM may from time to time agree to waive all or a portion of its management
fee and subsidize certain operating expenses of the Fund. Fee waivers and
expense subsidies will increase the Fund's yield and total return. The Fund is
not required to reimburse PIFM for such management fee waiver. Effective
September 1, 1997, PIFM discontinued its management fee waiver (.20 of 1%).
PORTFOLIO TRANSACTIONS
Prudential Securities may also act as a broker or futures commission merchant
for the Fund, provided that the commissions, fees or other remuneration it
receives are fair and reasonable. See "Portfolio Transactions and Brokerage" in
the Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, 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, 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. The Transfer Agent
is a wholly-owned subsidiary of PIFM. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
YEAR 2000
The services provided to the Fund and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of their outside service
providers. Many computer software systems in use today cannot distinguish the
year 2000 from the year 1900 because of the way dates are encoded and
calculated. Such event could have a negative impact on handling securities
trades, payments of interest and dividends, pricing and account services.
Although, at this time, there can be no assurance that there will be no adverse
impact on the Fund, the Manager, the Distributor, the Transfer Agent and the
Custodian have advised the Fund and they have been actively working on necessary
changes to their computer systems to prepare for the year 2000 and expect that
their systems, and those of their outside service providers, will be adapted in
time for that event.
HOW THE FUND VALUES ITS SHARES
THE FUND'S NAV IS DETERMINED BY SUBTRACTING ITS LIABILITIES FROM THE VALUE OF
ITS ASSETS AND DIVIDING THE REMAINDER BY THE NUMBER OF OUTSTANDING SHARES. NAV
IS CALCULATED SEPARATELY FOR EACH CLASS. THE 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. For valuation purposes, quotations
of foreign securities in a foreign currency are converted to U.S. dollar
equivalents. See "Net Asset Value" in the Statement of Additional Information.
19
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.
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different dividends.
As long as the Fund declares dividends daily, the NAV of the Class A, Class B,
Class C and Class Z shares will generally be the same. It is expected, however,
that the dividends 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 AVERAGE ANNUAL TOTAL RETURN,
AGGREGATE TOTAL RETURN AND YIELD IN ADVERTISEMENTS OR 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 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 total return shows how much an investment in the
Fund would have increased (decreased) over a specified period of time (I.E.,
one, five or ten years or since inception of the Fund) assuming that all
distributions and dividends by the Fund were reinvested on the reinvestment
dates during the period and less all recurring fees. The aggregate total return
reflects actual performance over a stated period of time. Average annual total
return is a hypothetical rate of return that, if achieved annually, would have
produced the same aggregate total return if performance had been constant over
the entire period. Average annual total return smooths out variations in
performance and takes into account any applicable initial or contingent deferred
sales charges. Neither average annual total return nor aggregate total return
takes into account any federal or state income taxes which may be payable upon
redemption. The Fund 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
Any dividends out of net investment income, together with distributions of net
short-term gains (I.E., the excess of net short-term capital gains over net
long-term capital losses), will be taxable as ordinary income to the shareholder
whether or not reinvested. Any net capital gains (I.E., the excess of net
capital gains from the sale of assets held for more than 12 months over net
20
short-term capital losses) distributed to shareholders will be taxable as
long-term capital gains 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 individual shareholders for securities
held more than 12, but not more than 18, months currently is 28% and for
securities held more than 18 months is 20%. 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 Fund shares by
a shareholder who is not a dealer in securities generally will be treated as
capital gain or loss. Any such capital gain derived by an individual will be
subject to tax at the reduced rates described above depending upon the
shareholder's holding period of the shares sold. Any such loss will be a
long-term capital loss, if the shares have been held more than one year, and
otherwise as short-term capital gain or loss. Any loss with respect to shares
that are held for six months or less, however, will be treated as long-term
capital loss to the extent of any capital gain distributions received by the
shareholder.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of 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 or local taxes. See "Taxes, Dividends and
Distributions" in the Statement of Additional Information.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Fund generally is required to withhold
and remit to the U.S. Treasury 31% of dividends, capital gain distributions and
redemption proceeds on the accounts of certain shareholders who fail to furnish
their tax identification numbers on IRS Form W-9 (or IRS Form W-8 in the case of
certain foreign shareholders) with the required certifications regarding the
shareholder's status under the federal income tax law, or, generally, who
otherwise are subject to backup withholding. Shareholders are advised to consult
their own tax advisers regarding specific questions as to federal, state or
local taxes. See "Taxes, Dividends and Distributions" in the Statement of
Additional Information. Dividends of net investment income and net short-term
capital gains paid to a foreign shareholder will generally be subject to U.S.
withholding tax at the rate of 30% (or lower treaty rate).
DIVIDEND AND DISTRIBUTIONS
THE FUND INTENDS TO DECLARE DAILY AND PAY MONTHLY INCOME DIVIDENDS BASED ON
ACTUAL NET INVESTMENT INCOME, IF ANY, DETERMINED IN ACCORDANCE WITH GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES; HOWEVER, A PORTION OF SUCH DIVIDENDS MAY ALSO
INCLUDE PROJECTED NET INVESTMENT INCOME. As of December 31, 1997, the Fund had a
capital loss carryforward for federal income tax purposes of $19,586,200.
Accordingly, no capital gains distribution is expected to be paid to
shareholders until net gains have been realized in excess of such carryforward
amount. Dividends paid by the Fund with respect to each class of shares, to the
extent any dividends are paid, will be calculated in the same manner, at the
same time, on the same day and will be in the same amount except that each class
other than Class Z will bear its own distribution charges, generally resulting
in lower dividends for Class B and Class C shares in relation to Class A 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 per
share for each class of shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES BASED ON
THE NAV OF EACH CLASS ON THE RECORD DATE 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 RECORD DATE TO RECEIVE SUCH DIVIDENDS AND
DISTRIBUTIONS IN CASH. Such election should be submitted to the Transfer Agent,
Attention: Account Maintenance, P.O. Box 15015, New Brunswick, New Jersey
21
08906-5015. If you hold shares through Prudential Securities, you should contact
your financial adviser to elect to receive dividends and distributions in cash.
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.
IF YOU BUY SHARES ON OR IMMEDIATELY BEFORE THE RECORD DATE (THE DATE THAT
DETERMINES WHO RECEIVES THE DIVIDEND), YOU WILL RECEIVE A PORTION OF THE MONEY
YOU INVESTED AS A TAXABLE DIVIDEND. THEREFORE, YOU SHOULD CONSIDER THE TIMING OF
DIVIDENDS WHEN BUYING SHARES OF THE FUND.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
THE FUND WAS INCORPORATED IN MARYLAND ON JANUARY 4, 1982. THE FUND IS
AUTHORIZED TO ISSUE 500 MILLION 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, WHICH CONSISTS OF 125 MILLION AUTHORIZED CLASS A SHARES, 125
MILLION AUTHORIZED CLASS B SHARES, 125 MILLION AUTHORIZED CLASS C SHARES AND 125
MILLION AUTHORIZED CLASS Z 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
sales charges or 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 to a limited group of 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.
The Board of Directors may increase or decrease the number of authorized
shares without approval by the 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 of these 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.
22
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 Commission under
the Securities Act. Copies of the Registration Statement may be obtained at a
reasonable charge from the Commission or may be examined, without charge, at the
office of the Commission in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH THE DISTRIBUTOR, PRUSEC OR
DIRECTLY FROM THE FUND THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES LLC, 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 the Distributor 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 NAV without any sales
charge. Participants in programs sponsored by Prudential Retirement Services
should contact their client representative for more information about Class Z
shares. Payments may be made by cash, wire, check or through an investor's
brokerage account. 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 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 the Transfer Agent, Prudential
Securities or Prusec. If a stock certificate is desired, it must be requested in
writing for each transaction. Certificates are issued only for full shares.
Shareholders who hold their shares through Prudential Securities will not
receive stock certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund.
Prudential Securities reserves the right to cancel any purchase order for which
payment has not been received by the third 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 the Transfer Agent 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 the Custodian, State Street
Bank and Trust Company, Boston, Massachusetts, Custody and Shareholder Services
Division, Attention: Prudential Mortgage Income Fund, Inc., specifying on the
wire the account number assigned by the Transfer Agent 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 the Custodian of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Fund as of that day. See "Net Asset Value" in the
Statement of Additional Information.
23
In making a subsequent purchase order by wire, you should wire the Custodian
directly and should be sure that the wire specifies Prudential Mortgage 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 the Transfer Agent 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
SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE
FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH
OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES
(ALTERNATIVE PURCHASE PLAN).
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE
SALES CHARGE DAILY NET ASSETS) OTHER INFORMATION
----------------------------------- ----------------------------------- -----------------------------------
CLASS A Maximum initial sales charge of 4% 0.30 of 1% (Currently being charged Initial sales charge waived or
of the public offering price at a rate of 0.15 of 1%) reduced for certain purchases
CLASS B Maximum CDSC of 5% of the lesser of 0.75 of 1% Shares convert to Class A shares
the amount invested or the approximately seven years after
redemption proceeds; declines to purchase
zero after six years
CLASS C Maximum CDSC of 1% of the lesser of 1% (Currently being charged at a Shares do not convert to another
the amount invested or the rate of 0.75 of 1%) class
redemption proceeds on redemptions
made within one year of purchase
CLASS Z None None Sold to a limited group of
investors
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 differ 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 the investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:
If you intend to hold your investment in the Fund for less than 7 years and do
not qualify for a reduced sales charge on Class A shares, since Class A shares
are subject to a maximum initial sales charge of 4% and Class B shares are
subject to a CDSC of 5% which declines to zero over a 6 year period, you should
consider purchasing Class C shares over either Class A or Class B shares.
24
If you intend to hold your investment for more than 6 years, you should
consider purchasing Class A shares over either Class B or Class C shares
regardless of whether or not you qualify for a reduced sales charge on Class A
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 your entire purchase price
invested initially because the sales charge on Class A shares is deducted at the
time of purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and Class C shares for the
higher cumulative annual distribution-related fee on those shares to exceed the
initial sales charge plus cumulative annual distribution-related fee on Class A
shares. This does not take into account the time value of money, which further
reduces the impact of the higher Class B or Class C distribution-related fee on
the investment, fluctuations in NAV, the effect of the return on the investment
over this period of time or redemptions when the CDSC is applicable.
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 AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
------------------------ --------------- --------------- -----------------
Less than $49,999 4.00% 4.17% 3.75%
$50,000 to $99,999 3.50 3.63 3.25
$100,000 to $249,999 2.75 2.83 2.50
$250,000 to $499,999 2.00 2.04 1.90
$500,000 to $999,999 1.50 1.52 1.40
$1,000,000 and above None None None
Prudential Securities 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), PIFM, Prudential Securities or one of their affiliates
will pay dealers, financial advisers and other persons which distribute shares a
finders' fee from its own resources based on a percentage of the NAV 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
25
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
Prudential Securities or its subsidiaries (Prudential Securities 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.
PRUDENTIAL RETIREMENT PROGRAMS. 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, for which Prudential serves as
the plan administrator or recordkeeper, provided that (i) the plan has at least
$1 million in existing assets or 250 eligible employees and (ii) the Fund is an
available investment option. These plans include pension, profit-sharing,
stock-bonus or other employee benefit plans under Section 401 of the Internal
Revenue Code, deferred compensation and annuity plans under Sections 457 and
403(b)(7) of the Internal Revenue Code and plans that participate in the
Transfer Agent's PruArray and SmartPath Programs (benefit plan recordkeeping
services)(hereafter referred to as a PruArray or SmartPath Plan). All plans of a
company for which Prudential serves as plan administrator or recordkeeper are
aggregated in meeting the $1 million threshold. The term existing assets as used
herein includes stock issued by a plan sponsor, shares of Prudential Mutual
Funds and shares of certain unaffiliated mutual funds that participate in the
PruArray or SmartPath Programs (Participating Funds). Existing assets also
include monies invested in The Guaranteed Interest Account (GIA), a group
annuity insurance product issued by Prudential, and units of the 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 NAV 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 NAV 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 Transfer Agent.
PRUARRAY SAVINGS PROGRAM. Class A shares are also offered at NAV 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 NAV 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 Transfer Agent and (ii) spouses of
employees who open an IRA account with the 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 SmartPath 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 of the Prudential Mutual Funds (including the Fund), (b) employees of
Prudential Securities and PIFM 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 and (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 180 days of the commencement of
the financial adviser's employment at Prudential Securities, or within one year
in the case of Benefit Plans, (ii) the purchase is made with proceeds of a
redemption of shares of any open-ended 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
26
(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 of
administrator.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No
initial sales charges are imposed upon Class A shares 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 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" below. Prudential Securities will
pay, from its own resources, 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. 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. Prudential Securities 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, Prudential Securities will pay, from its own
resources, 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 currently 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 Revsenue Code, deferred compensation 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 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 option; (iv) Benefit Plans for which Prudential Retirement Services
serves as recordkeeper 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 savings plan.
In connection with the sale of Class Z shares, PIFM, Prudential Securities or
one of their affiliates may pay dealers, financial advisers and other persons
which distribute shares a finders' fee from its own resources based on a
percentage of the NAV sold by such persons.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES AT ANY TIME FOR CASH AT THE NAV NEXT DETERMINED
AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM 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
CDSC, as described below. See "Contingent Deferred Sales Charges" below.
27
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST REDEEM
SHARES THROUGH PRUDENTIAL SECURITIES. PLEASE CONTACT 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 Preferred 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 Commission,
by order, so permits; provided that applicable rules and regulations of the
Commission 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 CASHIERS' 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 Commission. 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 will incur transaction costs in converting
the assets into cash. The Fund, however, has elected to be governed by Rule
18f-1 under the Investment Company Act, under which the Fund is obligated to
redeem shares solely in cash up to the lesser of $250,000 or 1% of the NAV of
the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Board of
Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose account
has a NAV of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No CDSC will be imposed on any such
involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of the Fund at the NAV next determined
after the order is
28
received, which must be within 90 days after the date of the redemption. Any
CDSC paid in connection with such redemption will be credited (in shares) to
your account. If less than a full repurchase is made, the credit will be on a
pro rata basis. You must notify the Fund's Transfer Agent, either directly or
through Prudential Securities, at the time the repurchase privilege is exercised
to adjust the account for the CDSC 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 income tax treatment of any gain or loss realized upon
redemption.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a CDSC declining from 5% to
zero over a six-year period. Class C shares redeemed within one year of purchase
will be subject to a 1% CDSC. The CDSC will be deducted from the redemption
proceeds and reduce the amount paid to you. The CDSC will be imposed on any
redemption by you which reduces the current value of your Class B or Class C
shares to an amount which is lower than the amount of all payments by you for
shares during the preceding six years, in the case of Class B shares, and one
year, in the case of Class C shares. A CDSC will be applied on the lesser of the
original purchase price or the current value of the shares being redeemed.
Increases in the value of your shares or shares 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 Prudential Securities. See "How the Fund is
Managed--Distributor" and "Waiver of 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" below.
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
OF THE DOLLARS INVESTED
YEAR SINCE PURCHASE 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
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in NAV above the total amount of payments for
the purchase of 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
29
would be $1,260 (105 shares at $12 per share). The CDSC would not be applied to
the value of the reinvested dividend shares and the amount which represents
appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500 minus
$260) would be charged at a rate of 4% (the applicable rate in the second year
after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will be
waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), 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
Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary date of your purchase or, for shares purchased prior
to March 1, 1997, on March 1 of the current year. The CDSC will be waived (or
reduced) on redemptions until this threshold 12% is reached.
In addition, the CDSC will be waived on redemptions of shares held by a
Director of the Fund.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec, at the time of redemption, that you are entitled to waiver
of the CDSC and provide the Transfer Agent with such supporting documentation as
it may deem appropriate. 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 CONTINGENT DEFERRED SALES CHARGES--CLASS C SHARES.
PRUARRAY OR SMARTPATH PLANS. The CDSC will be waived on redemptions from
qualified and non-qualified retirement and deferred compensation plans that
participate in the Transfer Agent's PruArray and SmartPath Programs.
30
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 NAV without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in the 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 NAV 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). PIFM reserves the right to modify
the formula for determining the number of Eligible Shares in the future as it
deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share NAV of the Class A shares may be higher than that of the
Class B shares at the time of conversion. Thus, although the aggregate dollar
value will be the same, you may receive fewer Class A shares than Class B shares
converted. 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 that (i) 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) 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
SHAREHOLDERS OF THE FUND HAVE AN EXCHANGE PRIVILEGE WITH CERTAIN OTHER
PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE PRIVILEGE), INCLUDING ONE OR MORE
SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS OF
SUCH FUNDS. CLASS A, CLASS B, CLASS C AND CLASS Z SHARES OF THE FUND MAY BE
EXCHANGED FOR CLASS A, CLASS B, CLASS C AND CLASS Z SHARES, RESPECTIVELY, OF
ANOTHER FUND ON THE BASIS OF THE RELATIVE NAV. No sales charge will be imposed
at the time of the exchange. Any applicable CDSC payable upon the redemption of
shares exchanged will be calculated from the first day of
31
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 TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, on weekdays, except
holidays, between the hours of 8:00 A. M. and 6:00 P. M., New York time. For
your protection and to prevent fraudulent exchanges, telephone calls will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds next determined after the request is received in
good order. The Exchange Privilege is available only in states where the
exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services 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 YOU 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 NAV 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 NAV.
Similarly, participants in Prudential Securities' 401(k) Plan for which the
Fund's Class Z shares is an available option and who wish to transfer their
Class Z shares out of the Prudential Securities' 401(k) Plan following
separation from service (I.E., voluntary or involuntary termination of
employment or retirement) will have their Class Z shares exchanged for Class A
shares at NAV.
32
The exchange privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.
FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, the Fund reserves the right to refuse purchase orders and exchanges
by any person, group or commonly controlled accounts, if, in the Manager's sole
judgment, such person, group or accounts were following a market timing strategy
or were otherwise engaging in excessive trading (Market Timers).
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading. The
Fund may notify the Market Timer of rejection of an exchange or purchase order
subsequent to the day on which the order was placed.
SHAREHOLDER SERVICES
In addition to the exchange privilege, a shareholder in the Fund can take
advantage of the following additional services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Fund at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/ or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make regular
purchases of the Fund's shares in amounts as little as $50 via an automatic
debit to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you should contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.
- TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including 401(k) plans, self-directed individual retirement accounts and
tax-sheltered accounts under Section 403(b)(7) of the Internal Revenue Code are
available through Prudential Securities. These plans are for use by both
self-employed individuals and corporate employers. These plans permit either
self-direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from Prudential Securities or the
Transfer Agent. If you are considering adopting such a plan, you should consult
with your own legal or tax adviser with respect to the establishment and
maintenance of such a plan.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" above.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. In addition, monthly
unaudited financial data are available upon request from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, or by
telephone, at (800) 225-1852 (toll-free) or, from outside the U.S.A., at (908)
417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
33
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential 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.
TAXABLE BOND FUNDS
--------------------------
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
TAX-EXEMPT BOND FUNDS
-----------------------------
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
--------------------
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
--------------------
Prudential Balanced Fund
Prudential Distressed Securities Fund, Inc.
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Index Series Fund
Prudential Bond Market Index Fund
Prudential Europe Index Fund
Prudential Pacific Index Fund
Prudential Small Cap Index Fund
Prudential Stock Index Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Active Balanced Fund
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
--------------------------
- - TAXABLE MONEY MARKET FUNDS
Cash Accumulation Trust
Liquid Assets Fund
National Money Market Fund
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
- - 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
A-1
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
- -------------------------------------------
TABLE OF CONTENTS
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
Hedging and Return Enhancement Strategies..... 12
Other Investments and Policies................ 14
Investment Restrictions....................... 16
HOW THE FUND IS MANAGED......................... 16
Manager....................................... 16
Distributor................................... 17
Fee Waivers................................... 19
Portfolio Transactions........................ 19
Custodian and Transfer and Dividend Disbursing
Agent........................................ 19
Year 2000..................................... 19
HOW THE FUND VALUES ITS SHARES.................. 19
HOW THE FUND CALCULATES PERFORMANCE............. 20
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 20
GENERAL INFORMATION............................. 22
Description of Common Stock................... 22
Additional Information........................ 23
SHAREHOLDER GUIDE............................... 23
How to Buy Shares of the Fund................. 23
Alternative Purchase Plan..................... 24
How to Sell Your Shares....................... 27
Conversion Feature--Class B Shares............ 31
How to Exchange Your Shares................... 31
Shareholder Services.......................... 33
THE PRUDENTIAL MUTUAL FUND FAMILY............... A-1
- -------------------------------------------
MF102A
Class A: 743915-20-9
Class B: 743915-10-0
CUSIP No.: Class C: 743915-30-8
Class Z: 743915-40-7
PRUDENTIAL
MORTGAGE
INCOME
FUND, INC.
PROSPECTUS
March 3, 1998
www.prudential.com
-----------------
[LOGO]
Supplement dated July 1, 1998
THE FOLLOWING INFORMATION SUPPLEMENTS YOUR PROSPECTUS:
Effective July 1, 1998, Prudential Investment Management Services LLC,
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, was
appointed the exclusive Distributor of Fund shares. Shares continue to be
offered through Prudential Securities Incorporated, Pruco Securities
Corporation and other brokers and dealers. Prudential Investment Management
Services is a wholly owned subsidiary of The Prudential Insurance Company of
America and an affiliate of Prudential Securities Incorporated and Pruco
Securities Corporation. All other arrangements with respect to the
distribution of Fund shares described in the Prospectus remain unchanged.
Supplement dated September 1, 1998
The following information should be added to the cover page of the
Prospectus.
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OF ANY BANK AND IS NOT
INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENT AGENCY.
The following information should be added under the heading "Shareholder
Guide--Shareholder Services."
SHAREHOLDER GUIDE
SHAREHOLDER SERVICES
THE PRUTECTOR PROGRAM--OPTIONAL GROUP TERM LIFE INSURANCE. Prudential
makes available optional group term life insurance coverage to purchasers of
shares of certain Prudential Mutual Funds which are held in an eligible
brokerage account. This insurance protects the value of your mutual fund
investment for your beneficiaries against market downturns. The insurance
benefit is based on the difference at the time of the insured's death between
the "protected value" and the then current market value of the shares. This
coverage is not available in all states and is subject to various
restrictions and limitations. For more complete information about this
program, including charges and expenses, please contact your Prudential
representative.
PRUDENTIAL MORTGAGE INCOME FUND
Supplement Dated August 27, 1998
to Prospectus Dated March 3, 1998
The Directors of Prudential Mortgage Income Fund, Inc. (the Fund) have
recently approved a proposal to exchange the assets and liabilities of the
Fund for shares of Prudential Government Income Fund, Inc. (Government Income
Fund). Class A, Class B, Class C and Class Z shares of the Fund would be
exchanged at relative net asset value for Class A, Class B, Class C and Class Z
shares, respectively, of Government Income Fund.
The transfer has been approved by the Board of Directors of the Fund and
by the Board of Directors of Government Income Fund and is subject to
approval by the shareholders of the Fund. It is anticipated that a proxy
statement/prospectus relating to the transaction will be mailed to
shareholders in late October 1998.
Under the terms of the proposal, shareholders of the Fund would become
shareholders of Government Income Fund. No sales charge would be imposed on
the proposed transfer. The Fund anticipates obtaining an opinion of its
counsel that the transaction would be a tax-free reorganization under the
Internal Revenue Code and therefore no gain or loss for Federal income tax
purposes would be recognized by shareholders of the Fund.
EFFECTIVE IMMEDIATELY, THE FUND WILL NO LONGER ACCEPT ORDERS TO PURCHASE
OR EXCHANGE INTO SHARES OF ANY CLASS EXCEPT FOR PURCHASES BY CERTAIN
RETIREMENT AND EMPLOYEE PLANS (EXCLUDING IRA ACCOUNTS.) Existing shareholders
may continue to acquire shares through dividend reinvestment. The current
exchange privilege of obtaining shares of other Prudential Mutual Funds and
the current redemption privilege will remain in effect until the transaction
is consummated.
Government Income Fund's investment objective is to seek high current
return.