AGREEMENT AND PLAN OF REORGANIZATION
Agreement and Plan of Reorganization (Agreement) made as of the day of
October, 1998, by and between, Prudential Mortgage Income Fund, Inc. (Mortgage
Income Fund) and Prudential Government Income Fund (Government Income Fund)
(Mortgage Income Fund and Government Income Fund collectively, the Funds and
each individually, a Fund). Mortgage Income Fund and Government Income Fund are
both corporations organized under the laws of the State of Maryland. Each Fund
maintains its principal place of business at Gateway Center Three, 100 Mulberry
Street, Newark, New Jersey 07102-4077. Shares of both Funds are divided into
four classes, designated as Class A, Class B, Class C and Class Z.
This Agreement is intended to be, and is adopted as, a plan of
reorganization pursuant to Section 368(a)(1)(C) of the Internal Revenue Code of
1986, as amended (Internal Revenue Code). Upon receipt of such representations
from each of the Funds as Swidler Berlin Shereff Friedman, LLP may require,
Swidler Berlin Shereff Friedman, LLP will deliver the opinion referenced in
paragraph 8.6 herein. The reorganization will comprise the transfer of the
assets of Mortgage Income Fund in exchange for shares of Government Income Fund,
and Government Income Fund's assumption of Mortgage Income Fund's liabilities,
if any, and the constructive distribution, after the Closing Date hereinafter
referred to, as a liquidating distribution of such shares of Government Income
Fund to the shareholders of Mortgage Income Fund, and the termination of
Mortgage Income Fund as provided herein, all upon the terms and conditions as
hereinafter set forth.
In consideration of the premises and of the covenants and agreements set
forth herein, the parties covenant and agree as follows:
1. TRANSFER OF ASSETS OF MORTGAGE INCOME FUND IN EXCHANGE FOR SHARES OF
GOVERNMENT INCOME FUND AND ASSUMPTION OF LIABILITIES, IF ANY, AND
TERMINATION OF MORTGAGE INCOME FUND
1.1 Subject to the terms and conditions herein set forth and on the basis of
the representations and warranties contained herein, Mortgage Income Fund agrees
to sell, assign, transfer and deliver all its assets, as set forth in paragraph
1.2, to Government Income Fund, and Government Income Fund agrees (a) to issue
and deliver to Mortgage Income Fund in exchange therefor the number of shares in
Government Income Fund determined by dividing the net asset value of the
Mortgage Income Fund allocable to Class A, Class B, Class C and Class Z shares
and shares of Common Stock (computed in the manner and as of the time and date
set forth in paragraph 2.1) by the net asset value allocable to a Class A, Class
B, Class C and Class Z shares of Government Income Fund (rounded to the third
decimal place) (computed in the manner and as of the time and date set forth in
paragraph 2.2) and (b) to assume all of Mortgage Income Fund's liabilities, if
any, as set forth in paragraph 1.3. Such transactions shall take place at the
closing provided for in paragraph 3 (Closing).
1.2 The assets of Mortgage Income Fund to be acquired by Government Income Fund
shall include without limitation all cash, cash equivalents, securities,
receivables (including interest and dividends receivable) and other property of
any kind owned by Mortgage Income Fund and any deferred or prepaid expenses
shown as assets on the books of Mortgage Income Fund on the closing date
provided in paragraph 3 (Closing Date). Government Income Fund has no plan or
intent to sell or otherwise dispose of significant assets of Mortgage Income
Fund, other than in the ordinary course of business.
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1.3 Except as otherwise provided herein, Government Income Fund will assume all
debts, liabilities, obligations and duties of Mortgage Income Fund of whatever
kind or nature, whether absolute, accrued, contingent or otherwise, whether or
not determinable as of the Closing Date and whether or not specifically referred
to in this Agreement; provided, however, that Mortgage Income Fund agrees to
utilize its best efforts, to the extent practicable, to cause such Trust to
discharge all of its known debts, liabilities, obligations and duties prior to
the Closing Date.
1.4 On or immediately prior to the Closing Date, Mortgage Income Fund will
declare and pay to its shareholders of record dividends and/or other
distributions so that it will have distributed substantially all (and in any
event not less than ninety-eight percent) of such Fund's investment company
taxable income (computed without regard to any deduction for dividends paid),
net tax-exempt interest income, if any, and realized net capital gains, if any,
for all taxable years through its termination.
1.5 On a date (Termination Date), as soon after the Closing Date as is
conveniently practicable but in any event within 30 days of the Closing Date,
Mortgage Income Fund will distribute PRO RATA to its Class A, Class B, Class C
and Class Z shareholders of record, determined as of the close of business on
the Closing Date, the Class A, Class B, Class C and Class Z shares of Government
Income Fund received by Mortgage Income Fund pursuant to paragraph 1.1 in
exchange for their interest in Mortgage Income Fund. Such distribution will be
accomplished by opening accounts on the books of Government Income Fund in the
names of Mortgage Income Fund's shareholders and transferring thereto the shares
credited to the account of Mortgage Income Fund on the books of Government
Income Fund. Each account opened shall be credited with the respective PRO RATA
number of Government Income Fund Class A, Class B, Class C and Class Z shares
due Mortgage Income Fund's Class A, Class B, Class C and Class Z shareholders,
respectively. Fractional shares of Government Income Fund shall be rounded to
the third decimal place. Upon the receipt of an order from the Securities and
Exchange Commission (SEC) indicating acceptance of the Form N-8F that Mortgage
Income Fund must file pursuant to the Investment Company Act of 1940, as amended
(Investment Company Act) to deregister as an investment company, Mortgage Income
Fund will file with the Secretary of State of the State of Maryland a
Certificate of Termination terminating Mortgage Income Fund , but in any event
such termination will be completed within twelve months following the Closing
Date.
1.6 Government Income Fund shall not issue certificates representing its shares
in connection with such exchange. With respect to any Mortgage Income Fund
shareholder holding Mortgage Income Fund certificates for shares of Common Stock
as of the Closing Date, until Government Income Fund is notified by Mortgage
Income Fund's transfer agent that such shareholder has surrendered his or her
outstanding certificates for shares of Common Stock or, in the event of lost,
stolen or destroyed certificates for shares of Common Stock, posted adequate
bond or submitted a lost certificate form, as the case may be, Government Income
Fund will not permit such shareholder to (1) receive dividends or other
distributions on Government Income Fund shares in cash (although such dividends
and distributions shall be credited to the account of such shareholder
established on Government Income Fund's books pursuant to paragraph 1.5, as
provided in the next sentence), (2) exchange Government Income Fund shares
credited to such shareholder's account for shares of other Prudential Mutual
Funds, or (3) pledge or redeem such shares. In the event that a shareholder is
not permitted to receive dividends or other distributions on Government Income
Fund shares in cash as provided in the preceding sentence, Government Income
Fund shall pay such dividends or other distributions in additional Government
Income Fund shares, notwithstanding any election such shareholder shall have
made previously with respect to the payment of dividends or other distributions
on shares of
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Mortgage Income Fund. Mortgage Income Fund will, at its expense, request its
shareholders to surrender their outstanding Mortgage Income Fund certificates
for shares of beneficial interest, post adequate bond or submit a lost
certificate form, as the case may be.
1.7 Ownership of Government Income Fund shares will be shown on the books of
the Government Income Fund's transfer agent. Shares of Government Income Fund
will be issued in the manner described in Government Income Fund's then current
prospectus and statement of additional information.
1.8 Any transfer taxes payable upon issuance of shares of Government Income
Fund in exchange for shares of Mortgage Income Fund in a name other than that of
the registered holder of the shares being exchanged on the books of Mortgage
Income Fund as of that time shall be paid by the person to whom such shares are
to be issued as a condition to the registration of such transfer.
1.9 Any reporting responsibility with the SEC or any state securities
commission of Mortgage Income Fund is, and shall remain, the responsibility of
Mortgage Income Fund up to and including the Termination Date.
1.10 All books and records of Mortgage Income Fund, including all books and
records required to be maintained under the Investment Company Act and the rules
and regulations thereunder, shall be available to Government Income Fund from
and after the Closing Date and shall be turned over to Government Income Fund on
or prior to the Termination Date.
2. VALUATION
2.1 The value of Mortgage Income Fund's assets and liabilities to be acquired
and assumed, respectively, by Government Income Fund shall be the net asset
value computed as of 4:15 p.m., New York time, on the Closing Date (such time
and date being hereinafter called the Valuation Time), using the valuation
procedures set forth in Mortgage Income Fund's then current prospectus and
statement of additional information.
2.2 The net asset value of Class A, Class B, Class C and Class Z shares of
Government Income Fund shall be the net asset value for Class A, Class B, Class
C and Class Z shares as of the Valuation Time, using the valuation procedures
set forth in Government Income Fund's then current prospectus and Government
Income Fund's statement of additional information.
2.3 The number of Government Income Fund shares to be issued (including
fractional shares, if any) in exchange for Mortgage Income Fund's net assets
shall be calculated as set forth in paragraph 1.1.
2.4 All computations of net asset value shall be made by or under the direction
of Prudential Investments Fund Management LLC (PIFM) in accordance with its
regular practice as manager of the Funds.
3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be December 4, 1998 or such later date as the
parties may agree. All acts taking place at the Closing shall be deemed to take
place simultaneously as of the close of business on the Closing Date unless
otherwise provided. The Closing shall be at the office of Government Income Fund
or at such other place as the parties may agree.
3.2 State Street Bank and Trust Company (State Street), as custodian for
Mortgage Income Fund, shall deliver to Government Income Fund at the Closing a
certificate of an authorized officer of State Street stating that (a) Mortgage
Income Fund's portfolio securities, cash and any other assets have been
transferred in proper form to Government Income Fund on the Closing Date and (b)
all necessary taxes, if any, have been paid, or provision for payment has been
made, in conjunction with the transfer of portfolio securities.
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3.3 In the event that immediately prior to the Valuation Time (a) the New York
Stock Exchange (NYSE) or other primary exchange is closed to trading or trading
thereon is restricted or (b) trading or the reporting of trading on the NYSE or
other primary exchange or elsewhere is disrupted so that accurate appraisal of
the value of the net assets of Mortgage Income Fund and of the net asset value
per share of Government Income Fund is impracticable, the Closing Date shall be
postponed until the first business day after the date when such trading shall
have been fully resumed and such reporting shall have been restored.
3.4 Mortgage Income Fund shall deliver to Government Income Fund on or prior to
the Termination Date the names and addresses of each of the shareholders of
Mortgage Income Fund and the number of outstanding shares owned by each such
shareholder, all as of the close of business on the Closing Date, certified by
the Secretary or Assistant Secretary of Mortgage Income Fund. Government Income
Fund shall issue and deliver to Mortgage Income Fund at the Closing a
confirmation or other evidence satisfactory to Mortgage Income Fund that shares
of Government Income Fund have been or will be credited to Mortgage Income
Fund's account on the books of Government Income Fund. At the Closing each party
shall deliver to the other such bills of sale, checks, assignments, share
certificates, receipts and other documents as such other party or its counsel
may reasonably request to effect the transactions contemplated by this
Agreement.
4. REPRESENTATIONS AND WARRANTIES
4.1 Mortgage Income Fund represents and warrants as follows:
4.1.1 Mortgage Income Fund is a business trust duly organized and validly
existing under the laws of the State of Maryland.
4.1.2 Mortgage Income Fund is an open-end, management investment company
duly registered under the Investment Company Act, and such registration is
in full force and effect;
4.1.3 Mortgage Income Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of any provision
of the Articles of Incorporation or By-Laws of Mortgage Income Fund or of
any material agreement, indenture, instrument, contract, lease or other
undertaking to which Mortgage Income Fund is a party or by which Mortgage
Income Fund is bound;
4.1.4 All material contracts or other commitments to which Mortgage Income
Fund, or the properties or assets of Mortgage Income Fund, is subject, or by
which Mortgage Income Fund is bound except this Agreement will be terminated
on or prior to the Closing Date without Mortgage Income Fund or Government
Income Fund incurring any liability or penalty with respect thereto;
4.1.5 No material litigation or administrative proceeding or investigation
of or before any court or governmental body is presently pending or to its
knowledge threatened against Mortgage Income Fund or any of its properties
or assets. Mortgage Income Fund knows of no facts that might form the basis
for the institution of such proceedings, and is not a party to or subject to
the provisions of any order, decree or judgment of any court or governmental
body that materially and adversely affects its business or its ability to
consummate the transactions herein contemplated;
4.1.6 The Portfolio of Investments, Statement of Assets and Liabilities,
Statement of Operations, Statement of Cash Flows, Statement of Changes in
Net Assets, and Financial Highlights of Mortgage Income Fund at December 31,
1997 and for the year then ended and the Notes thereto (copies of which have
been furnished to Government Income Fund) have been audited by
PricewaterhouseCoopers LLP, independent accountants, in accordance with
generally accepted auditing standards. Such financial statements are
prepared in accordance with generally accepted accounting principles and
present fairly,
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in all material respects, the financial condition, results of operations,
changes in net assets and financial highlights of Mortgage Income Fund as of
and for the period ended on such date, and there are no material known
liabilities of Mortgage Income Fund (contingent or otherwise) not disclosed
therein;
4.1.7 Since , 1998, there has not been any material adverse
change in Mortgage Income Fund's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of business, or
any incurrence by Mortgage Income Fund of indebtedness maturing more than
one year from the date such indebtedness was incurred, except as otherwise
disclosed to and accepted by Government Income Fund. For the purposes of
this paragraph 4.1.7, a decline in net assets or change in the number of
shares outstanding shall not constitute a material adverse change;
4.1.8 At the date hereof and at the Closing Date, all federal and other tax
returns and reports of Mortgage Income Fund required by law to have been
filed on or before such dates shall have been timely filed, and all federal
and other taxes shown as due on said returns and reports shall have been
paid insofar as due, or provision shall have been made for the payment
thereof, and, to the best of Mortgage Income Fund's knowledge, all federal
or other taxes required to be shown on any such return or report have been
shown on such return or report, no such return is currently under audit and
no assessment has been asserted with respect to such returns;
4.1.9 For each past taxable year since it commenced operations, Mortgage
Income Fund has met the requirements of Subchapter M of the Internal Revenue
Code for qualification and treatment as a regulated investment company and
has elected to be treated as such and Mortgage Income Fund intends to meet
those requirements for the current taxable year; and, for each past calendar
year since it commenced operations, Mortgage Income Fund has made such
distributions as are necessary to avoid the imposition of federal excise tax
or has paid or provided for the payment of any excise tax imposed;
4.1.10 All issued and outstanding shares of Mortgage Income Fund are, and
at the Closing Date will be, duly and validly authorized, issued and
outstanding, fully paid and non-assessable. All issued and outstanding
shares of Mortgage Income Fund will, at the Closing Date, be held in the
name of the persons and in the amounts set forth in the list of shareholders
submitted to Government Income Fund in accordance with the provisions of
paragraph 3.4. Mortgage Income Fund does not have outstanding any options,
warrants or other rights to subscribe for or purchase any shares, nor is
there outstanding any security convertible into any of its shares, except
for Class B shares of Mortgage Income Fund which have the conversion feature
described in Mortgage Income Fund's Prospectus dated March 3, 1998;
4.1.11 At the Closing Date, the Mortgage Income Fund will have good and
marketable title to the assets to be transferred to Government Income Fund
pursuant to paragraph 1.1, and full right, power and authority to sell,
assign, transfer and deliver such assets hereunder free of any liens,
claims, charges or other encumbrances, and, upon delivery and payment for
such assets, Government Income Fund will acquire good and marketable title
thereto;
4.1.12 The execution, delivery and performance of this Agreement has been
duly authorized by the Board of Trustees of Mortgage Income Fund and by all
necessary action, other than shareholder approval, on the part of Mortgage
Income Fund, and this Agreement constitutes a valid and binding obligation,
subject to shareholder approval, of Mortgage Income Fund;
4.1.13 The information furnished and to be furnished by Mortgage Income
Fund for use in applications for orders, registration statements, proxy
materials and other documents that may be necessary in
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connection with the transactions contemplated hereby is and shall be
accurate and complete in all material respects and is in compliance and
shall comply in all material respects with applicable federal securities and
other laws and regulations; and
4.1.14 On the effective date of the registration statement filed with the
SEC by Government Income Fund on Form N-14 relating to the shares of
Government Income Fund issuable hereunder, and any supplement or amendment
thereto (Registration Statement), at the time of the meeting of the
shareholders of Mortgage Income Fund and on the Closing Date, the Proxy
Statement of Mortgage Income Fund, the Prospectus of Government Income Fund,
and the Statement of Additional Information of Government Income Fund to be
included in the Registration Statement (collectively, Proxy Statement) (i)
will comply in all material respects with the provisions and regulations of
the Securities Act of 1933, as amended (1933 Act), the Securities Exchange
Act of 1934, as amended (1934 Act) and the Investment Company Act, and the
rules and regulations under such Acts and (ii) will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein in light of the circumstances under which they were made or
necessary to make the statements therein not misleading; provided, however,
that the representations and warranties in this paragraph 4.1.14 shall not
apply to statements in or omissions from the Proxy Statement and
Registration Statement made in reliance upon and in conformity with
information furnished by Government Income Fund for use therein.
4.2 Government Income Fund represents and warrants as follows:
4.2.1 Government Income Fund is a corporation duly organized and validly
existing under the laws of the State of Maryland;
4.2.2 Government Income Fund is an open-end, management investment company
duly registered under the Investment Company Act, and such registration is
in full force and effect;
4.2.3 Government Income Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of any provision
of the Articles of Incorporation or By-Laws of Government Income Fund or of
any material agreement, indenture, instrument, contract, lease or other
undertaking to which Government Income Fund is a party or by which
Government Income Fund is bound;
4.2.4 No material litigation or administrative proceeding or investigation
of or before any court or governmental body is presently pending or
threatened against Government Income Fund or any of its properties or
assets, except as previously disclosed in writing to Mortgage Income Fund.
Except as previously disclosed in writing to Mortgage Income Fund,
Government Income Fund knows of no facts that might form the basis for the
institution of such proceedings, and Government Income Fund is not a party
to or subject to the provisions of any order, decree or judgment of any
court or governmental body that materially and adversely affects its
business or its ability to consummate the transactions herein contemplated;
4.2.5 The Portfolio of Investments, Statement of Assets and Liabilities,
Statement of Operations, Statement of Changes in Net Assets, and Financial
Highlights of Government Income Fund at February 28, 1998, and for the
fiscal year then ended and the Notes thereto (copies of which have been
furnished to Mortgage Income Fund) have been audited by
PricewaterhouseCoopers LLP, independent accountants, in accordance with
generally accepted auditing standards. Such financial statements are
prepared in accordance with generally accepted accounting principles and
present fairly, in all material
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respects, the financial condition, results of operations, changes in net
assets and financial highlights of Government Income Fund as of and for the
period ended on such date, and there are no material known liabilities of
Government Income Fund (contingent or otherwise) not disclosed therein;
4.2.6 Since February 28, 1998, there has not been any material adverse
change in Government Income Fund's financial condition, assets, liabilities
or business other than changes occurring in the ordinary course of business,
or any incurrence by Government Income Fund of indebtedness maturing more
than one year from the date such indebtedness was incurred, except as
otherwise disclosed to and accepted by Mortgage Income Fund. For the
purposes of this paragraph, a decline in net asset value per share or a
decrease in the number of shares outstanding shall not constitute a material
adverse change;
4.2.7 At the date hereof and at the Closing Date, all federal and other tax
returns and reports of Government Income Fund required by law to have been
filed on or before such dates shall have been filed, and all federal and
other taxes shown as due on said returns and reports shall have been paid
insofar as due, or provision shall have been made for the payment thereof,
and, to the best of Government Income Fund's knowledge, all federal or other
taxes required to be shown on any such return or report are shown on such
return or report, no such return is currently under audit and no assessment
has been asserted with respect to such returns;
4.2.8 For each past taxable year since it commenced operations, Government
Income Fund has met the requirements of Subchapter M of the Internal Revenue
Code for qualification and treatment as a regulated investment company and
has elected to be treated as such and Government Income Fund intends to meet
those requirements for the current taxable year; and, for each past calendar
year since it commenced operations, Government Income Fund has made such
distributions as are necessary to avoid the imposition of federal excise tax
or has paid or provided for the payment of any excise tax imposed;
4.2.9 All issued and outstanding shares of Government Income Fund are, and
at the Closing Date will be, duly and validly authorized, issued and
outstanding, fully paid and non-assessable. Except as contemplated by this
Agreement, Government Income Fund does not have outstanding any options,
warrants or other rights to subscribe for or purchase any of its shares nor
is there outstanding any security convertible into any of its shares, except
for the Class B shares which have a conversion feature described in
Government Income Fund's Prospectus dated April 30, 1998;
4.2.10 The execution, delivery and performance of this Agreement has been
duly authorized by the Board of Directors of Government Income Fund and by
all necessary corporate action on the part of Government Income Fund, and
this Agreement constitutes a valid and binding obligation of Government
Income Fund;
4.2.11 The shares of Government Income Fund to be issued and delivered to
Mortgage Income Fund pursuant to this Agreement will, at the Closing Date,
have been duly authorized and, when issued and delivered as provided in this
Agreement, will be duly and validly issued and outstanding shares of
Government Income Fund, fully paid and non-assessable;
4.2.12 The information furnished and to be furnished by Government Income
Fund for use in applications for orders, registration statements, proxy
materials and other documents which may be necessary in connection with the
transactions contemplated hereby is and shall be accurate and complete in
all material respects and is and shall comply in all material respects with
applicable federal securities and other laws and regulations; and
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4.2.13 On the effective date of the Registration Statement, at the time of
the meeting of the shareholders of Mortgage Income Fund and on the Closing
Date, the Proxy Statement and the Registration Statement (i) will comply in
all material respects with the provisions of the 1933 Act, the 1934 Act and
the Investment Company Act and the rules and regulations under such Acts,
(ii) will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading and (iii) with respect to the Registration
Statement, at the time it becomes effective, it will not contain an untrue
statement of a material fact or omit to state a material fact necessary to
make the statements therein in the light of the circumstances under which
they were made, not misleading; provided, however, that the representations
and warranties in this paragraph 4.2.13 shall not apply to statements in or
omissions from the Proxy Statement and the Registration Statement made in
reliance upon and in conformity with information furnished by Mortgage
Income Fund for use therein.
5. COVENANTS OF GOVERNMENT INCOME FUND AND MORTGAGE INCOME FUND
5.1 Mortgage Income Fund and Government Income Fund each covenants to operate
its respective business in the ordinary course between the date hereof and the
Closing Date, it being understood that the ordinary course of business will
include declaring and paying customary dividends and other distributions and
such changes in operations as are contemplated by the normal operations of the
Funds, except as may otherwise be allowed by paragraph 1.2 hereof or required by
paragraph 1.4 hereof.
5.2 Mortgage Income Fund covenants to call a meeting of its shareholders to
consider and act upon this Agreement and to take all other action necessary to
obtain approval of the transactions contemplated hereby (including the
determinations of its Directors as set forth in Rule 17a-8(a) under the
Investment Company Act).
5.3 Mortgage Income Fund covenants that Government Income Fund shares to be
received for and on behalf of Mortgage Income Fund in accordance herewith are
not being acquired for the purpose of making any distribution thereof other than
in accordance with the terms of this Agreement.
5.4 Mortgage Income Fund covenants that it will assist Government Income Fund
in obtaining such information as Government Income Fund reasonably requests
concerning the beneficial ownership of Mortgage Income Fund's shares.
5.5 Subject to the provisions of this Agreement, each Fund will take, or cause
to be taken, all action, and will do, or cause to be done, all things,
reasonably necessary, proper or advisable to consummate and make effective the
transactions contemplated by this Agreement.
5.6 Mortgage Income Fund covenants to prepare the Proxy Statement in compliance
with the 1934 Act, the Investment Company Act and the rules and regulations
under each Act.
5.7 Mortgage Income Fund covenants that it will, from time to time, as and when
requested by Government Income Fund, execute and deliver or cause to be executed
and delivered all such assignments and other instruments, and will take or cause
to be taken such further action, as Government Income Fund may deem necessary or
desirable in order to vest in and confirm to Government Income Fund title to and
possession of all the assets of Mortgage Income Fund to be sold, assigned,
transferred and delivered hereunder and otherwise to carry out the intent and
purpose of this Agreement.
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5.8 Government Income Fund covenants to use all reasonable efforts to obtain
the approvals and authorizations required by the 1933 Act, the Investment
Company Act (including the determinations of its Board of Directors as set forth
in Rule 17a-8(a) thereunder) and such of the state Blue Sky or securities laws
as it may deem appropriate in order to continue its operations after the Closing
Date.
5.9 Government Income Fund covenants that it will, from time to time, as and
when requested by Mortgage Income Fund, execute and deliver or cause to be
executed and delivered all such assignments and other instruments, and will take
and cause to be taken such further action, as Government Income Fund may deem
necessary or desirable in order to (i) vest in and confirm to the Mortgage
Income Fund title to and possession of all the shares of Government Income Fund
to be transferred to the shareholders of Mortgage Income Fund pursuant to this
Agreement and (ii) assume all of the liabilities of Mortgage Income Fund in
accordance with this Agreement.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF MORTGAGE INCOME FUND
The obligations of Mortgage Income Fund to consummate the transactions
provided for herein shall be subject to the performance by Government Income
Fund of all the obligations to be performed by them hereunder on or before the
Closing Date and the following further conditions:
6.1 All representations and warranties of Government Income Fund contained in
this Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transaction contemplated by
this Agreement, as of the Closing Date with the same force and effect as if made
on and as of the Closing Date.
6.2 Government Income Fund shall have delivered to Mortgage Income Fund on the
Closing Date a certificate executed in its name by the President or a Vice
President of Government Income Fund, in form and substance satisfactory to
Mortgage Income Fund and dated as of the Closing Date, to the effect that the
representations and warranties of Government Income Fund in this Agreement are
true and correct at and as of the Closing Date, except as they may be affected
by the transaction contemplated by this Agreement, and as to such other matters
as Mortgage Income Fund shall reasonably request.
6.3 Mortgage Income Fund shall have received on the Closing Date a favorable
opinion from Swidler Berlin Shereff Friedman, LLP, counsel to Government Income
Fund, dated as of the Closing Date, to the effect that:
6.3.1 Government Income Fund is a corporation duly organized and validly
existing under the laws of the State of Maryland with power under its
Articles of Incorporation to own all of its properties and assets and, to
the knowledge of such counsel, to carry on its business as presently
conducted;
6.3.2 This Agreement has been duly authorized, executed and delivered by
Government Income Fund and, assuming due authorization, execution and
delivery of the Agreement by Mortgage Income Fund, is a valid and binding
obligation of Government Income Fund enforceable in accordance with its
terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity principles;
6.3.3 The shares of the Government Income Fund to be distributed to the
shareholders of Mortgage Income Fund under this Agreement, assuming their
due authorization, execution and delivery as contemplated by this Agreement,
will be validly issued and outstanding and fully paid and non-assessable,
and no shareholder of Government Income Fund has any pre-emptive right to
subscribe therefor or purchase such shares;
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6.3.4 The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, (i) conflict
with Government Income Fund's Declaration of Trust or By-Laws or (ii) result
in a default or a breach of (a) the Management Agreement dated July 1, 1988
between Government Income Fund and Prudential Investments Fund Management
LLC, as successor to Prudential Mutual Fund Management, Inc., (b) the
Custodian Contract dated July 31, 1990 between Government Income Fund and
State Street Bank and Trust Company, (c) the Distribution Agreement dated
April 10, 1996 between Government Income Fund and Prudential Securities
Incorporated and (d) the Transfer Agency and Service Agreement dated January
1, 1990 between Government Income Fund and Prudential Mutual Fund Services
LLC, as successor to Prudential Mutual Fund Services, Inc.; provided,
however, that such counsel may state that they express no opinion as to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors'
rights and to general equity principles;
6.3.5 To the knowledge of such counsel, no consent, approval,
authorization, filing or order of any court or governmental authority is
required for the consummation by Government Income Fund of the transactions
contemplated herein, except such as have been obtained under the 1933 Act,
the 1934 Act and the Investment Company Act and such as may be required
under state Blue Sky or securities laws;
6.3.6 Government Income Fund is registered with the SEC as an investment
company, and, to the knowledge of such counsel, no order has been issued or
proceeding instituted to suspend such registration; and
6.3.7 Such counsel knows of no litigation or government proceeding
instituted or threatened against Government Income Fund that could be
required to be disclosed in its registration statement on Form N-1A and is
not so disclosed.
Such opinion may rely on an opinion of Maryland Counsel to the extent it
addresses Maryland law.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF GOVERNMENT INCOME FUND
The obligations of Government Income Fund to complete the transactions
provided for herein shall be subject to the performance by Mortgage Income Fund
of all the obligations to be performed by it hereunder on or before the Closing
Date and the following further conditions:
7.1 All representations and warranties of Mortgage Income Fund contained in
this Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transaction contemplated by
this Agreement, as of the Closing Date with the same force and effect as if made
on and as of the Closing Date.
7.2 Mortgage Income Fund shall have delivered to Government Income Fund on the
Closing Date a statement of the assets and liabilities, which shall be prepared
in accordance with generally accepted accounting principles consistently
applied, together with a list of the portfolio securities of Mortgage Income
Fund showing the adjusted tax base of such securities by lot, as of the Closing
Date, certified by the Treasurer of Mortgage Income Fund.
7.3 Mortgage Income Fund shall have delivered to Government Income Fund on the
Closing Date a certificate executed in its name by its President or one of its
Vice Presidents, in form and substance
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satisfactory to Government Income Fund and dated as of the Closing Date, to the
effect that the representations and warranties of Mortgage Income Fund made in
this Agreement are true and correct at and as of the Closing Date except as they
may be affected by the transaction contemplated by this Agreement, and as to
such other matters as Government Income Fund shall reasonably request.
7.4 On or immediately prior to the Closing Date, Mortgage Income Fund shall
have declared and paid to its shareholders of record one or more dividends
and/or other distributions so that it will have distributed substantially all
(and in any event not less than ninety-eight percent) each of such Fund's
investment company taxable income (computed without regard to any deduction for
dividends paid), net tax-exempt interest income, if any, and realized net
capital gain, if any, of Mortgage Income Fund for all completed taxable years
from the inception of such Fund through December 31, 1997, and for the period
from and after December 31, 1997 through the Closing Date.
7.5 Government Income Fund shall have received on the Closing Date a favorable
opinion from Swidler Berlin Shereff Friedman, LLP, counsel to Mortgage Income
Fund, dated as of the Closing Date, to the effect that:
7.5.1 Mortgage Income Fund is duly organized and validly existing under the
laws of the State of Maryland with power under its Articles of Incorporation
to own all of its properties and assets and, to the knowledge of such
counsel, to carry on its business as presently conducted;
7.5.2 This Agreement has been duly authorized, executed and delivered by
Mortgage Income Fund and constitutes a valid and legally binding obligation
of Mortgage Income Fund enforceable against the assets of such Fund in
accordance with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general
equity principles;
7.5.3 The execution and delivery of the Agreement did not, and the
performance by Mortgage Income Fund of its obligations hereunder will not,
(i) violate Mortgage Income Fund's Articles of Incorporation or By-Laws or
(ii) result in a default or a breach of (a) the Management Agreement, dated
May 2, 1988 between Mortgage Income Fund and Prudential Investments Fund
Management LLC, as successor to Prudential Mutual Fund Management, Inc., (b)
the Custodian Contract dated August 1, 1990 between Mortgage Income Fund and
State Street Bank and Trust Company, (c) the Distribution Agreement dated
May 9, 1996 between Mortgage Income Fund and Prudential Securities
Incorporated and (d) the Transfer Agency and Service Agreement dated January
1, 1990 between Mortgage Income Fund and Prudential Mutual Fund Services
LLC, as successor to Prudential Mutual Fund Services, Inc.; provided,
however, that such counsel may state that insofar as performance by Mortgage
Income Fund of its obligations under this Agreement is concerned they
express no opinion as to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity principles;
7.5.4 All regulatory consents, authorizations and approvals required to be
obtained by Mortgage Income Fund under the federal laws of the United States
and the laws of the State of Maryland for the consummation of the
transactions contemplated by this Agreement have been obtained;
7.5.5 Such counsel knows of no litigation or any governmental proceeding
instituted or threatened against Mortgage Income Fund that would be required
to be disclosed in its Registration Statement on Form N-1A and is not so
disclosed; and
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7.5.6 Mortgage Income Fund is registered with the SEC as an investment
company, and, to the knowledge of such counsel, no order has been issued or
proceeding instituted to suspend such registration.
Such opinion may rely on an opinion of Maryland counsel to the extent it
addresses Maryland law, and may assume for purposes of the opinion given
pursuant to paragraph 7.5.2 that New York law is the same as Illinois law.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF GOVERNMENT INCOME FUND
The obligations of Government Income Fund and Mortgage Income Fund hereunder
are subject to the further conditions that on or before the Closing Date:
8.1 This Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of (a) the Boards of Directors of Government
Income Fund and Mortgage Income Fund, as to the determinations set forth in Rule
17a-8(a) under the Investment Company Act, (b) the Board of Directors of
Government Income Fund as to the assumption by Government Income Fund of the
liabilities of Mortgage Income Fund and (c) the holders of the outstanding
shares of Mortgage Income Fund in accordance with the provisions of Mortgage
Income Fund's Articles of Incorporation and By-Laws, and certified copies of the
resolutions evidencing such approvals shall have been delivered to Government
Income Fund and Mortgage Income Fund, as applicable.
8.2 Any proposed change to Government Income Fund's operations that may be
approved by the Board of Directors of Government Income Fund subsequent to the
date of this Agreement but in connection with and as a condition to implementing
the transactions contemplated by this Agreement, for which the approval of
Government Income Fund shareholders is required pursuant to the Investment
Company Act or otherwise, shall have been approved by the requisite vote of the
holders of the outstanding shares of Government Income Fund in accordance with
the Investment Company Act and the provisions of Maryland law, and certified
copies of the resolution evidencing such approval shall have been delivered to
Mortgage Income Fund.
8.3 On the Closing Date no action, suit or other proceeding shall be pending
before any court or governmental agency in which it is sought to restrain or
prohibit, or obtain damages or other relief in connection with, this Agreement
or the transactions contemplated herein.
8.4 All consents of other parties and all consents, orders and permits of
federal, state and local regulatory authorities (including those of the SEC and
of state Blue Sky or securities authorities, including "no-action" positions of
such authorities) deemed necessary by Government Income Fund or Mortgage Income
Fund to permit consummation, in all material respects, of the transactions
contemplated hereby shall have been obtained, except where failure to obtain any
such consent, order or permit would not involve a risk of a material adverse
effect on the assets or properties of Government Income Fund or Mortgage Income
Fund, provided, that either party hereto may for itself waive any part of this
condition.
8.5 The Registration Statement shall have become effective under the 1933 Act,
and no stop order suspending the effectiveness thereof shall have been issued,
and to the best knowledge of the parties hereto, no investigation or proceeding
under the 1933 Act for that purpose shall have been instituted or be pending,
threatened or contemplated.
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8.6 The Funds shall have received on or before the Closing Date an opinion of
Swidler Berlin Shereff Friedman, LLP with respect to Mortgage Income Fund
satisfactory to each of them, substantially to the effect that for federal
income tax purposes:
8.6.1 The acquisition by Government Income Fund of the assets of Mortgage
Income Fund solely in exchange for voting shares of Government Income Fund
and the assumption by Government Income Fund of Mortgage Income Fund's
liabilities, if any, followed by the distribution of Government Income
Fund's voting shares as a liquidating distribution pro rata to Mortgage
Income Fund's shareholders and the termination of Mortgage Income Fund
pursuant to the Plan and constructively in exchange for Mortgage Income
Fund's shares, will constitute a reorganization within the meaning of
Section 368(a)(1)(C) of the Internal Revenue Code, and each Fund will be "a
party to a reorganization" within the meaning of Section 368(b) of the
Internal Revenue Code;
8.6.2 No gain or loss will be recognized by the shareholders of the
Mortgage Income Fund upon receipt of the Government Income Fund Class A,
Class B, Class C and Class Z shares solely in exchange for and in
cancellation of the Mortgage Income Fund shares of Common Stock, as
described above and in the Agreement;
8.6.3 No gain or loss will be recognized to the Mortgage Income Fund upon
the transfer of all of its assets to the Government Income Fund solely in
exchange for Class A, Class B, Class C and Class Z shares of the Government
Income Fund and the assumption by the Government Income Fund of the
liabilities, if any, of the Mortgage Income Fund. In addition, no gain or
loss will be recognized to the Mortgage Income Fund on the distribution of
such shares to the Mortgage Income Fund's shareholders in liquidation by
terminating the Mortgage Income Fund;
8.6.4 No gain or loss will be recognized to Government Income Fund upon the
acquisition of the assets of the Mortgage Income Fund solely in exchange for
Class A shares of the Government Income Fund and the assumption of the
Mortgage Income Fund's liabilities, if any;
8.6.5 The basis of the Mortgage Income Fund assets in the hands of the
Government Income Fund will be the same as the basis of such assets in the
hands of the Mortgage Income Fund immediately prior to the Reorganization;
8.6.6 The holding period of the Mortgage Income Fund assets in the hands of
the Government Income Fund will include the period during which such assets
were held by the Mortgage Income Fund immediately prior to the
Reorganization;
8.6.7 The basis of the Government Income Fund Class A, Class B, Class C and
Class Z shares to be received by shareholders of the Mortgage Income Fund
will, in each instance, be the same as the basis of the Class A, Class B,
Class C and Class Z shares of beneficial interest of the Mortgage Income
Fund held by such shareholders and canceled in the Reorganization; and
8.6.8 The holding period of the Government Income Fund shares to be
received by the shareholders of the Mortgage Income Fund will include the
holding period of the shares of Common Stock of the Mortgage Income Fund
canceled pursuant to the Reorganization, provided that the Government Income
Fund shares were held as capital assets on the date of the Reorganization.
9. FINDER'S FEES AND EXPENSES
9.1 Each Fund represents and warrants to the other that there are no finder's
fees payable in connection with the transactions provided for herein.
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9.2 The expenses incurred in connection with the entering into and carrying out
of the provisions of this Agreement shall be allocated to Government Income Fund
and Mortgage Income Fund pro rata in a fair and equitable manner in proportion
to its assets.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 This Agreement constitutes the entire agreement between the Funds.
10.2 The representations, warranties and covenants contained in this Agreement
or in any document delivered pursuant hereto or in connection herewith shall
survive the consummation of the transactions contemplated hereunder.
11. TERMINATION
Government Income Fund or Mortgage Income Fund may at its option terminate
this Agreement at or prior to the Closing Date because of:
11.1 A material breach by the other of any representation, warranty or covenant
contained herein to be performed at or prior to the Closing Date; or
11.2 A condition herein expressed to be precedent to the obligations of either
party not having been met and it reasonably appearing that it will not or cannot
be met; or
11.3 A mutual written agreement of Mortgage Income Fund and Government Income
Fund.
In the event of any such termination, there shall be no liability for
damages on the part of either Fund (other than the liability of the Funds to pay
their allocated expenses pursuant to paragraph 9.2) or any Director or officer
of either Government Income Fund or Mortgage Income Fund.
12. AMENDMENT
This Agreement may be amended, modified or supplemented only in writing by
the parties; provided, however, that following the shareholders' meeting called
by Mortgage Income Fund pursuant to paragraph 5.2, no such amendment may have
the effect of changing the provisions for determining the number of shares of
Government Income Fund to be distributed to Mortgage Income Fund's shareholders
under this Agreement to the detriment of such shareholders without their further
approval.
13. NOTICES
Any notice, report, demand or other communication required or permitted by
any provision of this Agreement shall be in writing and shall be given by hand
delivery, or prepaid certified mail or overnight service addressed to Prudential
Investments Fund Management LLC, Gateway Center Three, 100 Mulberry Street,
Newark, New Jersey 07102, Attention: S. Jane Rose.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT
14.1 The paragraph headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
14.2 This Agreement may be executed in any number of counterparts, each of
which will be deemed an original.
14.3 This Agreement shall be governed by and construed in accordance with the
laws of the State of New York.
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14.4 This Agreement shall bind and inure to the benefit of the parties and
their respective successors and assigns, and no assignment or transfer hereof or
of any rights or obligations hereunder shall be made by either party without the
written consent of the other party. Nothing herein expressed or implied is
intended or shall be construed to confer upon or give any person, firm or
corporation other than the parties and their respective successors and assigns
any rights or remedies under or by reason of this Agreement.
15. NO PERSONAL LIABILITY
Each Fund's Articles of Incorporation provides that no shareholder of the
Fund shall be subject to any personal liability whatsoever to any person in
connection with the Fund's property, or the acts, obligations or affairs of the
Fund. No Director, officer, employee or agent of the Fund shall be subject to
any personal liability whatsoever to any person, other than the Fund or its
shareholders, in connection with the Fund's property or the affairs of the Fund,
save only that arising from bad faith, willful misfeasance, gross negligence or
reckless disregard of his or its duty to such person; and all persons shall look
solely to the Fund's property for satisfaction of claims of any nature arising
in connection with the affairs of the Fund. If any shareholder, Director,
officer, employee or agent, as such, of the Fund is made a party to any suit or
proceeding to enforce any such liability, he or it shall not, on account
thereof, be held to any personal liability.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed by the President of each Fund.
Prudential Mortgage Income Fund, Inc.
By /s/ Richard A. Redeker
---------------------------------
PRESIDENT
Prudential Government Income Fund, Inc.
By /s/ Richard A. Redeker
---------------------------------
PRESIDENT
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