As filed with the Securities and Exchange Commission on December 31, 1998
Securities Act File No. 33-63943
Investment Company Act File No. 811-4661
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |_|
Pre-Effective Amendment No. |_|
Post-Effective Amendment No. 4 |X|
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 |_|
Amendment No. 12 |X|
(Check appropriate box or boxes)
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THE GLOBAL TOTAL RETURN FUND, INC.
(Exact name of registrant as specified in charter)
GATEWAY CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077
(Address of Principal Executive Offices) (Zip Code)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 367-7525
MARGUERITE E.H. MORRISON, ESQ.
GATEWAY CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077
(Name and Address of Agent for Service of Process)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX):
|_| immediately upon filing pursuant to paragraph (b)
|_| on (date) pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)(1)
|X| on March 1, 1999 pursuant to paragraph (a)(1)
|_| 75 days after filing pursuant to paragraph (a)(2)
|_| on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
|_| this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
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Title of Securities
Being Registered ...............Shares of Common Stock, $.01 par value per share
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<PAGE>
FUND TYPE:
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Global Debt
INVESTMENT OBJECTIVE:
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Total return, made up of
current income and capital
appreciation.
[GRAPHIC OMITTED]
The Global Total
Return Fund, Inc.
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PROSPECTUS: MARCH 1, 1999
As with all mutual funds, the
Securities and Exchange
Commission has not approved the
Fund's shares, nor has the SEC
determined that this prospectus is
complete or accurate. It is a [LOGO] Prudential
criminal offense to state otherwise. Investments
<PAGE>
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TABLE OF CONTENTS
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1 RISK/RETURN SUMMARY
1 Investment Objective and Principal Strategies
1 Principal Risks
2 Evaluating Performance
2 Fees and Expenses
6 HOW THE FUND INVESTS
6 Investment Objective and Policies
7 Other Investments
8 Derivative Strategies
9 Additional Strategies
10 Investment Risks
14 HOW THE FUND IS MANAGED
14 Manager
14 Investment Adviser
14 Portfolio Managers
15 Distributor
15 Year 2000 Readiness Disclosure
16 FUND DISTRIBUTIONS AND TAX ISSUES
16 Distributions
17 Tax Issues
18 If You Sell or Exchange Your Shares
19 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUND
19 How to Buy Shares
26 How to Sell Your Shares
30 How to Exchange Your Shares
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The Global Total Return Fund, Inc. (800) 225-1852
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32 FINANCIAL HIGHLIGHTS
33 Class A Shares
34 Class B Shares
35 Class C Shares
36 Class Z Shares
37 THE PRUDENTIAL MUTUAL FUND FAMILY
FOR MORE INFORMATION (Back Cover)
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RISK/RETURN SUMMARY
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This section highlights key information about THE GLOBAL TOTAL RETURN FUND,
INC., which we refer to as "the Fund." Additional information follows this
summary.
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is to maximize TOTAL RETURN, made up of CURRENT INCOME
and CAPITAL APPRECIATION. We normally invest at least 65% of the Fund's total
assets in income-producing securities of the U.S. and foreign governments,
supranational organizations, semi-governmental entities or governmental
agencies, authorities or instrumentalities and short-term bank debt securities
or bank deposits. We can also invest up to 35% of total assets in other kinds of
income-producing securities. To achieve our income objective, we look for
investment-grade securities (BBB/Baa or above) denominated in U.S. dollars and
foreign currencies. While we make every effort to achieve our objective, we
can't guarantee success.
The Fund may use a variety of hedging strategies to protect the value of
the Funds investments including derivatives and cross-currency hedges.
side bar -----------------------------------------------------------------------
A SUPRANATIONAL ORGANIZATION is formed by the governments of
different countries to promote economic development. The
World Bank, the European Investment Bank and the Asian
Development Bank are supranational entities. Securities of
SEMI-GOVERNMENTAL ENTITIES are issued by organizations owned
by a national or state government or are debts of a
political unit that are not backed by the national
government's credit and taxing power. The Province of
Ontario and the City of Stockholm are examples of
semi-governmental entities.
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PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk.
Since the Fund invests primarily in bonds, there is the risk that interest rates
will go up significantly, which generally causes bond prices to go down. Bonds
with longer maturity dates typically produce higher yields and are subject to
greater price shifts as a result of changes in interest rates than bonds with
shorter maturity dates.
Bond prices and the Fund's net asset value generally move in opposite
directions--if interest rates go up, the prices of the bonds in the Fund's
portfolio may fall because the bonds the Fund holds won't, as a rule, pay as
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1
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RISK/RETURN SUMMARY
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well as the newer bonds issued. Bonds that are issued when interest rates are
high generally increase in value when interest rates fall. There is also the
risk that the borrower will not repay the debt.
Since we invest in foreign securities, there are more risks than if we
invested only in obligations of the U.S. government. The amount of income
available for distribution may be affected by our foreign currency gains or
losses and certain hedging activities. Foreign markets, especially those in
developing countries, tend to be more volatile than U.S. markets and changes in
currency exchange rates can reduce or increase market performance.
The Fund is non-diversified, meaning we can invest more than 5% of our
assets in the securities of any one issuer. Investing in a non-diversified
mutual fund involves greater risk than investing in a diversified fund.
The Fund may use risk management techniques to try to preserve assets or
enhance return. These strategies may present above average risks. Derivatives
may not fully offset the underlying positions and this could result in losses to
the Fund that would not otherwise have occurred.
Some of our investment strategies involve risk. Like any mutual fund, an
investment in the Fund could lose value, and you could lose money. For more
detailed information about the risks associated with the Fund, see "Investment
Risks". The Fund does not represent a complete investment program.
An investment in the Fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
EVALUATING PERFORMANCE
A number of factors--including risk--affect how the Fund performs. The following
bar chart and table show the Fund's performance for each full calendar year of
operation since 1989. They demonstrate the risk of investing in the Fund and how
returns can change from year to year. Past performance does not mean that the
Fund will achieve similar results in the future.
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2 The Global Total Return Fund, Inc. (800) 225-1852
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RISK/RETURN SUMMARY
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ANNUAL RETURN (CLASS A SHARES)(1) (AS PERCENT)
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1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
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BEST QUARTER: ___% (__ quarter of 19__) WORST QUARTER: ___% (__ quarter of 19__)
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1 These annual returns do not include sales charges. If sales charges were
included, the annual returns would be lower than those shown.
AVERAGE ANNUAL RETURN (AS OF 12/31/98)(1)
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1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
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Class A shares --% --% --% --% (since
7-7-86)
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Class B shares --% --% --% --% (since
1-15-96)
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Class C shares --% --% --% --% (since
1-15-96)
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Class Z shares --% --% --% --% (since
3-17-97)
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Morgan GBI(2) % % % n/a
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Lipper Average(3) --% --% --% n/a
1 The Fund's returns are after deduction of sales charges and expenses.
2 The J. P. Morgan Government Bond Index (GBI) is a market weighted index of
the total return of government bonds of the following nations: Australia,
Belgium, Canada, Denmark, France, Germany, Italy, Japan, the Netherlands,
Spain, Sweden, the United Kingdom and the United States. The GBI is an
unmanaged index and is traded, unhedged and measured in U.S. dollars. These
returns do not include the effect of any sales charges. The securities in GBI
may be very different than those in the Fund. These returns would be lower if
they included the effect of sales charges. GBI returns since inception of
each class are _% for Class A, _% for Class B, _% for Class C and _% for
Class Z shares. Source: Lipper, Inc.
3 The Lipper General World Income Average is based on the average return of all
mutual funds in the Lipper General World Income category and does not include
the effect of any sales charges. Again, these returns would be lower if they
included the effect of sales charges. Lipper returns since inception of each
class are _% for Class A, _% for Class B, _% for Class C and _% for Class Z
shares.The Series' returns are after deduction of sales charges and expenses.
Source: Lipper, Inc.
FEES AND EXPENSES
This table shows the sales charges, fees and expenses for each share class of
the Fund--Class A, B, C and Z. Each share class has different sales charges--
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3
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RISK/RETURN SUMMARY
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known as loads--and expenses, but represents an investment in the same fund.
Class Z shares are available only to a limited group of investors. For more
information about which share class may be right for you, see "How to Buy, Sell
and Exchange Shares of the Fund."
SHAREHOLDER FEES(1) (PAID DIRECTLY FROM YOUR INVESTMENT)
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CLASS A CLASS B CLASS C CLASS Z
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Maximum sales charge (load) imposed on 4% None 1% None
purchases (as a percentage of offering
price)
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Maximum deferred sales charge (load) None 5%(2) 1%(3) None
(as a percentage of the lower of
original purchase price or sale
proceeds)
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Maximum sales charge (load) imposed None None None None
on reinvested dividends and other
distributions
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Redemption fees None None None None
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Exchange fee None None None None
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ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS)
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CLASS A CLASS B CLASS C CLASS Z
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Management fees .75% .75% .75% .75%
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+ Distribution and service (12b-1) fees .30%(4) 1.00%(4) 1.00%(4) None
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+ Other expenses --% --% --% --%
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= TOTAL ANNUAL FUND OPERATING EXPENSES --% --% --% --%
1 Your broker may charge you a separate or additional fee for purchases and
sales of shares.
2 The Contingent Deferred Sales Charge (CDSC) for Class B shares decreases by
1% annually to 1% in the fifth and sixth years and 0% in the seventh year.
Class B shares convert to Class A shares approximately seven years after
purchase.
3 The CDSC for Class C shares is 1% for shares redeemed within 18 months of
purchase.
4 The Distributor of the Fund has voluntarily reduced its distribution and
service fees for Class A shares to .15 of 1% of the average daily net assets
of the Class A shares and .75 of 1% of both the Class B and Class C shares.
These voluntary reductions may be terminated at any time without notice. With
these reductions, Total annual Fund operating expenses are __% for Class A
shares and ____% for both Class B and Class C shares.
EXAMPLE
This example will help you compare the fees and expenses of the Fund's different
share classes and compare the cost of investing in the Fund with the cost of
investing in other mutual funds.
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4 The Global Total Return Fund, Inc. (800) 225-1852
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RISK/RETURN SUMMARY
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The example assumes that you invest $10,000 in the Fund for the time
periods indicated and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and that
the Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
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1 YR 3 YRS 5 YRS 10 YRS
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Class A shares $-- $-- $-- $--
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Class B shares $-- $-- $-- $--
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Class C shares $-- $-- $-- $--
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Class Z shares $-- $-- $-- $--
You would pay the following expenses on the same investment if you did not sell
your shares:
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1 YR 3 YRS 5 YRS 10 YRS
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Class A shares $-- $-- $-- $--
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Class B shares $-- $-- $-- $--
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Class C shares $-- $-- $-- $--
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Class Z shares $-- $-- $-- $--
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5
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HOW THE FUND INVESTS
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INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to maximize TOTAL RETURN, made up of CURRENT
INCOME and CAPITAL APPRECIATION. This means we seek investments that will
increase in value, as well as pay the Fund interest and other income. While we
make every effort to achieve our objective, we can't guarantee success.
In pursuing our objective, we normally invest at least 65% of the Fund's
total assets in income-producing securities of the U.S. and foreign governments,
supranational organizations, semi-governmental entities or government agencies,
authorities or instrumentalities and short-term bank debt securities or bank
deposits. We can invest in securities in U.S. dollars and securities in foreign
countries based on U.S. dollars or foreign currencies, although we will
generally limit investments in particular currencies (even U.S. dollars) to 40%
of the Fund's total assets except for the euro. The Fund may invest up to 65% of
its total assets in securities denominated in the euro. As a "global" fund, we
usually invest in issuers from at least three different countries, including the
U.S. We may invest in securities of developing countries, which may be subject
to more abrupt or erratic market movements than those of developed countries.
side bar -----------------------------------------------------------------------
On January 1, 1999, 11 of the 15 member states of the
European Union introduced the "euro" as a common currency.
During a three-year transitional period, the euro will
coexist with each participating states's currency. Beginning
July 1, 2002, the euro is anticipated to become the sole
currency of the participating states. During the transition
period, the Fund will treat the euro as a separate currency
from that of any participating state.
The conversion may adversely affect the Fund if the euro
does not take effect as planned; if a participating state
withdraws from the European Monetary Union; or if the
computing, accounting and trading systems used by the Funds'
service providers, or by entities with which the Fund or its
service providers do business, are not capable of
recognizing the euro as a distinct currency at the time of,
and following, euro conversion. In addition, the conversion
could cause markets to become more volatile.
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We can also invest up to 35% of total assets in corporate debt instruments,
other non-government debt securities and intermediate and long-term bank debt
securities. The Fund can invest up to 10% of its total assets in "stripped
securities" (that is, securities where the principal or a
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6 The Global Total Return Fund, Inc. (800) 225-1852
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HOW THE FUND INVESTS
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scheduled interest payment are sold in separate parts) of U.S. and foreign
government debt securities.
Most of the Fund's debt securities are "investment grade." This means major
rating services, like Standard & Poor's Ratings Group ("S&P") or Moody's
Investors Service, Inc. ("Moody's"), have rated the securities within one of
their four highest quality grades. Up to 10% of the Fund's total assets may be
invested in lower rated securities, which are riskier and considered
"speculative." These high-yield or "junk" bonds, will have a minimum rating of B
by Moody's or S&P or another major rating service at the time they are
purchased. The Fund may continue to hold such a security if it is subsequently
downgraded below B or is no longer rated by a major rating service. We may also
invest in obligations that are not rated, but that we believe are of comparable
quality to the obligations described above.
The Fund has a weighted average maturity of not more than 10 years and we
normally don't buy securities with a remaining maturity of more than 10 years.
The maturity of a bond is simply the number of years until the principal is due
and payable. Weighted average maturity is calculated by adding the maturities of
all of the bonds in a portfolio and dividing by the number of bonds on a
weighted basis.
The Fund may also use a variety of "hedging" strategies intended to protect
the value of the Fund's securities rather than to make a profit. These may
include derivative transactions and cross-currency hedges which are described in
more detail in the Fund's Statement of Additional Information.
For more information about this Fund and its investments, see "Investment
Risks" below and the Statement of Additional Information, "Description of the
Fund, Its Investments and Risks." The Statement of Additional Information--which
we refer to as the SAI--contains additional information about the Fund. To
obtain a copy, see the back cover page of this prospectus.
The Fund's investment objective is a fundamental policy that cannot be
changed without shareholder approval. The Board of the Fund can change
investment policies that are not fundamental.
OTHER INVESTMENTS
We may also use the following investment strategies to increase the Fund's
returns or protect its assets if market conditions warrant.
TEMPORARY DEFENSIVE INVESTMENTS AND CASH MANAGEMENT
In response to adverse market, economic or political conditions or for cash
management, we may temporarily invest up to 100% of the Fund's assets in
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7
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HOW THE FUND INVESTS
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U.S. Treasury or other U.S. dollar-denominated securities or high quality money
market instruments, including commercial paper of domestic and foreign
corporations, certificates of deposit, bankers' acceptances and other
obligations of domestic and foreign banks and short-term obligations issued or
guaranteed by the U.S. Government and its agencies. Investing heavily in these
securities limits our ability to achieve capital appreciation but can help to
preserve the Fund's assets when the bond markets are volatile.
ZERO COUPON SECURITIES
We can invest in ZERO COUPON SECURITIES. These are bonds that are sold for a
price that is less than their stated value. Interest payments on a zero coupon
bond are not made during the life of the bond, but at the bond's maturity the
holder gets the bond's stated value. The difference between the price paid for
the bond and the amount paid to the holder at the bond's maturity is the
holder's return. These types of securities may experience greater fluctuation in
value and less liquidity than similarly rated bonds that pay interest at regular
intervals.
ADJUSTABLE/FLOATING RATE SECURITIES
The Fund can invest in adjustable or floating rate securities whose interest
rate is calculated by reference to a specific index and is reset
periodically.The value of adjustable or floating rate securities does not
respond as quickly to changing interest rates as do fixed rate securities.
REPURCHASE AGREEMENTS
The Fund may also use REPURCHASE AGREEMENTS, where a party agrees to sell a
security to the Fund and then repurchase it at an agreed-upon price at a stated
time. This creates a fixed return for the Fund.
DERIVATIVE STRATEGIES
We may use alternative investment strategies--including DERIVATIVES--to try to
improve the Fund's returns or protect its assets, although we cannot guarantee
these strategies will work, that the instruments necessary to implement these
strategies will be available or that the Fund will not lose money.
Derivatives--such as futures, options, foreign currency forward contracts
and options on futures--involve costs and can be volatile. With derivatives, the
investment adviser tries to predict whether the underlying investment--a
security, market index, currency, interest rate or some other investment--will
go up or down at some future date. We may use derivatives to try to reduce risk
or to increase return consistent with the Fund's overall investment objective.
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8 The Global Total Return Fund, Inc. (800) 225-1852
<PAGE>
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HOW THE FUND INVESTS
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The investment adviser will consider other factors (such as cost) in deciding
whether to employ any particular strategy or use any particular instrument. Any
derivatives we may use may not match the Fund's underlying holdings.
Because we are a global fund and invest in securities denominated in
difference foreign currencies, we may use "currency hedges". Currency hedges can
help protect the Fund's NAV from declining if a particular foreign currency were
to decrease in value compared to the U.S. dollar.
The Fund may invest without limit in commercial paper and other instruments
that are "indexed" to certain specific foreign currency exchange rates. This
means that the instrument's principal amount is adjusted upwards or downwards
(but not below zero) to reflect changes in the exchange rate between two
currencies from the time the instrument is outstanding until it matures. When
the Fund purchases one of these instruments, it pays with the currency in which
the instrument is denominated and, at maturity, it receives interest and
principal payments in the same currency. These instruments offer the potential
for realizing gains as a result of changes in foreign currency exchange rates
that can be used to hedge (or cross-hedge) against a decline in the U.S. dollar
value of the investments while providing an attractive money market rate of
return.
For more information about these strategies, see the SAI, "Description of
the Fund, Its Investments and Risks--Risk Management and Return Enhancement
Strategies."
ADDITIONAL STRATEGIES
The Fund also follows certain policies when it: BORROWS MONEY (the Fund can
borrow up to 20% of the value of its total assets) and holds ILLIQUID SECURITIES
(the Fund may hold up to 15% of its net assets in illiquid securities, including
securities with legal or contractual restrictions, those without a readily
available market and repurchase agreements with maturities longer than seven
days). The Fund is "NON-DIVERSIFIED," meaning it can invest more than 5% of its
assets in the securities of any one issuer. The Fund is subject to certain
investment restrictions that are fundamental policies, which means they cannot
be changed without shareholder approval. For more information about these
restrictions, see the SAI.
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9
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HOW THE FUND INVESTS
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INVESTMENT RISKS
As noted, all investments involve risk, and investing in the Fund is no
exception. This chart outlines the key risks and potential rewards of the Fund's
principal investments. See, too, "Description of the Fund, it's Investments and
Risks" in the SAI.
INVESTMENT TYPE
% OF FUND'S ASSETS RISKS POTENTIAL REWARDS
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INCOME-PRODUCING o The Fund's share price, o Bonds have
SECURITIES yield and total return generally outperformed
will fluctuate in money market
At least 65% of total response to bond market instruments over the
assets movements. long term with less
risks than stocks.
o Credit risk--the
default of an issuer o Most bonds will
would leave the Fund rise in value when
with unpaid interest interest rates fall.
or principal
o Regular interest
o Market risk--the risk income
that bonds and toher
debt instruments may o Generally more
lose value in the secure than stock since
market because there companies must pay
is a lack of confidence their debts before
in the borrower paying stockholders
o Interest rate risk--the o Investment grade
value of most bonds bonds have a lower risk
will fall when of default
interest rates rise,
the longer a bond's o Principal and
maturity and the lower interest on government
its credit quality, securities may be
the more its value guaranteed by the
typically falls. It issuing government
can lead to price
volatility, o Junk bonds offer
particularly for junk higher yields and
bonds and stripped higher potential gains.
securities
o As a non-diversified
fund, we will have
greater exposure to
loss from a single issuer
o Not all government
securities are insured
or guaranteed by the
government but only by
the issuing agency
o Junk bonds (rated BB/Ba
or lower) have a
higher risk of default,
tend to be less liquid
and may be more
difficult to value.
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10 The Global Total Return Fund, Inc. (800) 225-1852
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HOW THE FUND INVESTS
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INVESTMENT TYPE
% OF FUNDS' ASSETS RISKS POTENTIAL REWARDS
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FOREIGN SECURITIES o Foreign markets o Investors can
economies participate in
Percentage varies political systems the growth of
may not be as stable foreign markets and
as in the U.S., companies operating
particularly those in in those markets
developing countries
o Changing value of
o Currency risk--changing foreign currencies
values of foreign
currencies o Opportunities for
diversification
o Debt securities
issued by
supranational
organizations or
semi-governmental
issuers may be backed
by limited assets in
the event of default
o May be less
liquid than U.S.
stocks and bonds
o Differences in
foreign laws,
accounting standards,
public information,
custody and
settlement practices
o Year 2000 conversion may
be more of a problem for
some foreign issuers
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11
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HOW THE FUND INVESTS
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INVESTMENT TYPE
% OF FUNDS' ASSETS RISKS POTENTIAL REWARDS
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DERIVATIVES o Derivatives o The Fund could
such as futures, make money and protect
Percentage Varies options and foreign against losses if the
currency forward investment analysis
contracts may not proves correct
fully offset the
underlying positions o Derivatives that
and this could result involve leverage could
in losses to the Fund generate substantial
that would gains at low cost
not have otherwise
occurred* o One way to
manage the Fund's
o Derivatives risk/return balance is
used for risk by locking in the
management may not value of an investment
have the intended ahead of time
effects and may
result in losses o May be used to
or missed hedge against changes
opportunities in currency exchange
rates
o The other party
to a derivatives
contract could default
o Derivatives
that involve leverage
could magnify losses
o Certain types
of derivatives
involve costs to the
Fund that can reduce
returns
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ILLIQUID SECURITIES o May be difficult o May offer a more
to value precisely attractive yield or
Up to 15% of potential for growth
net assets o May be difficult than more widely
to sell at the time traded securities
or price desired
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MONEY MARKET o Limits o May preserve the
INSTRUMENTS potential for capital Fund's assets
appreciation
up to 100% on a
temporary basis o See Credit risk
and Market risk
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12 The Global Total Return Fund, Inc. (800) 225-1852
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HOW THE FUND INVESTS
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INVESTMENT TYPE
% OF FUND'S ASSETS RISKS POTENTIAL REWARDS
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ZERO COUPON BONDS o Generates o May lock in a
"phantom income" for higher rate of return
up to 10% of net assets the Fund for tax than is available in
purposes although no the market place at
income is paid time of maturity.
o Typically subject to
greater volatility and
less liquidity in
adverse markets than
other income producing
securities
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ADJUSTABLE/FLOATING o Value lags o Can take
RATE SECURITIES value of fixed rate advantage of rising
securities when interest rates
Percentage varies interest rates change
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* An option is the right to buy or sell securities in exchange for a premium. A
futures contract is an agreement to buy or sell a set quantity of an
underlying product at a future date, or to make or receive a cash payment
based on the value of a securities index. A foreign currency forward contract
is an obligation to buy or sell a given currency on a future date and at a
set price.
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13
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HOW THE FUND IS MANAGED
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MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM)
GATEWAY CENTER THREE, 100 MULBERRY STREET
NEWARK, NJ 07102-4077
Under a management agreement with the Fund, PIFM manages the Fund's
investment operations and administers its business affairs. For the fiscal year
ended December 31, 1998, the Fund paid PIFM management fees of .75% of the
Fund's average net assets.
As of January 31, 1999, PIFM served as the Manager to all __ of the
Prudential Mutual Funds, and as Manager or administrator to __ closed-end
investment companies, with aggregate assets of approximately $__ billion.
INVESTMENT ADVISER
The Prudential Investment Corporation, called Prudential Investments, is the
Fund's investment adviser. Its address is Prudential Plaza, 751 Broad Street,
Newark, NJ 07102. Prudential Investments has entered into a service agreement
with PRICOA Asset Management Ltd. (PRICOA), s subsidiary of The Prudential
Insurance Company of America, for the provision of investment advisory services
to the Fund and compensates PRICOA for its reasonable costs and expenses in
providing such services. PIFM has responsibility for all investment advisory
services, supervises Prudential Investments and reimburses Prudential
Investments for its reasonable costs and expenses.
PRICOA, an indirect wholly-owned subsidiary of Prudential, is located at
Cutlers Court, 100 Piccadilly, London W1V9FN England. It was incorporated under
U.K. law in January 1997 and as of December 31, 1998 had approximately $__
billion under management.
PORTFOLIO MANAGERS
The Fund is managed by J. Gabriel Irwin and Simon Wells, who head the Global
Fixed Income Group of Prudential Investments. Messrs. Irwin and Wells have
managed the Fund since April 1995. Messrs. Irwin and Wells have been officers of
PRICOA since August 1997 and have been employed by Prudential Investments and
Prudential-Bache Securities (U.K.) Inc. since April 1995. Previously, they were
employed by Smith Barney Global Capital Management Inc., where they worked
together as Directors and Senior members of the Investment Policy Committee.
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14 The Global Total Return Fund, Inc. (800) 225-1852
<PAGE>
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HOW THE FUND IS MANAGED
- --------------------------------------------------------------------------------
DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS) distributes the Fund's
shares under a Distribution Agreement with the Fund. The Fund has Distribution
and Service Plans under Rule 12b-1 of the Investment Company Act. Under the
Plans and the Distribution Agreement, PIMS pays the expenses of distributing the
Fund's Class A, B, C and Z shares and provides certain shareholder support
services. The Fund pays distribution and other fees to PIMS as compensation for
its services for each class of shares other than Class Z. These fees--known as
12b-1 fees--are shown in the "Fees and Expenses" table.
YEAR 2000 READINESS DISCLOSURE
Many computer systems used today cannot distinguish the year 2000 from the year
1900 because of the way dates are encoded. This could be a problem when the year
2000 arrives and could affect securities trades, interest and dividend payments,
pricing and account services. Although we cannot guarantee that this will not be
a problem, the Fund's service providers have been working on adapting their
computer systems. They expect that their systems, and the systems of their
service providers, will be ready for the year 2000.
In addition, issuers of securities may also encounter year 2000 compliance
problems. If these problems are significant and are not corrected, securities
markets could go down or issuers could have poor performance. If the Fund owns
these securities, then it is possible that the Fund could lose money.
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15
<PAGE>
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FUND DISTRIBUTIONS AND TAX ISSUES
- --------------------------------------------------------------------------------
Investors who buy shares of the Fund should be aware of some important tax
issues. For example, the Fund distributes DIVIDENDS of ordinary income and any
realized net CAPITAL GAINS to shareholders. These distributions are subject to
taxes, unless you hold your shares in a 401(k) plan, an Individual Retirement
Account (IRA) or some other qualified tax-deferred plan or account.
Also, if you sell shares of the Fund for a profit, you may have to pay
capital gains taxes on the amount of your profit, again unless you hold your
shares in a qualified tax-deferred plan or account.
The following briefly discusses some of the important federal tax issues
you should be aware of, but is not meant to be tax advice. For tax advice,
please speak with your tax adviser.
DISTRIBUTIONS
The Fund distributes DIVIDENDS of any net investment income to shareholders,
typically every quarter. For example, if the Fund owns Utopia Government bonds
and the bond pays income, the Fund will pay out a portion of this income to its
shareholders, assuming the Fund's income is more than its costs and expenses.
The dividends you receive from the Fund will be taxed as ordinary income,
whether or not they are reinvested in the Fund.
The Fund also distributes realized net CAPITAL GAINS to shareholders
- --typically once a year--which are generated when the Fund sells its assets for
a profit. For example, if the Fund bought 100 shares of ACME Corp. stock for a
total of $1,000 and more than one year later sold the shares for a total of
$1,500, the Fund has net long-term capital gains of $500, which it will pass on
to shareholders (assuming the Fund's total gains are greater than any losses it
may have). Capital gains are taxed differently depending on how long the Fund
holds the security--if a security is held more than one year before it is sold,
LONG-TERM capital gains are taxed at the rate of 20%, but if the security is
held one year or less, SHORT-TERM capital gains are taxed at rates up to 39.6%.
Different rates apply to corporate shareholders.
For your convenience, Fund distributions of dividends and capital gains are
AUTOMATICALLY REINVESTED in the Fund without any sales charge. If you ask us to
pay the distributions in cash, we will send you a check if your account is with
the Transfer Agent. Otherwise, if your account is with a broker you will receive
a credit to your account. Either way, the distributions may be subject to taxes,
unless your shares are held in a qualified tax-deferred plan or account. For
more information about automatic reinvestment and other shareholder services,
see "Step 4: Additional Shareholder Services" in the next section.
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16 The Global Total Return Fund, Inc. (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
FUND DISTRIBUTIONS AND TAX ISSUES
- --------------------------------------------------------------------------------
TAX ISSUES
FORM 1099
Every year, you will receive a Form 1099, which reports the amount of dividends
and capital gains we distributed to you during the prior year. If you own shares
of the Fund as part of a qualified tax-deferred plan or account, your taxes are
deferred, so you will not receive a Form 1099. However, you will receive a Form
1099 when you take any distributions from your qualified tax-deferred plan or
account.
Fund distributions are generally taxable to you in the year they are
received, except when we declare certain dividends in the fourth quarter and
actually pay them in January of the following year. In such cases, the dividends
are treated as if they were paid on December 31 of the prior year. Corporate
shareholders are eligible for the 70% dividends-received deduction for certain
dividends.
WITHHOLDING TAXES
If you are subject to backup withholding, we will withhold and pay to the U.S.
Treasury 31% of your distributions, or, if federal tax law requires you to
provide the Fund with your tax identification number and certifications as to
your tax status, and you fail to do this, we will withhold and pay to the U.S.
Treasury 31% of your distributions and sale proceeds. Dividends of net
investment income and short-term capital gains paid to a nonresident foreign
shareholder generally will be subject to a U.S. withholding tax of 30%. This
rate may be lower, depending on any tax treaty the U.S. may have with the
shareholder's country.
IF YOU PURCHASE JUST BEFORE RECORD DATE
If you buy shares of the Fund just before the record date (the date that
determines who receives the distribution), that distribution will be paid to
you. As explained above, the distribution may be subject to income or capital
gains taxes. You may think you've done well, since you bought shares one day,
and soon after received a distribution. That is not so because when dividends
are paid out, the value of each share of the Fund decreases by the amount of the
dividend and the market changes (if any) to reflect the payout. The distribution
you receive makes up for the decrease in share value. However, the timing of
your purchase does mean that part of your investment came back to you as taxable
income.
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17
<PAGE>
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Fund Distributions and Tax Issues
- --------------------------------------------------------------------------------
QUALIFIED RETIREMENT PLANS
Retirement plans and accounts allow you to defer paying taxes on investment
income and capital gains. Contributions to these plans may also be tax
deductible, although distributions from these plans generally are taxable. In
the case of Roth IRA accounts, contributions are not tax deductible, but
distributions from the plan may be tax-free. Please contact your financial
adviser for information on a variety of Prudential Mutal Funds that are suitable
for retirement plans offered by Prudential.
IF YOU SELL OR EXCHANGE YOUR SHARES
If you sell any shares of the Fund for a profit, you have REALIZED A CAPITAL
GAIN, which is subject to tax, unless you hold shares in a qualified
tax-deferred plan or account. The amount of tax you pay depends on how long you
owned your shares. If you sell shares of the Fund for a loss, you may have a
capital loss, which you may use to offset certain capital gains you have.
side bar -----------------------------------------------------------------------
CAPITAL GAIN
RECEIPTS +$ (taxes owed)
FROM OR
SALE -$ CAPITAL LOSS
(offset against gain)
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
Exchanging your shares of the Fund for the shares of another Prudential
Mutual Fund is considered a sale for tax purposes. In other words, it's a
"taxable event." Therefore, if the shares you exchanged have increased in value
since you purchased them, you have capital gains, which are subject to the taxes
described above.
Any gain or loss you may have from selling or exchanging Fund shares will
not be reported on the Form 1099. Therefore, unless you hold your shares in a
qualified tax-deferred plan or account, you or your financial adviser should
keep track of the dates on which you buy and sell--or exchange--Fund shares, as
well as the amount of any gain or loss on each transaction. For tax advice,
please see your tax adviser.
AUTOMATIC CONVERSION OF CLASS B SHARES
We have obtained a legal opinion that the conversion of Class B shares into
Class A shares--which happens automatically approximately seven years after
purchase--is not a "taxable event" because it does not involve an actual sale of
your Class B shares. This opinion, however, is not binding on the IRS. For more
information about the automatic conversion of Class B shares, see "Class B
Shares Convert to Class A Shares After Approximately Seven Years" in the next
section.
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18 The Global Total Return Fund, Inc. (800) 225-1852
<PAGE>
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HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
- --------------------------------------------------------------------------------
HOW TO BUY SHARES
STEP 1: OPEN AN ACCOUNT
If you don't have an account with us or a securities firm that is permitted to
buy or sell shares of the Fund for you, call Prudential Mutual Fund Services LLC
(PMFS) at (800) 225-1852 or contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: INVESTMENT SERVICES
P.O. BOX 15020
NEW BRUNSWICK, NJ 08906-5020
To purchase by wire, call the number above to obtain an application. After
PMFS receives your completed application, you will receive an account number.
For additional information about purchasing shares of the Fund, see the back
cover page of this prospectus. We have the right to reject any purchase order
(including an exchange into the Fund) or suspend or modify the Fund's sale of
its shares.
STEP 2: CHOOSE A SHARE CLASS
Individual investors can choose among Class A, Class B, Class C, and Class Z
shares of the Fund, although Class Z shares are available only to a limited
group of investors.
Multiple share classes let you choose a cost structure that better meets
your needs. With Class A shares, you pay the sales charge at the time of
purchase, but the operating expenses each year are lower than the expenses of
Class B and Class C shares. With Class B shares, you only pay a sales charge if
you sell your shares within certain time periods (that is why it is called a
Contingent Deferred Sales Charge, or CDSC), but the operating expenses each year
are higher than the Class A share expenses. With Class C shares, you pay a low
front-end sales charge and low CDSC, but the operating expenses are also higher
than the expenses for Class A shares.
When choosing a share class, you should consider the following:
o The amount of your investment
o The length of time you expect to hold the shares and the impact of the
varying distribution fees
o The different sales charges that apply to each share class--Class A's
front-end sales charge vs. Class B's CDSC vs. Class C's low front-end
sales charge and low CDSC
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19
<PAGE>
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HOW TO BUY, SELL AND
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- --------------------------------------------------------------------------------
o Whether you qualify for any reduction or waiver of sales charges
o The fact that Class B shares automatically convert to Class A shares
approximately seven years after purchase
o Whether you qualify to purchase Class Z shares
Share Class Comparison. Use this chart to help you compare the Fund's different
share classes. The discussion following this chart will tell you whether you are
entitled to a reduction or waiver of any sales charges.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
Minimum purchase $1,000 $1,000 $2,500 None
amount(1)
- ---------------------------------------------------------------------------------------------
Minimum amount for $100 $100 $100 None
subsequent purchases(1)
- ---------------------------------------------------------------------------------------------
Maximum initial 4% of the public None 1% of the public None
sales charge offering price offering price
- ---------------------------------------------------------------------------------------------
Contingent Deferred None If Sold During: 1% on sales None
Sales Charge (CDSC)(2) Year 1, 5% made within
Year 2, 4% 18 months
Year 3, 3% of purchase(2)
Year 4, 2%
Year 5/6, 1%
Year 7, 0%
- ---------------------------------------------------------------------------------------------
Annual distribution .30 of 1% 1% (.75 of 1% 1% (.75 of 1% None
and service (12b-1) (.15 of 1% currently) currently)
fees shown as a currently)
percentage of average
net assets(3)
- ---------------------------------------------------------------------------------------------
</TABLE>
1 The minimum investment requirements do not apply to certain retirement and
employee savings plans and custodial accounts for minors. The minimum initial
and subsequent investment for purchases made through the Automatic Investment
Plan is $50. For more information, see "Additional Shareholder
Services--Automatic Investment Plan."
2 For more information about the CDSC and how it is calculated, see "Contingent
Deferred Sales Charges (CDSC)." Class C shares bought before November 2, 1998
have a 1% CDSC if sold within one year.
3 These distribution fees are paid from the Fund's assets on a continuous
basis. Over time, the fees will increase the cost of your investment and may
cost you more than paying other types of sales charges. The service fee for
Class A, B and C shares is .25 of 1%. The distribution fee for Class A shares
is limited to .30 of 1% (including the .25 of 1% service fee) and is .75 of
1% for Class B and Class C shares.
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20 The Global Total Return Fund, Inc. (800) 225-1852
<PAGE>
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HOW TO BUY, SELL AND
EXHANGE SHARES OF THE FUND
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REDUCING OR WAIVING CLASS A'S INITIAL SALES CHARGE
The following describes the different ways investors can reduce or avoid paying
Class A's initial sales charge.
Increase the Amount of Your Investment. You can reduce Class A's sales charge by
increasing the amount of your investment. This table shows you how the sales
charge decreases as the amount of your investment increases.
- --------------------------------------------------------------------------------
SALES CHARGE AS % SALES CHARGE AS % DEALER
AMOUNT OF PURCHASE OF OFFERING PRICE OF AMOUNT INVESTED REALLOWANCE
- --------------------------------------------------------------------------------
Less than $50,000 4.00% 4.17% 3.75%
- --------------------------------------------------------------------------------
$50,000 but less than 3.50% 3.63% 3.25%
$100,000
- --------------------------------------------------------------------------------
$100,000 but less than 2.75% 2.83% 2.50%
$250,000
- --------------------------------------------------------------------------------
$250,000 but less than 2.00% 2.04% 1.90%
$500,000
- --------------------------------------------------------------------------------
$500,000 but less than 1.50% 1.52% 1.40%
$1,000,000
$1,000,000 and above(1) None None None
- --------------------------------------------------------------------------------
1 If you invest $1 million or more, you can buy only Class A shares, unless you
qualify to buy Class Z shares.
To satisfy the purchase amounts above, you can:
o Invest with an eligible group of related investors;
o Buy the Class A shares of two or more Prudential Mutual Funds at the same
time;
o Use your RIGHTS OF ACCUMULATION, which allow you to combine the value of
Prudential Mutual Fund shares you already own with the value of the
shares you are purchasing for purposes of determining the applicable
sales charge (note: you must notify the Transfer Agent if you qualify for
Rights of Accumulation); or
o Sign a LETTER OF INTENT, stating in writing that you or a group of
related investors will purchase a certain amount of shares in the Fund
and other Prudential Mutual Funds within 13 months.
Benefit Plans. Benefit Plans can avoid Class A's initial sales charge if 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
under the exchange privilege) or 250 eligible employees or
- --------------------------------------------------------------------------------
21
<PAGE>
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HOW TO BUY, SELL AND
EXHANGE SHARES OF THE FUND
- --------------------------------------------------------------------------------
participants. For these purposes, a Benefit Plan is a pension, profit-sharing or
other employee benefit plan qualified under Section 401 of the Internal Revenue
Code, a deferred compensation or annuity plan under Sections 403(b) and 457 of
the Internal Revenue Code, a "rabbi" trust or a non-qualified deferred
compensation plan sponsored by an employer that has a tax-qualified benefit plan
with Prudential. Class A shares may also be purchased without a sales charge by
participants who are repaying loans from Benefit Plans where Prudential (or its
affiliates) provides administrative or recordkeeping services, sponsors the
product or provides account services.
Certain Prudential retirement programs--such as PruArray Association
Benefit Plans and PruArray Savings Programs--may also be exempt from Class A's
sales charge. For more information, see the SAI or contact your financial
adviser. In addition, waivers are available to investors in certain programs
sponsored by brokers, investment advisers and financial planners who have
agreements with Prudential Investments Advisory Group relating to:
o Mutual fund "wrap" or asset allocation programs where the sponsor places
Fund trades and charges its clients a management, consulting or other
fee for its services; and
o Mutual Fund "supermarket" programs where the sponsor links its
customers' accounts to a master account in the sponsor's name and the
sponsor charges a fee for its services.
Other Types of Investors. Other investors pay no sales charges, including
certain officers, employees or agents of Prudential and its affiliates,
Prudential Mutual Funds, the subadvisers of the Prudential Mutual Funds and
clients of brokers that have entered into a selected dealer agreement with the
Distributor. To qualify for a reduction or waiver of the sales charge, you must
notify the Transfer Agent or your broker at the time of purchase. For more
information see the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Reduction and Waiver of Initial Sales Charge--Class A Shares."
WAIVING CLASS C'S INITIAL SALES CHARGE
Benefit Plans. Benefit Plans (as defined above) may purchase Class C shares
without paying an initial sales charge. Class C shares may also be purchased
without an initial sales charge by participants who are repaying loans from
Benefit Plans where Prudential (or its affiliates) provides administrative or
recordkeeping services, sponsors the product or provides account services.
Prudential Retirement Plans. The initial sales charge will be waived for
purchases of Class C shares by both qualified and non-qualified retirement and
- --------------------------------------------------------------------------------
22 The Global Total Return Fund, Inc. (800) 225-1852
<PAGE>
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HOW TO BUY, SELL AND
EXHANGE SHARES OF THE FUND
- --------------------------------------------------------------------------------
deferred compensation plans participating in the PruArray Plan and other plans
if Prudential also provides administrative or recordkeeping services.
Investment of Redemption Proceeds from Other Investment Companies. The initial
sales charge will be waived for purchases of Class C shares if the purchase is
made with money from the redemption of shares of any unaffiliated investment
company, as long as the shares were not held in an account at Prudential
Securities Incorporated or one of its affiliates. These purchases must be made
within 60 days of the redemption. To qualify for this waiver, you must:
o purchase your shares through an account at Prudential Securities
o purchase your shares through an ADVANTAGE Account or an Investor Account
with Pruco Securities Corporation
o purchase your shares through another broker
This waiver is not available to investors who purchase shares directly from
the Transfer Agent. If you are entitled to the waiver, you must notify either
the Transfer Agent or your broker. The Transfer Agent may require any supporting
documents it considers appropriate.
QUALIFYING FOR CLASS Z SHARES
Class Z shares of the Fund can be purchased by any of the following:
o Any Benefit Plan as defined above, and certain non-qualified plans,
provided the Benefit Plan--in combination with other plans sponsored by
the same employer or group of related employers--has at least $50
million in defined contribution assets
o Participants in any fee-based program or trust program sponsored by
Prudential or an affiliate which includes mutual funds as investment
options and the Fund as an available option
o 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
o Benefit Plans for which an affiliate of the Distributor provides
administrative or recordkeeping services and as of September 20, 1996
were either Class Z shareholders of the Prudential Mutual Funds or
executed a letter of intent to purchase Class Z shares of the Prudential
Mutual Funds
o Current and former Directors/Trustees of the Prudential Mutual Funds
(including the Fund)
- --------------------------------------------------------------------------------
23
<PAGE>
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HOW TO BUY, SELL AND
EXHANGE SHARES OF THE FUND
- --------------------------------------------------------------------------------
o Employees of Prudential and/or Prudential Securities who participate in
a Prudential-sponsored employee savings plan
o Prudential with an investment of $10 million or more
In connection with the sale of shares, the Manager, the Distributor or one
of their affiliates may pay brokers, financial advisers and other persons a
commission of up to 4% of the purchase price for Class B shares, up to 2% of the
purchase price for Class C shares and a finder's fee for Class Z shares from
their own resources based on a percentage of the net asset value of shares sold
or otherwise.
CLASS B SHARES CONVERT TO CLASS A SHARES AFTER APPROXIMATELY SEVEN YEARS
If you buy Class B shares and hold them for approximately seven years, we will
automatically convert them into Class A shares without charge. At that time, we
will also convert any Class B shares that you received with reinvested dividends
and other distributions. Since the 12b-1 fees for Class A shares are lower than
for Class B shares, converting to Class A shares lowers your Fund expenses.
When we do the conversion, you will get fewer Class A shares than the
number of Class B shares converted if the price of the Class A shares is higher
than the price of Class B shares. The total dollar value will be the same, so
you will not have lost any money by getting fewer Class A shares. We do the
conversions quarterly, not on the anniversary date of your purchase. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Conversion Feature--Class B Shares."
STEP 3: UNDERSTANDING THE PRICE YOU'LL PAY
The price you pay for each share of the Fund is based on the share value. The
share value of a mutual fund--known as the NET ASSET VALUE OR NAV--is determined
by a simple calculation--it's the total value of the Fund (assets minus
liabilities) divided by the total number of shares outstanding. For example, if
the value of the investments held by Fund XYZ (minus its liabilities) is $1,000
and there are 100 shares of Fund XYZ owned by shareholders, the price of one
share of the fund--or the NAV--is $10 ($1,000 divided by 100). Portfolio
securities are valued based upon market quotations or, if not readily available,
at fair value as determined in good faith under procedures established by the
Fund's Board. Most national newspapers report the NAVs of most mutual funds,
which allows investors to check the price of mutual funds daily.
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24 The Global Total Return Fund, Inc. (800) 225-1852
<PAGE>
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HOW TO BUY, SELL AND
EXHANGE SHARES OF THE FUND
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side bar -----------------------------------------------------------------------
MUTUAL FUND SHARES
The NAV of mutual fund shares changes every day because the value of a
fund's portfolio changes constantly. For example, if Fund XYZ holds
Utopia government bonds in its portfolio and the price of Utopia
government bonds goes up, while the value of the fund's other holdings
remains the same and expenses don't change, the NAV of Fund XYZ will
increase.
- --------------------------------------------------------------------------------
We determine the NAV of our shares once each business day at 4:15 p.m. New York
Time on days that the New York Stock Exchange is open for trading. Because we
are a global fund, the NAV can change on days when you cannot buy or sell
shares. We do not determine NAV on days when we have not received any orders to
purchase, sell or exchange Fund shares, or when changes in the value of the
Fund's portfolio do not materially affect the NAV.
WHAT PRICE WILL YOU PAY FOR SHARES OF THE FUND?
For Class A and Class C shares, you'll pay the public offering price, which is
NAV next determined after we receive your order to purchase, plus an initial
sales charge (unless you're entitled to a waiver). For Class B and Class Z
shares, you will pay the NAV next determined after we receive your order to
purchase (remember, there are no up-front sales charges for these share
classes). Your broker may charge a separate or additional fee for purchases of
shares.
STEP 4: ADDITIONAL SHAREHOLDER SERVICES
As a Fund shareholder, you can take advantage of the following services and
privileges:
Automatic Reinvestment. As we explained in the "Fund Distributions and Tax
Issues" section, the Fund pays out--or distributes--its net investment income
and capital gains to all shareholders. For your convenience, we will
automatically reinvest your distributions in the Fund at NAV, without any sales
charge. If you want your distributions paid in cash, you can indicate this
preference on your application, notify your broker, or notify the Transfer Agent
in writing (at the address below) at least five business days before the date we
determine who receives dividends:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: ACCOUNT MAINTENANCE
P.O. BOX 15015
NEW BRUNSWICK, NJ 08906-5015
- --------------------------------------------------------------------------------
25
<PAGE>
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HOW TO BUY, SELL AND
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- --------------------------------------------------------------------------------
Automatic Investment Plan. You can make regular purchases of the Fund for as
little as $50 by having the funds automatically withdrawn from your bank or
brokerage account at specified intervals.
Retirement Plan Services. Prudential offers a wide variety of retirement plans
for individuals and institutions, including large and small businesses. For
information on IRAs, including Roth IRAs, or SEP-IRAs for a one-person business,
please contact your financial adviser. If you are interested in opening a 401(k)
or other company-sponsored retirement plan (SIMPLES, SEP plans, Keoghs,
403(b)(7) plans, pension and profit-sharing plans), your financial adviser will
help you determine which retirement plan best meets your needs. Complete
instructions about how to establish and maintain your plan and how to open
accounts for you and your employees will be included in the retirement plan kit
you receive in the mail.
The PruTector Program. Optional group term life insurance--which protects the
value of your Prudential Mutual Fund investment for your beneficiaries against
market declines--is available to investors who purchase their shares through
Prudential. This insurance is subject to various restrictions and charges and is
not available in all states.
Systematic Withdrawal Plan. A systematic withdrawal plan is available that will
provide you with monthly or quarterly checks. Remember, the sale of Class B and
Class C shares may be subject to a CDSC.
Reports to Shareholders. Every year we will send you an annual report (along
with an updated prospectus) and a semi-annual report, which contain important
financial information about the Fund. To reduce Fund expenses, we will send one
annual shareholder report, one semi-annual shareholder report and one annual
prospectus per household, unless you instruct us or your broker otherwise.
HOW TO SELL YOUR SHARES
You can sell your shares of the Fund for cash (in the form of a check) at any
time, subject to certain restrictions.
When you sell shares of the Fund--also known as redeeming your shares--the
price you will receive will be the NAV next determined after the Transfer Agent,
the Distributor or your broker receives your order to sell. If your broker holds
your shares, he must receive your order to sell by 4:15 p.m. New York Time to
process the sale on that day. Otherwise, contact:
- --------------------------------------------------------------------------------
26 The Global Total Return Fund, Inc. (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
HOW TO BUY, SELL AND
EXHANGE SHARES OF THE FUND
- --------------------------------------------------------------------------------
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: REDEMPTION SERVICES
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010
Generally, we will pay you for the shares that you sell within seven days
after the Transfer Agent, the Distributor or your broker receives your sell
order. If you hold shares through a broker, payment will be credited to your
account. If you are selling shares you recently purchased with a check, we may
delay sending you the sales proceeds until your check clears, which can take up
to 10 days from your purchase date. You can avoid delay if you purchase by wire,
certified check or cashier's check. Your broker may charge you a separate or
additional fee for sales of shares.
RESTRICTIONS ON SALES
There are certain times when you may not be able to sell shares of the Fund, or
when we may delay paying you the proceeds from a sale. This may happen during
unusual market conditions or emergencies when the Fund can't determine the value
of its assets or sell its holdings. For more information, see the SAI,
"Purchase, Redemption and Pricing of Fund Shares--Sale of Shares."
If you are selling more than $50,000 of shares, you want the check sent to
someone or some place that is not in our records or you are a business or a
trust, or if you hold your shares directly with the Transfer Agent, you may have
to have the signature on your sell order guaranteed by a financial institution.
For more information, see the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Sale of Shares--Signature Guarantee."
CONTINGENT DEFERRED SALES CHARGES (CDSC)
If you sell Class B shares within six years of purchase or Class C shares within
18 months of purchase (one year for Class C shares purchased before November 2,
1998), you will have to pay a CDSC. To keep the CDSC as low as possible, we will
sell amounts representing shares in the following order:
o Amounts representing shares you purchased with reinvested dividends and
distributions
o Amounts representing the increase in NAV above the total amount of
payments for shares made during the past six years for Class B shares
(five years for Class B shares purchased before January 22, 1990) and 18
months for Class C shares (one year for Class C shares purchased before
November 2, 1998)
- --------------------------------------------------------------------------------
27
<PAGE>
- --------------------------------------------------------------------------------
HOW TO BUY, SELL AND
EXHANGE SHARES OF THE FUND
- --------------------------------------------------------------------------------
o Amounts representing the cost of shares held beyond the CDSC period (six
years for Class B shares and 18 months for Class C shares)
Since shares that fall into any of the categories listed above are not
subject to the CDSC, selling them first helps you to avoid--or at least
minimize--the CDSC.
Having sold the exempt shares first, if there are any remaining shares that
are subject to the CDSC, we will apply the CDSC to amounts representing the cost
of shares held for the longest period of time within the applicable CDSC period.
As we noted before in the "Share Class Comparison" chart, the CDSC for
Class B shares is 5% in the first year, 4% in the second, 3% in the third, 2% in
the fourth and 1% in the fifth and sixth years and 0% in the seventh year. The
rate decreases on the first day of the month following the anniversary date of
your purchase, not on the anniversary date itself. The CDSC is 1% for Class C
shares--which is applied to shares sold within 18 months of purchase (or one
year if purchased before November 2, 1998). For both Class B and C shares, the
CDSC is the lesser of the original purchase price or the redemption proceeds.
For purposes of determining how long you've held your shares, all purchases
during the month are grouped together and considered to have been made on the
last day of the month.
The holding period for purposes of determining the applicable CDSC will be
calculated from the first day of the month after initial purchase, excluding any
time shares were held in a money market fund.
WAIVER OF THE CDSC--CLASS B SHARES
The CDSC will be waived if the Class B shares are sold:
o After a shareholder is deceased or disabled (or, in the case of a trust
account, the death or disability of the grantor). This waiver applies to
individual shareholders, as well as shares owned in joint tenancy (with
rights of survivorship), provided the shares were purchased before the
death or disability
o To provide for certain distributions--made without IRS penalty--from a
tax-deferred retirement plan, IRA, or Section 403(b) custodial account
o On certain sales from a Systematic Withdrawal Plan
For more information on the above and other waivers, see the SAI,
"Purchase, Redemption and Pricing of Fund Shares--Waiver of Contingent Deferred
Sales Charges--Class B Shares."
- --------------------------------------------------------------------------------
28 The Global Total Return Fund, Inc. (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
HOW TO BUY, SELL AND
EXHANGE SHARES OF THE FUND
- --------------------------------------------------------------------------------
WAIVER OF THE CDSC--CLASS C SHARES
Prudential Retirement Plans. The CDSC will be waived for purchases of Class C
shares by both qualified and non-qualified retirement and deferred compensation
plans participating in the PruArray Plan and other plans if Prudential also
provides administrative or recordkeeping services. The CDSC will also be waived
on redemptions from Benefit Plans sponsored by Prudential and its affiliates to
the extent that the redemption proceeds are invested in The Guaranteed
Investment Account (a group annuity insurance product sponsored by Prudential)
the Guaranteed Insulated Separate Account (a separate account offered by
Prudential) and shares of The Stable Value Fund (an unaffiliated bank collective
fund).
Other Benefit Plans. The CDSC will be waived on redemptions from Benefit Plans
holding shares through a broker not affiliated with Prudential and for which the
broker provides administrative or recordkeeping services.
REDEMPTION IN KIND
If the sales of Fund shares you make during any 90-day period reach the lesser
of $250,000 or 1% of the value of the Fund's net assets, we can then give you
securities from the Fund's portfolio instead of cash. If you want to sell the
securities for cash, you would have to pay the costs charged by a broker.
SMALL ACCOUNTS
If you make a sale that reduces your account value to less than $500, we may
sell the rest of your shares (without charging any CDSC) and close your account.
We would do this to minimize the Fund's expenses paid by other shareholders. We
will give you 60 days' notice, during which time you can purchase additional
shares to avoid this action. This involuntary sale does not apply to
shareholders who own their shares as part of a 401(k) plan, an IRA or some other
tax-deferred plan or account.
90-DAY REPURCHASE PRIVILEGE
After you redeem your shares, you have a 90-day period during which you may
reinvest any of the redemption proceeds in shares of the same Fund without
paying an initial sales charge. Also, if you paid a CDSC when you redeemed your
shares, we will credit your new account with the appropriate number of shares to
reflect the amount of the CDSC you paid. In order to take advantage of this
one-time privilege, you must notify the Transfer Agent or your broker at the
time of the repurchase. See the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Sale of Shares."
- --------------------------------------------------------------------------------
29
<PAGE>
- --------------------------------------------------------------------------------
HOW TO BUY, SELL AND
EXHANGE SHARES OF THE FUND
- --------------------------------------------------------------------------------
RETIREMENT PLANS
To sell shares and receive a distribution from your retirement account, call
your broker or the Transfer Agent for a distribution request form. There are
special distribution and income tax withholding requirements for distributions
from retirement plans and you must submit a withholding form with your request
to avoid delay. If your retirement plan account is held for you by your employer
or plan trustee, you must arrange for the distribution request to be signed and
sent by the plan administrator or trustee. For additional information, see the
SAI.
HOW TO EXCHANGE YOUR SHARES
You can exchange your shares of the Fund for shares of the same class in certain
other Prudential Mutual Funds--including certain money market funds--if you
satisfy the minimum investment requirements. For example, you can exchange Class
A shares of the Fund for Class A shares of another Prudential Mutual Fund, but
you can't exchange Class A shares for Class B, Class C or Class Z shares. Class
B and Class C shares may not be exchanged into money market funds other than
Prudential Special Money Market Fund, Inc. After an exchange, at redemption the
CDSC will be calculated from the first day of the month after initial purchase,
excluding any time shares were held in a money market fund. We may change the
terms of the exchange privilege after giving you 60 days' notice.
If you hold shares through a broker, you must exchange shares through your
broker. Otherwise contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: EXCHANGE PROCESSING
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010
There is no sales charge for such exchanges. However, if you exchange--and
then sell--Class B shares within approximately six years of your original
purchase or Class C shares within 18 months of your original purchase, you must
still pay the applicable CDSC. If you have exchanged Class B or Class C shares
into a money market fund, the time you hold the shares in the money market
account will not be counted in calculating the required holding periods for CDSC
liability.
Remember, as we explained in the section entitled "Fund Distributions and
Tax Issues--If You Sell or Exchange Your Shares," exchanging shares is
- --------------------------------------------------------------------------------
30 The Global Total Return Fund, Inc. (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
HOW TO BUY, SELL AND
EXHANGE SHARES OF THE FUND
- --------------------------------------------------------------------------------
considered a sale for tax purposes. Therefore, if the shares you exchange are
worth more than you paid for them, you may have to pay capital gains tax. For
additional information about exchanging shares, see the SAI, "Shareholder
Investment Account--Exchange Privilege."
If you own Class B or Class C shares and qualify to purchase either Class A
shares without paying an initial sales charge or Class Z shares, we will
automatically exchange your Class B or Class C shares which are not subject to a
CDSC for Class A or Class Z shares, as appropriate. We make such exchanges on a
quarterly basis if you qualify for this exchange privilege. We have obtained a
legal opinion that this exchange is not a "taxable event" for federal income tax
purposes. This opinion is not binding on the IRS.
FREQUENT TRADING
Frequent trading of Fund shares in response to short-term fluctuations in the
market--also known as "market timing"--may make it very difficult to manage the
Fund's investments. Also when market timing occurs, the Fund may have to sell
portfolio securities to have the cash necessary to redeem the market timer's
shares. This can happen at a time when it is not advantageous to sell any
securities, so the Fund's performance may be hurt. When large dollar amounts are
involved, market timing can also make it difficult to use long-term investment
strategies because we cannot predict how much cash the Fund will have to invest.
When in our opinion such activity would have a disruptive effect on portfolio
management, the Fund reserves the right to refuse purchase orders and exchanges
into the Fund by any person, group or commonly controlled accounts. The Fund may
notify a market time of rejection of an exchange or purchase order subsequent to
the day the order is placed. If the Fund allows a market timer to trade Fund
shares, it may require the market timer to enter into a written agreement to
follow certain procedures and limitations.
- --------------------------------------------------------------------------------
31
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights will help you evaluate the Fund's financial
performance. The TOTAL RETURN in each chart represents the rate that a
shareholder earned on an investment in that share class of the Fund, assuming
reinvestment of all dividends and other distributions. The information is for
each share class for the periods indicated.
Review each chart with the financial statements and report of independent
accountants, which appear in the annual report and the SAI and are available
upon request. Additional performance information for each share class is
contained in the annual report, which you can receive at no charge.
- --------------------------------------------------------------------------------
32 The Global Total Return Fund, Inc. (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
CLASS A SHARES
The financial highlights for two years ended December 31, 1998 were audited by
______________, independent accountants, and the financial highlights for the
three years ended December 31, 1996 were audited by other independent auditors,
whose reports were unqualified.
<TABLE>
<CAPTION>
CLASS A SHARES (FISCAL YEARS ENDED 12-31
PER SHARE OPERATING PERFORMANCE 1998 1997(2) 1996 1995(3) 1994(3)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $-- $8.38 $8.44 $7.46 $8.76
INCOME FROM INVESTMENT OPERATIONS:
Net investment income -- .55 .62 .54 .52
Net realized and unrealized gain
(loss) on investments and foreign -- (.18) .32 1.25 (1.22)
currency transactions
TOTAL FROM INVESTMENT OPERATIONS -- .37 .94 1.79 (.70)
- ---------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment -- (.68) (.62) (.54) (.17)
income
Distributions in excess of net -- (.19) (.50) (.27) --
investment income
Distributions from capital gains -- -- -- -- (.13)
Tax return of capital -- -- -- -- (.30)
distributions
TOTAL DISTRIBUTIONS (--) (.87) (1.12) (.81) (.60)
Redemption fee retained by Fund -- -- .12 -- --
NET ASSET VALUE, END OF YEAR $-- $7.88 $8.38 $8.44 $7.46
TOTAL RETURN(1) --% 4.55% 13.15% 25.45% (8.10)%
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $-- $183,054 $229,770 $559,071 $493,645
Average net assets (000) $-- $204,795 $299,026 $549,407 $536,230
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees --% 1.39% 1.33% 1.02% 1.04%
Expenses, excluding distribution fees --% 1.24% 1.18% 1.02% 1.04%
Net investment income --% 6.73% 7.01% 6.50% 6.45%
Portfolio turnover rate --% 43% 32% 256% 583%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
1 Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each period
reported.
2 Calculated based upon average shares outstanding during the year.
3 Before 1-15-96, the Fund was a closed-end investment company.
- --------------------------------------------------------------------------------
33
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
CLASS B SHARES
The financial highlights for the two years ended December 31, 1998 were audited
by ______________, independent accountants, and the financial highlights for the
period ended December 31, 1996 were audited by other independent auditors, whose
reports were unqualified.
CLASS B SHARES (FISCAL YEARS ENDED 12-31)
PER SHARE OPERATING PERFORMANCE 1998 1997(3) 1996(1)
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $-- $8.39 $8.51
INCOME FROM INVESTMENT OPERATIONS:
Net investment income -- .49 .57
Net realized and unrealized gain (loss)
on investments and foreign currency -- (.16) .26
transactions
TOTAL FROM INVESTMENT OPERATIONS -- .33 .83
- --------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income -- (.64) (.57)
Distributions in excess of net investment -- (.19) (.50)
income
TOTAL DISTRIBUTIONS (--) (.83) (1.07)
Redemption fee retained by Fund -- -- .12
NET ASSET VALUE, END OF YEAR $-- $7.89 $8.39
TOTAL RETURN(2) --% 3.98% 11.99%
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996
- --------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000) $-- $2,300 $175
Average net assets (000) $-- $1,246 $52
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees --% 1.99% 1.93%(4)
Expenses, excluding distribution fees --% 1.24% 1.18%(4)
Net investment income --% 6.13% 6.41%(4)
Portfolio turnover --% 43% 32%
- --------------------------------------------------------------------------------
1 For the period from 1-15-96 (when Class B shares were first offered) through
12-31-96.
2 Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each period
reported.
3 Calculated based upon average shares outstanding during the year.
4 Annualized.
- --------------------------------------------------------------------------------
34 The Global Total Return Fund, Inc. (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
CLASS C SHARES
The financial highlights for two years ended December 31, 1998 were audited by
______________, independent accountants, and the financial highlights for the
period ended December 31, 1996 were audited by other independent auditors, whose
reports were unqualified.
CLASS C SHARES (FISCAL YEARS ENDED 12-31)
PER SHARE OPERATING PERFORMANCE 1998 1997(3) 1996(1)
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $-- $8.39 $8.51
INCOME FROM INVESTMENT OPERATIONS:
Net investment income -- .49 .57
Net realized and unrealized gain (loss)
on investment and foreign currency -- (.16) .26
transactions
TOTAL FROM INVESTMENT OPERATIONS -- .33 .83
- --------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income -- (.64) (.57)
Distributions in excess of net investment -- (.19) (.50)
income
TOTAL DISTRIBUTIONS (--) (.83) (1.07)
Redemption fee retained by Fund -- -- .12
NET ASSET VALUE, END OF PERIOD $-- $7.89 $8.39
TOTAL RETURN(2) --% 3.98% 11.99%
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996
- --------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000) $-- $190 $210(4)
Average net assets (000) $-- $397 $204(4)
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees --% 1.99% 1.93%(5)
Expenses, excluding distribution fees --% 1.24% 1.18%(5)
Net investment income (loss) --% 6.13% 6.41%(5)
Portfolio turnover --% 43% 32%
- --------------------------------------------------------------------------------
1 For the period from 1-15-96 (when Class C shares were first offered) through
12-31-96.
2 Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each period
reported. Total return for periods of less than a full year is not
annualized.
3 Calculated based upon average shares outstanding during the period.
4 Amounts are actual and not rounded to the nearest thousand.
5 Annualized.
- --------------------------------------------------------------------------------
35
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
CLASS Z SHARES
The financial highlights were audited by ______________, independent
accountants, whose report was unqualified.
CLASS Z SHARES (FISCAL YEARS ENDED 12-31)
PER SHARE OPERATING PERFORMANCE 1998 1997(1,2)
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $-- $8.32
INCOME FROM INVESTMENT OPERATIONS:
Net investment income -- .39
Net realized and unrealized gain (loss)
on investment and foreign currency -- .05
transactions
TOTAL FROM INVESTMENT OPERATIONS -- .44
- --------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income -- (.69)
Distributions in excess of net investment -- (.19)
income
TOTAL DISTRIBUTIONS (--) (.88)
NET ASSET VALUE, END OF YEAR $-- $7.88
TOTAL RETURN(3) --% 5.56%
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1998 1997
- --------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000) $-- $686
Average net assets (000) $-- $257
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees --% 1.24%(4)
Expenses, excluding distribution fees --% 1.24%(4)
Net investment income --% 5.41%(4)
Portfolio turnover --% 43%
- --------------------------------------------------------------------------------
1 Information shown is for the period from 3-17-97 (when Class Z shares were
first offered) through 12-31-97.
2 Calculated based upon average shares outstanding during the period.
3 Total return assumes reinvestment of dividends and any other distributions.
It is calculated assuming shares are purchased on the first day and sold on
the last day of each period reported. Total return for periods of less than a
full year is not annualized.
4 Annualized.
- --------------------------------------------------------------------------------
36 The Global Total Return Fund, Inc. (800) 225-1852
<PAGE>
- --------------------------------------------------------------------------------
THE PRUDENTIAL MUTUAL FUND FAMILY
- --------------------------------------------------------------------------------
Prudential offers a broad range of mutual funds designed to meet your individual
needs. For more information about these funds, contact your financial adviser or
Prudential professional or call (800) 225-1852. Read the prospectus carefully
before you invest or send money.
STOCK FUNDS
PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
PRUDENTIAL EMERGING GROWTH FUND, INC.
PRUDENTIAL EQUITY FUND, INC.
PRUDENTIAL EQUITY INCOME FUND
PRUDENTIAL INDEX SERIES FUND
Prudential Small-Cap Index Fund
Prudential Stock Index Fund
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
PRUDENTIAL MID-CAP VALUE FUND
PRUDENTIAL REAL ESTATE SECURITIES FUND
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
PRUDENTIAL 20/20 FOCUS FUND
PRUDENTIAL UTILITY FUND, INC.
NICHOLAS-APPLEGATE FUND, INC.
Nicholas-Applegate Growth Equity Fund
ASSET ALLOCATION/BALANCED FUNDS
PRUDENTIAL BALANCED FUND
PRUDENTIAL DIVERSIFIED FUNDS
Conservative Growth Fund
Moderate Growth Fund
High Growth Fund
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Prudential Active Balanced Fund
GLOBAL FUNDS
GLOBAL STOCK FUNDS
PRUDENTIAL DEVELOPING MARKETS FUND
Prudential Developing Markets Equity Fund
Prudential Latin America Equity Fund
PRUDENTIAL EUROPE GROWTH FUND, INC.
PRUDENTIAL GLOBAL GENESIS FUND, INC.
PRUDENTIAL INDEX SERIES FUND
Prudential Europe Index Fund
Prudential Pacific Index Fund
PRUDENTIAL NATURAL RESOURCES FUND, INC.
PRUDENTIAL PACIFIC GROWTH FUND, INC.
PRUDENTIAL WORLD FUND, INC.
Global Series
International Stock Series
GLOBAL UTILITY FUND, INC.
GLOBAL BOND FUNDS
PRUDENTIAL GLOBAL LIMITED MATURITY FUND, INC.
Limited Maturity Portfolio
PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC.
PRUDENTIAL INTERNATIONAL BOND FUND, INC.
THE GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
37
<PAGE>
BOND FUNDS
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 HIGH YIELD TOTAL RETURN FUND, INC.
PRUDENTIAL INDEX SERIES FUND
Prudential Bond Market Index Fund
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 Income Series
Insured Series
PRUDENTIAL MUNICIPAL SERIES FUND
Florida Series
Massachusetts Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
MONEY MARKET FUNDS
TAXABLE MONEY MARKET FUNDS
CASH ACCUMULATION TRUST
Liquid Assets Fund
National Money Market Fund
PRUDENTIAL GOVERNMENT SECURITIES TRUST
Money Market Series
U.S. Treasury Money Market Series
PRUDENTIAL 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
- --------------------------------------------------------------------------------
38 The Global Total Return Fund, Inc. (800) 225-1852
<PAGE>
FOR MORE INFORMATION
- --------------------------------------------------------------------------------
Please read this prospectus before you invest in the Fund and keep it for future
reference. For information or shareholder questions contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
P.O. BOX 15005
NEW BRUNSWICK, NJ 08906-5005
(800) 225-1852
(732) 417-7555
(if calling from outside the U.S.)
- --------------------------------------------------------------------------------
Outside Brokers Should Contact:
PRUDENTIAL INVESTMENT MANAGEMENT
SERVICES LLC
P.O. BOX 15035
NEW BRUNSWICK, NJ 08906-5035
(800) 778-8769
- --------------------------------------------------------------------------------
Visit Prudential's Web Site At:
HTTP://WWW.PRUDENTIAL.COM
- --------------------------------------------------------------------------------
Additional information about the Fund can be obtained without charge and can be
found in the following documents:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
(incorporated by reference into this prospectus)
ANNUAL REPORT
(contains a discussion of the market conditions and investment strategies
that significantly affected the Fund's performance)
SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
You can also obtain copies of Fund documents from the Securities and Exchange
Commission as follows:
By Mail:
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-6009
(The SEC charges a fee to copy documents.)
In Person:
Public Reference Room in
Washington, DC
(For hours of operation, call
1(800) SEC-0330)
Via the Internet:
http://www.sec.gov
- --------------------------------------------------------------------------------
CUSIP Numbers:
Class A Shares--37936L-30-2
Class B Shares--37936L-40-1
Class C Shares--37936L-50-0
Class Z Shares--37936L-20-3
Investment Company Act File No:
811-4661
MF169A
<PAGE>
THE GLOBAL TOTAL RETURN FUND, INC.
Statement of Additional Information
dated March 1, 1999
The Global Total Return Fund, Inc. (the Fund) is an open-end,
non-diversified management investment company, or a mutual fund. The Fund's
investment objective is to seek total return made up of current income and
capital appreciation. The Fund seeks to achieve this objective by investing at
least 65% of its total assets in income-producing securities of the U.S. and
foreign governments, supranational organizations, semi-governmental entities or
governmental agencies and in short-term bank debt securities or bank deposits.
To achieve our income objective, we look for investment-grade securities
denominated in U.S. dollars and in foreign currencies. There can be no assurance
that the Fund's investment objective will be achieved.
The Fund's address is Gateway Center Three, 100 Mulberry Street, Newark,
New Jersey 07102-4077, and its telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should
only be read in conjunction with the Fund's Prospectus, dated March 1, 1999, a
copy of which may be obtained from the Fund upon request.
TABLE OF CONTENTS
PAGE
----
Fund History ............................................................ B-2
Description of the Fund, Its Investments and Risks ...................... B-2
Investment Restrictions ................................................. B-16
Management of the Fund .................................................. B-17
Control Persons and Principal Holders of Securities ..................... B-19
Investment Advisory and Other Services .................................. B-21
Brokerage Allocation and Other Practices ................................ B-25
Capital Shares, Other Securities and Organization ....................... B-26
Purchase, Redemption and Pricing of Fund Shares ......................... B-27
Shareholder Investment Account .......................................... B-36
Net Asset Value ......................................................... B-40
Taxes, Dividends and Distributions ...................................... B-41
Performance Information ................................................. B-42
Financial Statements .................................................... B-
Report of Independent Accountants ....................................... B-45
Appendix I--General Investment Information .............................. I-1
Appendix II--Historical Performance Data ................................ II-1
Appendix III--Information Relating to Prudential ........................ III-1
================================================================================
<PAGE>
FUND HISTORY
The Global Total Return Fund, Inc. was incorporated under the laws of
Maryland on May 6, 1986 under the name "The Global Yield Fund, Inc." as a
closed-end, non-diversified management investment company. In connection with a
change in the Fund's investment objective approved by shareholders in November,
1994, shareholders approved a change in the name of the Fund to The Global Total
Return Fund, Inc. The Fund operated as a closed-end fund prior to January 15,
1996. On December 6, 1995, shareholders approved open-ending the Fund, and since
January 15, 1996, the Fund has operated as an open-end fund.
DESCRIPTION OF THE FUND, ITS INVESTMENTS AND RISKS
(A) CLASSIFICATION. The Fund is a "non-diversified" investment company and
may invest more than 5% of its total assets in the securities of one or more
issuers. However, the Fund intends to limit its investments in the securities of
any one issuer, except for securities issued or guaranteed as to payment of
principal and interest by any one government, supranational issuer,
semi-government or government agency, authority or instrumentality, to 5% of its
total assets at the time of purchase. Except for securities issued or guaranteed
by the U.S. Government, its agencies, authorities or instrumentalities, the Fund
will not invest 25% or more of its total assets at the time of purchase in the
securities of a central government or a supranational issuer and not more than
10% of its total assets in securities of a semi-government or government agency,
authority or instrumentality. Investment in a non-diversified investment company
involves greater risk than investment in a diversified investment company
because a loss resulting from the default of a single issuer may represent a
greater portion of the total assets of a non-diversified portfolio.
(B) AND (C) INVESTMENT STRATEGIES, POLICIES AND RISKS. The Fund's
investment objective is to maximize total return, made up of current income and
capital appreciation. While the principal investment policies and strategies for
seeking to achieve this objective are described in the Fund's prospectus, the
Fund may from time to time also use the securities, instruments, policies and
strategies described below in seeking to achieve its objective. The Fund may not
be successful in achieving its objective and you could lose money.
FOREIGN SECURITIES
As a global fund, the Fund will invest a substantial portion of its total
assets in foreign money market instruments and debt and equity securities.
(American Depositary Receipts (ADRs) and American Depositary Shares (ADSs) are
not considered foreign securities within this limitation.) In many instances,
foreign securities may provide higher yields but may be subject to greater
fluctuations in price than securities of domestic issuers which have similar
maturities and quality. Under certain market conditions these investments may be
less liquid than the securities of U.S. corporations and are certainly less
liquid than securities issued or guaranteed by the U.S. Government, its
instrumentalities or agencies.
Foreign securities involve certain risks, which should be considered
carefully by an investor in the Fund. These risks include political or economic
instability in the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of imposition of exchange controls
and the risk of currency fluctuations. Such securities may be subject to greater
fluctuations in price than securities issued by U.S. corporations or issued or
guaranteed by the U.S. Government, its instrumentalities or agencies. In
addition, there may be less publicly available information about a foreign
company than about a domestic company. Foreign companies generally are not
subject to uniform accounting, auditing and financial reporting standards
comparable to those applicable to domestic companies. There is generally less
government regulation of securities exchanges, brokers and listed companies
abroad than in the United States, and, for certain foreign countries, there is a
possibility of expropriation, confiscatory taxation or diplomatic developments
which could affect investment in those countries. Finally, in the event of a
default of any such foreign debt obligations, it may be more difficult for the
Fund to obtain, or to enforce a judgment against, the issuers of such
securities.
The costs attributable to foreign investing are higher than the costs of
domestic investing. For example, the cost of maintaining custody of foreign
securities generally exceeds custodian costs for domestic securities, and
transaction and settlement costs of foreign investing are frequently higher than
those attributable to domestic investing. Foreign investment income may be
subject to foreign withholding or other government taxes that could reduce the
return to the Fund on those securities. Tax treaties between the United States
and certain foreign countries may, however, reduce or eliminate the amount of
foreign tax to which the Fund would be subject.
The Fund invests in debt securities denominated in the currencies of
countries whose governments are considered stable by the Fund's Subadviser. In
addition to the U.S. Dollar, such currencies include, among others, the
Australian Dollar, British Pound Sterling, Canadian Dollar, Japanese Yen, New
Zealand Dollar, Mexican Peso, Danish Kroner, Norwegian Kroner, Swedish Krona,
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Swiss Franc and the Euro. An issuer of debt securities purchased by the Fund may
be domiciled in a country other than the country in whose currency the
instrument is denominated.
It is expected that on January 1, 1999, 11 of the 15 member states of the
European Monetary Union will introduce the "euro" as a common currency. During a
three-year transitional period, the euro will coexist with each participating
state's currency and, on July 1, 2002, the euro is expected to become the sole
currency of the participating states. During the transition period , the Fund
will treat the euro as a separate currency from that of any participating state.
The conversion may adversely affect the Fund if the euro does not take
effect as planned; if a participating state withdraws from the European Monetary
Union; or if the computing, accounting and trading systems used by the Funds'
service providers, or by entities with which the Fund or its service providers
do business, are not capable of recognizing the euro as a distinct currency at
the time of, and following, euro conversion. In addition, the conversion could
cause markets to become more volatile.
The overall effect of the transition of member states' currencies to the
euro is not known at this time. It is likely that more general short- and
long-term ramifications can be expected, such as changes in the economic
environment and change in the behavior of investors, which would affect the
Fund's investments and its net asset value. In addition, although U.S. Treasury
regulations generally provide that the euro conversion will not, in itself,
cause a U.S. taxpayer to realize gain or loss, other changes that may occur at
the time of the conversion, such as accrual periods, holiday conventions,
indices, and other features may require the realization of a gain or loss by the
Fund as determined under existing tax law.
The Fund's Manager is taking steps: (1) that it believes will reasonably
address euro-related changes to enable the Fund to process transactions
accurately and completely with minimal disruption to business activities and (2)
to obtain reasonable assurances that appropriate steps have been taken by the
Fund's other service providers to address the conversion.
The Fund may also invest in debt securities denominated in the currencies
of certain "emerging market" nations, such as, but not limited to, the Czech
Republic, Hungary, Greece, South Korea, Hong Kong, Malaysia, Indonesia,
Thailand, China, Israel, Chile, Colombia, Venezuela, Estonia, Turkey and
Argentina. Companies in these markets in which the Fund may invest may have
limited product lines, markets or financial resources and may lack management
depth. The securities of these companies may have limited marketability and may
be subject to more abrupt or erratic market movements than securities of larger,
more established companies or the market averages in general.
Investing in the fixed-income markets of emerging market countries
involves exposure to economies that are generally less diverse and mature, and
to political systems which can be expected to have less stability than those of
developed countries. Historical experience indicates that the markets of
developing countries have been more volatile than the markets of developed
countries. The risks associated with investments in foreign securities,
described above, may be greater with respect to investments in developing
countries.
A change in the value of a foreign currency against the U.S. dollar will
result in a corresponding change in the U.S. dollar value of the Fund's assets
denominated in that currency. These currency fluctuations can result in gains or
losses for the Fund. For example, if a foreign security increases in value as
measured in its currency, an increase in value of the U.S. dollar, relative to
the currency in which the foreign security is denominated can offset some or all
of such gains. These currency changes will also affect the Fund's return, income
and distributions to shareholders. In addition, although the Fund will receive
income in such currencies, the Fund will be required to compute and distribute
its income in U.S. dollars. Therefore, if the exchange rate for any such
currency decreases after the Fund's income has been accrued and translated into
U.S. dollars, the Fund could be required to liquidate portfolio securities to
make such distributions. Similarly, if an exchange rate for any such currency
decreases between the time the Fund incurs expenses in U.S. dollars and the time
such expenses are paid, the amount of such currency required to be converted
into U.S. dollars in order to pay such expenses in U.S. dollars will be greater
than the equivalent amount of such currency at the time such expenses were
incurred. Under the Internal Revenue Code of 1986, as amended (the Internal
Revenue Code), changes in an exchange rate which occur between the time the Fund
accrues interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities will result in foreign exchange gains or
losses that increase or decrease distributable net investment income. Similarly,
dispositions of certain debt securities (by sale, at maturity or otherwise) at a
U.S. dollar amount that is higher or lower than the Fund's original U.S. dollar
cost may result in foreign exchange gains or losses, which will increase or
decrease distributable net investment income. Gains and losses on security and
currency transactions cannot be predicted. This fact coupled with the different
tax and accounting treatment of certain currency gains and losses increases the
likelihood of distributions in whole or in part constituting a return of capital
to shareholders.
The Fund's interest income from foreign government securities issued in
local markets may, in some cases, be subject to applicable withholding taxes
imposed by governments in such markets. The Fund may sell a foreign security it
owns prior to
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maturity in order to avoid foreign withholding taxes on dividend and interest
income and buy back the same security for a future settlement date. Interest on
foreign government securities is not generally subject to foreign withholding
taxes. See "Taxes, Dividends and Distributions."
The Fund may invest in debt securities issued by supranational
organizations such as the World Bank, the European Investment Bank, the European
Coal and Steel Community, and the Asian Development Bank.
The Fund may invest in debt securities issued by "semi-governmental
entities" such as entities owned by a national, state or equivalent government
or are obligations of a political unit that are not backed by the national
government's "full faith and credit" and general taxing powers. Examples of
semi-governmental issues include, among others, the Province of Ontario and the
city of Stockholm.
Returns available from foreign currency denominated debt instruments can
be adversely affected by changes in exchange rates. The Fund's investment
adviser believes that the use of foreign currency hedging techniques, including
"cross-currency hedges" may assist, under certain conditions, in helping to
protect against declines in the U.S. dollar value of income available for
distribution to shareholders and declines in the net asset value of the Fund's
shares resulting from adverse changes in currency exchange rates. For example,
the return available from securities denominated in a particular foreign
currency would diminish in the event the value of the U.S. dollar increased
against such currency. Such a decline could be partially or completely offset by
an increase in value of cross-currency hedge involving a forward exchange
contract to sell a different foreign currency, where such contract is available
on terms more advantageous to the Fund than a contract to sell the currency in
which the position being hedged is denominated. Cross-currency hedges can,
therefore, under certain conditions, provide protection of net asset value in
the event of a general rise in the U.S. dollar against foreign currencies.
However, there can be no assurance that the Fund will be able to engage in
cross-currency hedging or that foreign exchange rate relationships will be
sufficiently predictable to enable the investment adviser to employ
cross-currency hedging techniques successfully. A cross-currency hedge cannot
protect against exchange rate risks perfectly, and if the investment adviser is
incorrect in its judgment of future exchange rate relationships, the Fund could
be in a less advantageous position than if such a hedge had not been
established.
The Fund may invest in component parts of debt securities of foreign
governments or semi-governmental entities, namely either the corpus (principal)
of such obligations or one or more of the interest payments scheduled to be paid
on such obligations. These securities may take the form of (1) obligations from
which the interest coupons have been stripped (principal only); (2) the interest
coupons that are stripped (interest only); (3) book-entries at a bank
representing ownership of obligation components; or (4) receipts evidencing the
component parts (corpus or coupons) of obligations that have not actually been
stripped. Such receipts evidence ownership of component parts of obligations
(corpus or coupons) purchased by a third party (typically an investment banking
firm) and held on behalf of the third party in physical or book-entry form by a
major commercial bank or trust company pursuant to a custody agreement with the
third party. The Fund may also invest in custodial receipts held by a third
party. Stripped securities are, in general, more sensitive to interest rate
changes than securities that have not been stripped. Combined with investments
in similar U.S. Government securities, the Fund will not invest more than 10% of
its total assets in such securities.
If the security is denominated in a foreign currency, it may be affected
by changes in currency rates and in exchange control regulations, and costs may
be incurred in connection with conversions between currencies. The Fund may
enter into foreign currency forward contracts for the purchase or sale of
foreign currency for hedging purposes. See "Hedging and Return Enhancement
Strategies--Special Risks Related to Forward Foreign Currency Exchange
Contracts" below.
INCOME-PRODUCING SECURITIES
Under normal circumstances, the Fund will invest at least 65% of its total
assets in income producing securities. The Fund anticipates that it will
primarily invest in fixed income securities rated A or better by Moody's
Investors Service, Inc. (Moody's) or Standard & Poor's Ratings Group (S&P) or
comparably rated by another nationally recognized statistical rating
organization (NRSRO). The Fund may also invest up to 10% of its total assets in
debt securities rated below investment grade but no lower than B by either S&P
or Moody's or another NRSRO.
Fixed-income securities are subject to the risk of an issuer's inability
to meet principal and interest payments on the obligations (credit risk) and may
also be subject to price volatility due to such factors as interest rate
sensitivity, the market perception of the creditworthiness of the issuer and
general market liquidity (market risk). Lower rated (i.e., high yield or "junk
bonds") securities are more likely to react to developments affecting market and
credit risk than are more highly rated securities, which react primarily to
movements in the general level of interest rates. The investment adviser
considers both credit risk and market risk in making investment decisions for
the Fund.
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Under adverse economic conditions, there is a risk that highly leveraged
issuers may be unable to service their debt obligations or to repay their
obligations upon maturity. In addition, the secondary market for high yield
securities, which is concentrated in relatively few market makers, may not be as
liquid as the secondary market for more highly rated securities. Under adverse
market or economic conditions, the secondary market for high yield securities
could contract further, independent of any specific adverse changes in the
condition of a particular issuer. As a result, the investment adviser could find
it more difficult to sell these securities or may be able to sell the securities
only at prices lower than if such securities were widely traded. Prices realized
upon the sale of such lower rated or unrated securities, under these
circumstances, may be less than the prices used in calculating the Fund's net
asset value.
Lower rated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Fund experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting in
a decline in the overall credit quality of the Fund's portfolio and increasing
the exposure of the Fund to the risks of high yield securities.
Subsequent to its purchase by the Fund, an issue of securities may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the Fund. Neither event will require sale of these securities by the Fund,
but the Subadviser will consider this event in its determination of whether the
Fund should continue to hold the securities.
During the year ended December 31, 1998, the monthly dollar-weighted
average ratings of the debt obligations held by the Fund, expressed as a
percentage of the Fund's total investments, were as follows:
PERCENTAGE OF
RATING TOTAL INVESTMENTS
------ -----------------
AAA/Aaa =
AA/Aa =
A/A =
BBB/Baa =
BB/Ba =
B/B =
CCC/Caa =
CC/Ca =
Unrated =
U.S. GOVERNMENT SECURITIES
U.S. TREASURY SECURITIES. The Fund may invest in U.S. Treasury securities,
including Bills, Notes, Bonds and other debt securities issued by the U.S.
Treasury. These instruments are direct obligations of the U.S. Government and,
as such, are backed by the "full faith and credit" of the United States. They
differ primarily in their interest rates, the lengths of their maturities and
the dates of their issuances.
SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Fund may invest in debt securities issued or guaranteed
by agencies or instrumentalities of the U.S. Government, including but not
limited to, Government National Mortgage Association (GNMA), Federal National
Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC)
securities. Obligations of GNMA, the Farmers Home Administration and the
Export-Import Bank are backed by the "full faith and credit" of the United
States. In the case of securities not backed by the "full faith and credit" of
the United States, the Fund must look principally to the agency issuing or
guaranteeing the obligation for ultimate repayment. Such securities include
obligations issued by the Student Loan Marketing Association (SLMA), FNMA and
FHLMC, each of which may borrow from the U.S. Treasury to meet its obligations,
although the U.S. Treasury is under no obligation to lend to such entities.
The Fund may invest in component parts of U.S. Government debt securities,
namely either the corpus (principal) of such obligations or one or more of the
interest payments scheduled to be paid on such obligations. These obligations
may take the form of (i) obligations from which the interest coupons have been
stripped; (ii) the interest coupons that are stripped; (iii) book-entries at a
Federal Reserve member bank representing ownership of obligation components; or
(iv) receipts evidencing the component parts (corpus or coupons) of U.S.
Government obligations that have not actually been stripped. Such receipts
evidence ownership of component parts of U.S. Government obligations (corpus or
coupons) purchased by a third party (typically an investment banking firm) and
held on behalf of the third party in physical or book-entry form by a major
commercial bank or trust company pursuant to a custody agreement with the third
party. The Fund may also invest in custodial receipts held by a third party
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that are not U.S. Government securities. Combined with investments in similar
foreign government and semi-governmental entity securities, the Fund will not
invest more than 10% of its total assets in such securities.
SPECIAL CONSIDERATIONS. U.S. Government securities are considered among
the most creditworthy of fixed-income investments. The yields available from
U.S. Government securities are generally lower than the yields available from
corporate debt securities. The values of U.S. Government securities (like those
of fixed-income securities generally) will change as interest rates fluctuate.
During periods of falling U.S. interest rates, the values of outstanding
long-term U.S. Government securities generally rise. Conversely, during periods
of rising interest rates, the values of such securities generally decline. The
magnitude of those fluctuations will generally be greater for securities with
longer maturities. Although changes in the value of U.S. Government securities
will not affect investment income from those securities, they will affect the
net asset value (NAV) of the Fund.
At a time when the Fund has written call options on a portion of its U.S.
Government securities, its ability to profit from declining interest rates will
be limited. Any appreciation in the value of the securities held in the
portfolio above the strike price would likely be partially or wholly offset by
unrealized losses on call options written by the Fund. The termination of option
positions under these conditions would generally result in the realization of
capital losses, which would reduce the Fund's capital gains distributions.
Accordingly, the Fund would generally seek to realize capital gains to offset
realized losses by selling portfolio securities. In such circumstances, however,
it is likely that the proceeds of such sales would be reinvested in lower
yielding securities. See "Special Considerations Applicable to Options."
MORTGAGE-RELATED SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES.
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. However, these guarantees do not
extend to the securities' yield or value, which are likely to vary inversely
with fluctuations in interest rates nor do these guarantees extend to the yield
or value of the Fund's shares. 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.
In addition to GNMA, FNMA or FHLMC certificates through which the holder
receives a share of all interest and principal payments from the mortgages
underlying the certificate, the Fund may also invest in certain mortgage
pass-through securities issued by the U.S. Government or its agencies and
instrumentalities commonly referred to as mortgage-backed security strips or MBS
strips. 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 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.
The Fund will invest in both Adjustable Rate Mortgage Securities, which
are pass-through mortgage securities collateralized by adjustable rate
mortgages, and Fixed-Rate Mortgage Securities, which are collateralized by
fixed-rate mortgages. For purposes of the Fund's maturity limitation, the
maturity of a mortgage-backed security will be deemed to be equal to its
remaining maturity (i.e., the average maturity of the mortgages underlying such
security determined by the investment adviser on the basis of assumed prepayment
rates with respect to such mortgages).
MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT INSTRUMENTALITIES
FHLMC SECURITIES. FHLMC presently issues two types of mortgage
pass-through securities, mortgage participation certificates (PCs) and
guaranteed mortgage certificates (GMCs). The Fund does not intend to invest in
GMCs. PCs resemble GNMA Certificates in that each PC represents a pro rata share
of all interest and principal payments made and owed on the underlying pool.
FHLMC guarantees timely monthly payment of interest on PCs and the stated
principal amount. GMCs also represent a pro rata interest in a pool of
mortgages. However, these instruments pay interest semi-annually and return
principal once a year in guaranteed minimum payments. The expected average life
of these securities is approximately ten years.
ADJUSTABLE RATE MORTGAGE SECURITIES. Generally, adjustable rate mortgage
securities (ARMs) have a specified maturity date and amortize principal over
their life. In periods of declining interest rates, there is a reasonable
likelihood that ARMs will
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experience increased rates of prepayment of principal. However, the major
difference between ARMs and fixed rate mortgage securities (FRMs) is that the
interest rate and the rate of amortization of principal of ARMs can and do
change in accordance with movements in a particular, pre-specified, published
interest rate index. Because the interest rate on ARMs generally moves in the
same direction as market interest rates, the market value of ARMs tends to be
more stable than that of long-term fixed-rate securities.
FIXED-RATE MORTGAGE SECURITIES. The Fund anticipates investing in
high-coupon fixed-rate mortgage securities. Such securities are collateralized
by fixed-rate mortgages and tend to have high prepayment rates when the level of
prevailing interest rates declines significantly below the interest rates on the
mortgages. Thus, under those circumstances, the securities are generally less
sensitive to interest rate movements than lower coupon FRMs.
CHARACTERISTICS OF MORTGAGE-BACKED SECURITIES
The underlying mortgages which collateralize the ARMs, collateralized
mortgage obligations and Real Estate Mortgage Investment Conduits in which the
Fund invests will frequently have caps and floors which limit the maximum amount
by which the loan rate to the residential borrower may change up or down (1) per
reset or adjustment interval and (2) over the life of the loan. Some residential
mortgage loans restrict periodic adjustments by limiting changes in the
borrower's monthly principal and interest payments rather than limiting interest
rate changes. These payment caps may result in negative amortization.
The market value of mortgage securities, like other U.S. Government
securities, will generally vary inversely with changes in market interest rates,
declining when interest rates rise and rising when interest rates decline.
However, mortgage securities, while having comparable risk of decline during
periods of rising rates, usually have less potential for capital appreciation
than other investments of comparable maturities due to the likelihood of
increased prepayments of mortgages as interest rates decline. In addition, to
the extent such mortgage securities are purchased at a premium, mortgage
foreclosures and unscheduled principal prepayments generally will result in some
loss of the holders' principal to the extent of the premium paid. On the other
hand, if such mortgage securities are purchased at a discount, an unscheduled
prepayment of principal will increase current and total returns and will
accelerate the recognition of income which when distributed to shareholders will
be taxable as ordinary income.
During periods of declining interest rates, prepayments of mortgages
underlying mortgage-backed securities can be expected to accelerate. When
mortgage obligations are prepaid, the Fund reinvests the prepaid amounts in
securities, the yields of which reflect interest rates prevailing at that time.
Therefore, the Fund's ability to maintain a portfolio of high-yielding
mortgage-backed securities will be adversely affected to the extent that
prepayments of mortgages must be reinvested in securities which have lower
yields than the prepaid mortgages. Moreover, prepayments of mortgages which
underlie securities purchased at a premium generally will result in capital
losses.
CORPORATE AND OTHER NON-GOVERNMENT DEBT SECURITIES
ZERO COUPON, PAY-IN-KIND OR DEFERRED PAYMENT SECURITIES
The Fund may also invest in zero coupon, pay-in-kind or deferred payment
securities. Zero coupon securities are securities that are sold at a discount to
par value and on which interest payments are not made during the life of the
security. Upon maturity, the holder is entitled to receive the par value of the
security. While interest payments are not made on such securities, holders of
such securities are deemed to have received annually "phantom income." The Fund
accrues income with respect to these securities prior to the receipt of cash
payments. Pay-in-kind securities are securities that have interest payable by
delivery of additional securities. Upon maturity, the holder is entitled to
receive the aggregate par value of the securities. Deferred payment securities
are securities that remain a zero coupon security until a predetermined date, at
which time the stated coupon rate becomes effective and interest becomes payable
at regular intervals. Zero coupon, pay-in-kind and deferred payment securities
may be subject to greater fluctuation in value and lesser liquidity in the event
of adverse market conditions than comparably rated securities paying cash
interest at regular intervals.
CUSTODIAL RECEIPTS
Obligations issued or guaranteed as to principal and interest by the U.S.
Government, foreign governments or semi-governmental entities 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 notes or bonds. Such
notes and bonds are held in custody by a bank on behalf of the owners. These
U.S. Government custodial receipts are known by various names, including
"Treasury Receipts," "Treasury Investment Growth Receipts" (TIGRs) and
"Certificates of Accrual on Treasury Securities" (CATS). The Fund will not
invest more than 5% of its assets in such custodial receipts.
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RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES
The Fund also may engage in various portfolio strategies, including using
derivatives, to seek to reduce certain risks of its investments and to attempt
to enhance return. The Fund, and thus its investors, may lose money through any
unsuccessful use of these strategies. These strategies currently include the use
of options, foreign currency forward contracts and futures contracts and options
on such contracts. The Fund's ability to use these strategies may be limited by
various factors such as market conditions, regulatory limits and tax
considerations, and there can be no assurance that any of these strategies will
succeed. See "Taxes, Dividends and Distributions" below. If new financial
products and risk management techniques are developed, the Fund may use these to
the extent consistent with its investment objective and policies.
OPTIONS ON SECURITIES
The Fund may purchase and write (that is, sell) put and call options on
securities that are traded on national securities exchanges or in the
over-the-counter market to seek to enhance return or to protect against adverse
price fluctuations in securities in the Fund's portfolio. These options will be
on equity securities and financial indices (e.g., S&P500). The Fund may write
covered put and call options to generate additional income through the receipt
of premiums, purchase put options in an effort to protect the value of a
security that it owns against a decline in market value and purchase call
options in an effort to protect against an increase in the price of securities
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.
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 option, in return for the premium, has the obligation, upon exercise of the
option, to deliver, depending upon the terms of the option contract, the
underlying securities or a specified amount of cash to the purchaser upon
receipt of the exercise price. When the Fund writes a call option, the Fund
gives up the potential for gain on the underlying securities 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, as
the writer of a put option, might, therefore, be obligated to purchase the
underlying securities for more than their current market price.
The Fund may wish to protect certain portfolio securities against a
decline in market value through purchase of put options on other carefully
selected securities which The Prudential Investment Corporation, doing business
as Prudential Investments (Prudential Investments), and PRICOA Asset Management
Ltd (PRICOA, and collectively with Prudential Investments, the Subadviser)
believes may move in the same direction as those portfolio securities. If the
Subadviser's judgment is correct, changes in the value of the put options should
generally offset changes in the value of the portfolio securities being hedged.
If the Subadviser's judgment is not correct, the value of the securities
underlying the put option may decrease less than the value of the Fund's
investments and therefore the put option may not provide complete protection
against a decline in the value of the Fund's investments below the level sought
to be protected by the put option.
The Fund may similarly wish to hedge against appreciation in the value of
debt securities that it intends to acquire through purchase of call options on
other carefully selected debt securities which the Subadviser believes may move
in the same direction as those portfolio securities. In such circumstances the
Fund will be subject to risks analogous to those summarized above in the event
that the correlation between the value of call options so purchased and the
value of the securities intended to be acquired by the Fund is not as close as
anticipated and the value of the securities underlying the call options
increases less than the value of the securities to be acquired by the Fund.
The Fund may write options on securities in connection with buy-and-write
transactions; that is, it may purchase a security and concurrently write a call
option against that security. If the call option is exercised, the Fund's
maximum gain will be the premium it received for writing the option, adjusted
upwards or downwards by the difference between the Fund's purchase price of the
security and the exercise price of the option. If the option is not exercised
and the price of the underlying security declines, the amount of the decline
will be offset in part, or entirely, by the premium received.
The exercise price of a call option may be below (in-the-money), equal to
(at-the-money) or above (out-of-the-money) the current value of the underlying
security at the time the option is written. Buy-and-write transactions using
in-the-money call options may be used when it is expected that the price of the
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underlying security will remain flat of decline moderately during the option
period. Buy-and-write transactions using at-the-money call options may be used
when it is expected that the price of the underlying security will remain fixed
or advance moderately during the option period. An buy-and-write transaction
using an out-of-the-money call option may be used when it is expected that the
premium received from writing the call option plus the appreciation in the
market price of the underlying security up to the exercise price will be greater
than the appreciation in the price of the underlying security alone. If the call
option is exercised in such a transaction, the Fund's maximum gain will be the
premium received by it for writing the option, adjusted upwards or downwards by
the difference between the Fund's purchase price of the security and the
exercise price of the option. If the option is not exercised and the price of
the underlying security declines, the amount of the decline will be offset in
part, or entirely, by the premium received.
The Fund may write both American style options and European style options.
An American style option is an option which may be exercised by the holder at
any time prior to its expiration. A European style option may only be exercised
as of the expiration of the option.
Prior to being notified of exercise of the option, the writer of an
exchange-traded option that wishes to terminate its obligation may effect a
"closing purchase transaction" by buying an option of the same series as the
option previously written. (Options of the same series are options with respect
to the same underlying security, having the same expiration date and the same
strike price.) The effect of the purchase is that the writer's position will be
cancelled by the exchange's affiliated clearing organization. Likewise, an
investor who is the holder of an option may liquidate a position by effecting a
"closing sale transaction" by selling an option of the same series as the option
previously purchased. There is no guarantee that either a closing purchase or a
closing sale transaction can be effected.
Exchange-traded options in the U.S. are issued by a clearing organization
affiliated with the exchange on which the option is listed which, in effect,
gives its guarantee to every exchange-traded option transaction. In contrast,
OTC Options are contracts between the Fund and its counterparty with no clearing
organization guarantee. Thus, when the Fund purchases an OTC option, it relies
on the dealer from which it has purchased the OTC option to make or take
delivery of the securities underlying the option. Failure by the dealer to do so
would result in the loss of the premium paid by the Fund as well as the loss of
the expected benefit of the transaction. The Board of Directors of the Fund has
approved a list of dealers with which the Fund may engage in OTC options.
When the Fund writes an OTC option, it generally will be able to close out
the OTC option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Fund originally wrote the OTC option.
While the Fund will enter into OTC options only with dealers which agree to, and
which are expected to be capable of, entering into closing transactions with the
Fund, there can be no assurance that the Fund will be able to liquidate an OTC
option at a favorable price at any time prior to expiration. Until the Fund is
able to effect a closing purchase transaction in a covered OTC call option the
Fund has written, it will not be able to liquidate securities used as cover
until the option expires or is exercised or different cover is substituted. In
the event of insolvency of the contra-party, the Fund may be unable to liquidate
an OTC option.
OTC options purchased by the Fund will be treated as illiquid securities
subject to any applicable limitation on such securities. Similarly, the assets
used to "cover" OTC options written by the Fund will be treated as illiquid
unless the OTC options are sold to qualified dealers who agree that the Fund may
repurchase any OTC options it writes for a maximum price to be calculated by a
formula set forth in the option agreement. The "cover" for an OTC option written
subject to this procedure would be considered illiquid only to the extent that
that maximum repurchase price under the formula exceeds the intrinsic value of
the option.
The Fund will write only "covered" options. An option is covered if, as
long as the Fund is obligated under the option, it (i) owns an offsetting
position in the underlying security or (ii) segregates cash or other liquid
assets n an amount equal to or greater than its obligation under the option.
Under the first circumstance, the Fund's losses are limited because it owns the
underlying security; under the second circumstance, in the case of a written
call option, the Fund's losses are potentially unlimited.
[There is no limitation on the amount of call options the Fund may write.
The Fund may write covered put options to the extent that cover for such options
does not exceed 25% of the Fund's net assets. The Fund will not purchase an
option if, as a result of such purchase, more than 20% of its total assets would
be invested in premiums for options and options on futures.]
SPECIAL CONSIDERATIONS APPLICABLE TO OPTIONS
ON TREASURY BONDS AND NOTES. Because trading interest in Treasury Bonds
and Notes tends to center on the most recently auctioned issues, the Exchanges
will not indefinitely continue to introduce new series of options with
expirations to replace expiring options on particular issues. Instead, the
expirations introduced at the commencement of options trading on a particular
issue will be allowed to run their course, with the possible addition of a
limited number of new expirations as the original ones expire. Options trading
on each series of Bonds or Notes will thus be phased out as new options are
listed on the more recent issues, and a full range of expiration dates will not
ordinarily be available for every series on which options are traded.
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ON TREASURY BILLS. Because the deliverable Treasury Bill changes from week
to week, writers of Treasury Bill call options cannot provide in advance for
their potential exercise settlement obligations by acquiring and holding the
underlying security. However, if the Fund holds a long position in Treasury
Bills with a principal amount corresponding to the option contract size, the
Fund may be hedged from a risk standpoint. In addition, the Fund will maintain
in a segregated account with its Custodian Treasury Bills maturing no later than
those which would be deliverable in the event of an assignment of an exercise
notice to ensure that it can meet its open option obligations.
ON GNMA CERTIFICATES. The Fund may purchase and write options on GNMA
Certificates in the over-the-counter market and, to the extent available, on any
Exchange.
Since the remaining principal balance of GNMA Certificates declines each
month as a result of mortgage payments, the Fund, as a writer of a covered GNMA
call option holding GNMA Certificates as "cover" to satisfy its delivery
obligation in the event of assignment of an exercise notice, may find that its
GNMA Certificates no longer have sufficient remaining principal balance for this
purpose. Should this occur, the Fund will enter into a closing purchase
transaction or will purchase additional GNMA Certificates from the same pool (if
obtainable) or replacement GNMA Certificates in the cash market in order to
remain covered or substitute cover.
A GNMA Certificate held by the Fund to cover a call option the Fund has
written in any but the nearest expiration month may cease to represent cover for
the option in the event of a decline in the GNMA coupon rate at which new pools
are originated under the FHA/VA loan ceiling in effect at any given time. Should
this occur, the Fund will no longer be covered, and the Fund will either enter
into a closing purchase transaction or replace the Certificate with a
Certificate which represents cover. When the Fund closes its option position or
replaces the Certificate, it may realize an unanticipated loss and incur
transaction costs.
OPTIONS ON CURRENCIES
Instead of purchasing or selling futures or forward currency exchange
contracts, the Fund may attempt to accomplish similar objectives by purchasing
put or call options on currencies either on exchanges or in over-the-counter
markets or by writing put options or covered call options on currencies. A put
option gives the Fund the right to sell a currency at the exercise price until
the option expires. A call option gives the Fund the right to purchase a
currency at the exercise price until the option expires. Both options serve to
insure against adverse currency price movements in the underlying portfolio
assets designated in a given currency. The Fund's use of options on currencies
will be subject to the same limitations as its use of options on securities,
described above. The Fund will not purchase put or call options if, as a result
thereof, the value of the options would exceed 5% of the Fund's net assets.
FOREIGN CURRENCY FORWARD CONTRACTS
The Fund's transactions in forward currency exchange will be limited to
hedging involving either specific transactions or portfolio positions.
Transaction hedging is the forward purchase or sale of currency with respect to
specific receivables or payables of the Fund generally arising in connection
with the purchase or sale of its portfolio securities and accruals of interest
receivable and Fund expenses. Position hedging is the forward sale of currency
with respect to portfolio security positions denominated or quoted in that
currency or in a currency bearing a high degree of positive correlation to the
value of that currency.
The Fund may not position hedge (including cross hedges) with respect to a
particular currency for an amount greater than the aggregate market value
(determined at the time of making any sale of forward currency) of the
securities being hedged. If the Fund enters into a position hedging transaction,
the transaction will be "covered" by the position being hedged or the Fund's
Custodian will segregate cash or other liquid assets of the Fund (less the value
of the "covering" positions, if any) in an amount equal to the value of the
Fund's total assets committed to the consummation of the given forward contract.
If the value of the securities segregated declines, additional cash or
securities will be segregated so that the value of the account will, at all
times, equal the amount of the Fund's net commitment with respect to the forward
contract.
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At or before the maturity of a forward sale contract, the Fund may either
sell a portfolio security and make delivery of the currency, or retain the
security and offset its contractual obligations to deliver the currency by
purchasing a second contract pursuant to which the Fund will obtain, on the same
maturity date, the same amount of the currency which it is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund, at the time of execution of the offsetting transaction,
will incur a gain or a loss to the extent that movement has occurred in forward
contract prices. Should forward prices decline during the period between the
Fund's entering into a forward contract for the sale of a currency and the date
it enters into an offsetting contract for the purchase of the currency, the Fund
will realize a gain to the extent the price of the currency it has agreed to
purchase is less than the price of the currency it has agreed to sell. Should
forward prices increase, the Fund will suffer a loss to the extent the price of
the currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. Closing out forward purchase contracts involves similar
offsetting transactions.
The use of foreign currency contracts does not eliminate fluctuations in
the underlying prices of the securities, but it does establish a rate of
exchange that can be achieved in the future. In addition, although forward
currency contracts limit the risk of loss due to a decline in the value of the
hedged currency, they also limit any potential gain that might result if the
value of the currency increases.
FUTURES CONTRACTS AND OPTIONS THEREON
The Fund may purchase and sell interest rate and financial futures
contracts to take advantage of or to protect the Fund against fluctuations in
interest rates affecting the value of debt securities which the Funds holds or
intends to acquire and may also purchase or sell currency futures contracts and
options thereon to manage currency risks. The Fund, and thus its investors, may
lose money through any unsuccessful use of these strategies.
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 transactions, 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 market 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 may only write ("covered") put and call options on futures
contracts. The Fund will be considered "covered" with respect to a call option
it writes on a futures contract if the Fund owns the assets which are
deliverable under the futures contract or an option to purchase that futures
contract having a strike price equal to or less than the strike price of the
"covered" option and having an expiration date not earlier than the expiration
date of the "covered" option, or if it segregates and maintains with the Fund's
Custodian for the term of the option cash or other liquid assets equal to the
fluctuating value of the optioned future. The Fund will be considered "covered"
with respect to a put option it writes on a futures contract if it owns an
option to sell that futures contract having a strike price equal to or greater
than the strike price of the "covered" option or if it segregates with the
Custodian for the term of the option cash or other liquid assets at all times
equal in value to the exercise price of the put (less any initial margin
deposited by the Fund with the Custodian with respect to such put option). There
is no limitation on the amount of the Fund's assets which can be placed in the
segregated account.
The Fund's successful use of futures contracts and options thereon depends
upon the investment adviser's ability to predict the direction of the market and
interest rates and requires skills and techniques different from those used in
selecting portfolio securities. The correlation between movements in the price
of a futures contract and movements in the price of the securities being hedged
is imperfect and the risk from imperfect correlation increases as the
composition of the Fund's portfolio diverges from the composition of the
relevant index. There is also a risk that the value of the securities being
hedged may increase or decrease at a greater rate than the related futures
contracts, resulting in losses to the Fund. Certain futures exchanges or boards
of trade have established daily limits on the amount that the price of futures
contracts or options 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.
Certain of the futures and options on futures sold or purchased in the
Fund may be traded on foreign exchanges. Such transactions may not be regulated
as effectively as similar transactions in the United States, may not involve a
clearing mechanism and related guarantees, and are subject to the risk of
governmental action affecting trading in, or the prices of, foreign securities.
The value of such positions also could be adversely affected by (1) other
complex foreign political, legal and economic factors, (2) lesser availability
than the United States of data on which to make trading decisions, (3) delays in
the Fund's ability to act upon economic events occurring in the foreign markets
during non-business hours in the United States, (4) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States and (5) lesser trading volume.
RISKS OF RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES
Participation in the options or futures markets and in currency exchange
transactions involves investment risks and transaction costs to which the Fund
would not be subject absent the use of these strategies. The Fund, and thus
investors, may
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lose money through any unsuccessful use of these strategies. If the Subadviser's
predictions of movements in the direction of the securities, foreign currency or
interest rate markets are inaccurate, the adverse consequences to the Fund may
leave the Fund in a worse position than if such strategies were not used. Risks
inherent in the use of options, foreign currency and futures contracts and
options on futures contracts include: (1) dependence on the Subadviser's ability
to predict correctly movements in the direction of interest rates, securities
prices and currency markets; (2) imperfect correlation between the price of
options and futures contracts and options thereon and movements in the prices of
the securities being hedged; (3) the fact that the skills needed to use these
strategies are different from those needed to select portfolio securities; (4)
the possible absence of a liquid secondary market for any particular instrument
at any time; (5) the risk that the counterparty may be unable to complete the
transaction; and (6) the possible inability of the Fund to purchase or sell a
portfolio security at a time that otherwise would be favorable for it to do so,
or the possible need for the Fund to sell a portfolio security at a
disadvantageous time, due to the need for the Fund to maintain "cover" or to
segregate securities in connection with hedging transactions.
The Fund will generally purchase options and futures on an exchange only
if there appears to be a liquid secondary market for such options or futures;
the Fund will generally purchase OTC options only if the investment adviser
believes that the other party to the options will continue to make a market for
such options.
[INTEREST RATE FUTURES CONTRACTS AND OPTIONS THEREON
The Fund will purchase or sell interest rate futures contracts to take
advantage of or to protect the Fund against fluctuations in interest rates
affecting the value of debt securities which the Fund holds or intends to
acquire. For example, if interest rates are expected to increase, the Fund might
sell futures contracts on debt securities, the values of which historically have
a high degree of positive correlation to the values of the Fund's portfolio
securities. Such a sale would have an effect similar to selling an equivalent
value of the Fund's portfolio securities. If interest rates increase, the value
of the Fund's portfolio securities will decline, but the value of the futures
contracts to the Fund will increase at approximately an equivalent rate thereby
keeping the net asset value of the Fund from declining as much as it otherwise
would have. The Fund could accomplish similar results by selling debt securities
with longer maturities and investing in debt securities with shorter maturities
when interest rates are expected to increase. However, since the futures market
may be more liquid than the cash market, the use of futures contracts as a risk
management technique allows the Fund to maintain a defensive position without
having to sell its portfolio securities.
Similarly, the Fund may purchase interest rate futures contracts when it
is expected that interest rates may decline. The purchase of futures contracts
for this purpose constitutes a hedge against increases in the price of debt
securities (caused by declining interest rates) which the Fund intends to
acquire. Since fluctuations in the value of appropriately selected futures
contracts should approximate that of the debt securities that will be purchased,
the Fund can take advantage of the anticipated rise in the cost of the debt
securities without actually buying them. Subsequently, the Fund can make the
intended purchase of the debt securities in the cash market and currently
liquidate its futures position. To the extent the Fund enters into futures
contracts for this purpose, it will segregate with the Fund's Custodian cash or
other liquid assets from its portfolio in an amount equal to the difference
between the fluctuating market value of such futures contracts and the aggregate
value of the initial margin deposited by the Fund with its Custodian with
respect to such futures contracts sufficient to cover the Fund's obligations
with respect to such futures contracts.
The purchase of a call option on a futures contract is similar in some
respects to the purchase of a call option on an individual security. Depending
on the pricing of the option compared to either the price of the futures
contract upon which it is based or the price of the underlying debt securities,
it may or may not be less risky than ownership of the futures contract or
underlying debt securities. As with the purchase of futures contracts, when the
Fund is not fully invested it may purchase a call option on a futures contract
to hedge against a market advance due to declining interest rates.
The purchase of a put option on a futures contract is similar to the
purchase of protective put options on portfolio securities. The Fund will
purchase a put option on a futures contract to hedge the Fund's portfolio
against the risk of rising interest rates and consequent reduction in the value
of portfolio securities.
The amount of risk the Fund assumes when it purchases an option on a
futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of an
option also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the securities which are deliverable upon
exercise of the futures contract. If the futures price at expiration of the
option is below the exercise price, the Fund will retain the full amount of the
option premium which provides a partial hedge against any decline that may have
occurred in the Fund's portfolio holdings. The writing of a put option on a
futures contract constitutes a partial hedge against increasing prices of the
securities which are deliverable upon exercise of the futures contract. If the
futures price at expiration of the option is higher than the exercise price, the
Fund will retain the full amount of the option premium which provides a partial
hedge against
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any increase in the price of debt securities which the Fund intends to purchase.
If a put or call option the Fund has written is exercised, the Fund will incur a
loss which will be reduced by the amount of the premium it received. Depending
on the degree of correlation between changes in the value of its portfolio
securities and changes in the value of its futures positions, the Fund's losses
from options on futures it has written may to some extent be reduced or
increased by changes in the value of its portfolio securities.
In addition, futures contracts entail risks. Although the Fund believes
that use of such contracts will benefit the Fund, if the investment adviser's
investment judgment about the general direction of interest rates is incorrect,
the Fund's overall performance would be poorer than if it had not entered into
any such contracts. For example, if the Fund has hedged against the possibility
of an increase in interest rates which would adversely affect the price of bonds
held in its portfolio and interest rates decrease instead, the Fund will lose
part or all of the benefit of the increased value of its bonds which it has
hedged because it will have offsetting losses in its futures positions. In
addition, particularly in such situations, if the Fund has insufficient cash, it
may have to sell bonds from its portfolio to meet daily variation margin
requirements. Such sales of bonds may be, but will not necessarily be, at
increased prices which reflect the rising market. The Fund may have to sell
securities at a time when it may be disadvantageous to do so.]
[CURRENCY FUTURES AND OPTIONS THEREON
Generally, foreign currency futures contracts and options thereon are
similar to the interest rate futures contracts and options thereon discussed
previously. By entering into currency futures and options thereon on U.S. and
foreign exchanges, the Fund will seek to establish the rate at which it will be
entitled to exchange U.S. dollars for another currency at a future time. By
selling currency futures, the Fund will seek to establish the number of dollars
it will receive at delivery for a certain amount of a foreign currency. In this
way, whenever the Fund anticipates a decline in the value of a foreign currency
against the U.S. dollar, the Fund can attempt to "lock in" the U.S. dollar value
of some or all of the securities held in its portfolio that are denominated in
that currency. By purchasing currency futures, the Fund can establish the number
of dollars it will be required to pay for a specified amount of a foreign
currency in a future month. Thus if the Fund intends to buy securities in the
future and expects the U.S. dollar to decline against the relevant foreign
currency during the period before the purchase is effected, the Fund can attempt
to "lock in" the price in U.S. dollars of the securities it intends to acquire.
The purchase of options on currency futures will allow the Fund, for the
price of the premium and related transaction costs it must pay for the option,
to decide whether or not to buy (in the case of a call option) or to sell (in
the case of a put option) a futures contract at a specified price at any time
during the period before the option expires. If the investment adviser, in
purchasing an option, has been correct in its judgment concerning the direction
in which the price of a foreign currency would move as against the U.S. dollar,
the Fund may exercise the option and thereby take a futures position to hedge
against the risk it had correctly anticipated or close out the option position
at a gain that will offset, to some extent, currency exchange losses otherwise
suffered by the Fund. If exchange rates move in a way the investment adviser did
not anticipate, however, the Fund will have incurred the expense of the option
without obtaining the expected benefit; any such movement in exchange rates may
also thereby reduce rather than enhance the Fund's profits on its underlying
securities transactions.]
[As in the case of interest rate futures contracts and options thereon,
the Fund may hedge against the risk of a decrease or increase in the U.S. dollar
value of a foreign currency denominated debt security which the Fund owns or
intends to acquire by purchasing or selling options contracts, futures contracts
or options thereon with respect to a foreign currency other than the foreign
currency in which such debt security is denominated, where the values of such
different currencies (vis-a-vis the U.S. dollar) historically have a high degree
of positive correlation.]
ADDITIONAL RISKS OF OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Options, futures contracts and options thereon may be traded on foreign
exchanges. Such transactions may not be regulated as effectively as similar
transactions in the U.S., may not involve a clearing mechanism and related
guarantees, and are subject to the risk of governmental actions affecting
trading in, or the prices of, foreign securities. The value of such positions
also could be adversely affected by (i) other complex foreign political, legal
and economic factors, (ii) lesser availability than in the U.S. of data on which
to make trading decisions, (iii) delays in the Fund's ability to act upon
economic events occurring in the foreign markets during non-business hours in
the U.S., (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the U.S. and (v) lesser trading
volume.
Exchanges on which options, futures and options on futures are traded may
impose limits on the positions that the Fund may take in certain circumstances.
In addition, the hours of trading of financial futures contracts and options
thereon may not conform to the hours during which the Fund may trade the
underlying securities. To the extent the futures markets close before the
securities markets, significant price and rate movements can take place in the
securities markets that cannot be reflected in the futures markets.
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<PAGE>
SPECIAL RISK CONSIDERATIONS RELATING TO FUTURES AND OPTIONS THEREON
Certain risks are inherent in the Fund's use of futures contracts and
options on futures. One such risk arises because the correlation between
movements in the price of futures contracts or options on futures and movements
in the price of the securities hedged or used for cover will not be perfect.
Another risk is that the price of futures contracts or options on futures may
not move inversely with changes in interest rates. If the Fund has sold futures
contracts to hedge securities held by the Fund and the value of the futures
position declines more than the price of such securities increases, the Fund
will realize a loss on the futures contracts which is not completely offset by
the appreciation in the price of the hedged securities. Similarly, if the Fund
has written a call on a futures contract and the value of the call increases by
more than the increase in the value of the securities held as cover, the Fund
may realize a loss on the call which is not completely offset by the
appreciation in the price of the securities held as cover and the premium
received for writing the call.
The Fund's ability to establish and close out positions in futures
contracts and options on futures contracts will be subject to the development
and maintenance of liquid markets. Although the Fund generally will purchase or
sell only those futures contracts and options thereon for which there appears to
be a liquid market, there is no assurance that a liquid market on an exchange
will exist for any particular futures contract or option thereon at any
particular time. In the event no liquid market exists for a particular futures
contract or option thereon in which the Fund maintains a position, it will not
be possible to effect a closing transaction in that contract or to do so at a
satisfactory price and the Fund would have to either make or take delivery under
the futures contract or, in the case of a written option, wait to sell the
underlying securities until the option expires or is exercised or, in the case
of a purchased option, exercise the option. In the case of a futures contract or
an option on a futures contract which the Fund has written and which the Fund is
unable to close, the Fund would be required to maintain margin deposits on the
futures contract or option and to make variation margin payments until the
contract is closed.
Successful use of futures contracts and options thereon and forward
contracts by the Fund is subject to the ability of the investment adviser to
predict correctly movements in the direction of interest and foreign currency
rates. If the investment adviser's expectations are not met, the Fund would be
in a worse position than if a hedging strategy had not been pursued. For
example, if the Fund has hedged against the possibility of an increase in
interest rates which would adversely affect the price of securities in its
portfolio and the price of such securities increases instead, the Fund will lose
part or all of the benefit of the increased value of its securities because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash to meet daily variation margin
requirements, it may have to sell securities to meet the requirements. These
sales may, but will not necessarily, be at increased prices which reflect the
rising market. The Fund may have to sell securities at a time when it is
disadvantageous to do so.
Pursuant to the requirements of the Commodity Exchange Act, as amended,
all U.S. futures contracts and options thereon must be traded on an exchange.
Since a clearing corporation effectively acts as the counterparty on every
futures contract and option thereon, the counterparty risk depends on the
strength of the clearing or settlement corporation associated with the exchange.
Additionally, although the exchanges provide a means of closing out a position
previously established, there can be no assurance that a liquid market will
exist for a particular contract at a particular time. In the case of options on
futures, if such a market does not exist, the Fund, as the holder of an option
on futures contracts, would have to exercise the option and comply with the
margin requirements for the underlying futures contract to realize any profit,
and if the Fund were the writer of the option, its obligation would not
terminate until the option expired or the Fund was assigned an exercise notice.
LIMITATIONS ON THE PURCHASE AND SALE OF FUTURES CONTRACTS AND OPTIONS ON FUTURES
CONTRACTS
The Fund will engage in transactions in futures contracts and options
thereon only for bona fide hedging, return enhancement and risk management
purposes, in each case in accordance with the rules and regulations of the CFTC,
and not for speculation.
In accordance with CFTC regulations, the Fund may not purchase or sell
futures contracts or options thereon for return enhancement or risk management
purposes if immediately thereafter the sum of the amounts of initial margin
deposits on the Fund's existing futures and premiums paid for options on futures
would exceed 5% of the market value of the Fund's total assets after taking into
account unrealized profits and unrealized losses on any such contracts;
provided, however, that in the case of an option that is in-the-money at the
time of the purchase, the in-the-money amount may be excluded in calculating the
5% limitation. The above restriction does not apply to the purchase and sale of
futures contracts and options thereon for bona fide hedging purposes. In
instances involving the purchase of futures contracts or call options thereon or
the writing of put options thereon by the Fund, an amount of cash or other
liquid assets equal to the market value of the futures contracts and options
thereon (less any related margin deposits), will be deposited in a segregated
account with the Fund's Custodian (or a futures commission merchant) to cover
the position, or alternative cover will be employed, thereby insuring that the
use of such instruments is unleveraged.
B-14
<PAGE>
The Fund's purchase and sale of futures contracts and purchase and writing
of options on futures contracts will be for the purpose of protecting its
portfolio against anticipated future changes in interest rates or foreign
currency exchange which might otherwise either adversely affect the value of the
Fund's portfolio securities or adversely affect the prices of securities that
the Fund intends to purchase at a later date, to change the effective duration
of the Fund's portfolio and to enhance the Fund's return. The Fund expects that
in 75% of the transactions involving an anticipatory hedge it will purchase
securities for its portfolio when it closes out its earlier purchase of futures
or call options thereon or put options it has written thereon. Under unusual
market conditions, however, the Fund may terminate any of such positions without
a corresponding purchase of securities.
In addition, CFTC regulations may impose limitations on the Fund's ability
to engage in certain return enhancement and risk management strategies. There
are no limitations on the Fund's use of futures contracts and options on futures
contracts beyond the restrictions set forth above.
Although the Fund intends to purchase or sell futures and options on
futures only on exchanges where there appears to be an active market, there is
no guarantee that an active market will exist for any particular contract or at
any particular time. If there is not a liquid market at a particular time, it
may not be possible to close a futures position at such time, and, in the event
of adverse price movements, the Fund would continue to be required to make daily
cash payments of variation margin. However, in the event a futures contract has
been used to hedge portfolio securities, such securities will not be sold until
the futures contract can be terminated. In such circumstances, an increase in
the price of securities, if any, may partially or completely offset losses on
the futures contract. However, there is no guarantee that the price movements of
the securities will, in fact, correlate with the price movements in the futures
contracts and thus provide an offset to losses on a futures contract.
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 in securities markets
either within or outside of the United States.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act, securities which are otherwise not readily
marketable and repurchase agreements having a maturity of longer than seven
days. Securities which have not been registered under the Securities Act are
referred to as private placements or restricted securities and are purchased
directly from the issuer or in the secondary market. Mutual funds do not
typically hold a significant amount of these restricted or other illiquid
securities because of the potential for delays on resale and uncertainty in
valuation. Limitations on resale may have an adverse effect on the marketability
of portfolio securities and a mutual fund might be unable to dispose of
restricted or other illiquid securities promptly or at reasonable prices and
might thereby experience difficulty satisfying redemptions within seven days. A
mutual fund might also have to register such restricted securities in order to
dispose of them resulting in additional expense and delay. Adverse market
conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The investment adviser anticipates that the
market for certain restricted securities such as institutional commercial paper
and foreign securities will expand further as a result of this regulation and
the development of automated systems for the trading, clearance and settlement
of unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc.
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper for which there is a readily available
market are treated as liquid only when deemed liquid under procedures
established by the Directors. The investment adviser will monitor the liquidity
of such restricted securities subject to the supervision of the Board of
Directors. In reaching liquidity decisions, the investment adviser will
consider, among others, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers wishing to purchase or sell
the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades (that is, the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer). In addition, in order for commercial paper that is issued in
reliance on Section 4(2) of the Securities Act, to be
B-15
<PAGE>
considered liquid (a) it must be rated in one of the two highest rating
categories by at least two nationally recognized statistical rating
organizations (NRSRO), or if only one NRSRO rates the securities, by that NRSRO,
or, if unrated, be of comparable quality in the view of the investment adviser;
and (b) it must not be "traded flat" (that is, without accrued interest) or in
default as to principal or interest. Repurchase agreements subject to demand are
deemed to have a maturity equal to the notice period.
The staff of the Securities and Exchange Commission (Commission) has taken
the position that purchased over-the-counter options and the assets used as
"cover" for written over-the-counter options are illiquid securities unless the
Fund and the counterparty have provided for the Fund, at the Fund's election, to
unwind the over-the-counter option. The exercise of such an option ordinarily
would involve the payment by the Fund of an amount designed to reflect the
counterparty's economic loss from an early termination, but does allow the Fund
to treat the assets used as "cover" as "liquid." The Fund will also treat
non-U.S. Government interest-only and principal-only mortgage backed security
strips as illiquid so long as the staff of the Commission maintains its position
that such securities are illiquid.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase or sell securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place in the future in order to secure what is considered to be an advantageous
price and yield to the Fund at the time of entering into the transaction. The
Fund's Custodian will segregate cash or other liquid assets having a value equal
to or greater than the Fund's purchase commitments. The securities so purchased
are subject to market fluctuation and no interest accrues to the purchaser
during the period between purchase and settlement. At the time of delivery of
the securities the value may be more or less than the purchase price and an
increase in the percentage of the Fund's assets committed to the purchase of
securities on a when-issued or delayed delivery basis may increase the
volatility of the Fund's net asset value.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements, whereby the seller of a
security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Fund's money is
invested in the repurchase agreement. The Fund's repurchase agreements will at
all times be fully collateralized by U.S. Government obligations in an amount at
least equal to the resale price. The instruments held as collateral are valued
daily, and if the value of instruments declines, the Fund will require
additional collateral. If the seller defaults and the value of the collateral
securing the repurchase agreement declines, the Fund may incur a loss.
The Fund will enter into repurchase transactions only with parties meeting
creditworthiness standards approved by the Fund's Directors. The Fund's
investment adviser will monitor the creditworthiness of such parties under the
general supervision of the Directors. In the event of a default or bankruptcy by
a seller, the Fund will promptly seek to liquidate the collateral.
The Fund participates in a joint repurchase account with other investment
companies managed by Prudential Investments Fund Management LLC (the manager)
pursuant to an order of the Commission. On a daily basis, any uninvested cash
balances of the Fund may be aggregated with those of such investment companies
and invested in one or more repurchase agreements. Each fund participates in the
income earned or accrued in the joint account based on the percentage of its
investment.
BORROWING
The Fund may borrow up to 20% of the value of its total assets (calculated
when the loan is made) for temporary, extraordinary or emergency purposes, or
for the clearance of transactions and to take advantage of investment
opportunities. The Fund may pledge up to 20% of its total assets to secure these
borrowings. If the Fund borrows to invest in securities, any investment gains
made on the securities in excess of interest paid on the borrowing will cause
the net asset value of the shares to rise faster than would otherwise be the
case. On the other hand, if the investment performance of the additional
securities purchased fails to cover their cost (including any interest paid on
the money borrowed) to the Fund, the net asset value of the Fund's shares will
decrease faster than would otherwise be the case. This is the speculative factor
known as "leverage." If the Fund's asset coverage of borrowings falls below
300%, the Fund will take prompt action (within 3 days) to reduce its borrowings.
If the 300% asset coverage should decline as a result of market fluctuations or
other reasons, the Fund may be required to sell portfolio securities to reduce
the debt and restore the 300% asset coverage, even though it may be
disadvantageous from an investment standpoint to sell securities at that time.
The Fund will not purchase portfolio securities when borrowings exceed 5% of the
value of its total assets.
SEGREGATED ASSETS
The Fund will segregate with its Custodian, State Street Bank and Trust
Company (State Street), cash, U.S. Government securities, equity securities
(including foreign securities), debt securities or other liquid, unencumbered
assets, equal in value to
B-16
<PAGE>
its obligations in respect of potentially leveraged transactions. These include
forward contracts, when-issued and delayed delivery securities, futures
contracts, written options and options on futures contracts (unless otherwise
covered), if collateralized or otherwise covered, in accordance with Commission
guidelines, these will not be deemed to be senior securities. The assets
segregated will be marked-to-market daily.
DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS
When conditions dictate a defensive strategy, the Fund may temporarily
invest without limit in U.S. Treasury or other U.S. dollar-denominated
securities or high quality money market instruments, including commercial paper
of domestic and foreign corporations, certificates of deposit, bankers'
acceptances and other obligations of domestic and foreign banks, and short-term
obligations issued or guaranteed by the U.S. Government and its agencies. Such
investments may be subject to certain risks, including future political and
economic developments, the possible imposition of withholding taxes on interest
income, the seizure or nationalization of foreign deposits and foreign exchange
controls or other restrictions.
PORTFOLIO TURNOVER
As a result of the investment policies described above, the Fund may
engage in a substantial number of portfolio transactions, and the Fund's
portfolio turnover rate may exceed 100%, but is not expected to exceed 250%. The
portfolio turnover rates for the Fund were %, and 43% for the fiscal years
ended December 31, 1998 and 1997, respectively. The portfolio turnover rate is
generally the percentage computed by dividing the lesser of portfolio purchases
or sales (excluding all securities, including options, whose maturities or
expiration date at acquisition were one year or less) by the monthly average
value of the long-term portfolio. High portfolio turnover (100% or more)
involves correspondingly greater brokerage commissions and other transaction
costs, which are borne directly by the Fund. In addition, high portfolio
turnover may also mean that a proportionately greater amount of distributions to
shareholders will be taxed as ordinary income rather than long-term capital
gains compared to investment companies with lower portfolio turnover See
"Portfolio Transactions and Brokerage" and "Taxes, Dividendsand Distributions."
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities. A "majority of the Fund's
outstanding voting securities," when used in this Statement of Additional
Information, means the lesser of (1) 67% of the voting shares represented at a
meeting at which more than 50% of the outstanding voting shares are present in
person or represented by proxy or (2) more than 50% of the outstanding voting
shares.
The Fund may not:
1. Purchase securities on margin, except such short-term credits as
may be necessary for the clearance of transactions; provided that the
deposit or payment by the Fund of initial or maintenance margin in
connection with futures or options is not considered the purchase of a
security on margin.
2. Make short sales of securities or maintain a short position.
3. Issue senior securities, borrow money or pledge its assets,
except that the Fund may borrow from banks up to 20% of the value of its
total assets (calculated when the loan is made) for temporary,
extraordinary or emergency purposes, for the clearance of transactions or
for investment purposes. The Fund may pledge up to 20% of the value of its
total assets to secure such borrowings. For purposes of this restriction,
the purchase or sale of securities on a when-issued or delayed delivery
basis, forward foreign currency exchange contracts and collateral
arrangements relating thereto, and collateral arrangements with respect to
interest rate swap transactions, reverse repurchase agreements, dollar
roll transactions, options, futures contracts and options thereon and
obligations of the Fund to Directors pursuant to deferred compensation
arrangements are not deemed to be pledge of assets or the issuance of a
senior security.
4. Buy or sell commodities, commodity contracts, real estate or
interests in real estate. Transactions in foreign currencies, financial
futures contracts and forward contracts and any related options thereon
are not considered by the Fund to be transactions in commodities or
commodity contracts.
5. Make loans, except through (i) repurchase agreements and (ii) the
purchase of debt obligations and bank deposits.
6. Make investments for the purpose of exercising control or
management.
7. Act as an underwriter (except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities in
the Fund's investment portfolio).
8. Except for securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, invest 25% or more of its
total assets at the time of purchase in any one industry or in the
securities of any central government or supranational issuer.
B-17
<PAGE>
Whenever any fundamental investment policy or investment restriction
states a maximum percentage of the Fund's assets, it is intended that if the
percentage limitation is met at the time the investment is made, a later change
in percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that the Fund's
asset coverage for borrowings falls below 300%, the Fund will take prompt action
to reduce its borrowings, as required by applicable law.
MANAGEMENT OF THE FUND
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) WITH FUND DURING PAST FIVE YEARS
- ------------------------ --------- ----------------------
Edward D. Beach (73) Director President and Director of BMC
Fund, Inc., a closed-end
investment company; formerly Vice
Chairman of Broyhill Furniture
Industries, Inc.; Certified
Public Accountant; Secretary and
Treasurer of Broyhill Family
Foundation Inc.; Member of the
Board of Trustees of Mars Hill
College and Director or Trustee
of funds within the
Prudential Mutual Funds.
Delayne Dedrick Gold (59) Director Marketing and Management
Consultant and Director or
Trustee of funds
within the Prudential Mutual
Funds.
*Robert F. Gunia (51) Vice Vice President (since September
President 1997) of Prudential Investments;
and Director Executive Vice President and
Treasurer (since December 1996)
of Prudential Investments Fund
Management LLC (PIFM); Senior
Vice President (since March 1987)
of Prudential Securities
Incorporated (Prudential
Securities); formerly Chief
Administrative Officer (July
1990-September 1996), Director
(January 1989-September 1996) and
Executive Vice President,
Treasurer and Chief Financial
Officer (June 1987-September
1996) of Prudential Mutual Fund
Management, Inc. (PMF); Vice
President and Director (since May
1989) of The Asia Pacific Fund,
Inc. and Director or Trustee of
funds within the Prudential
Mutual Funds.
Douglas H. McCorkindale (58) Director Vice Chairman (since March 1984)
and President (since September
1997) of Gannett Co. Inc.
(publishing and media); Director
of Continental Airlines, Inc.,
Gannett Co. Inc. and Frontier
Corporation and Director or
Trustee of funds within the
Prudential Mutual Funds.
*Mendel A. Melzer, CFA (38) Director Chief Investment Officer (since
100 Mulberry Street October 1996) of Prudential
Gateway Two Mutual Funds; formerly Chief
Newark, NJ 07102 Financial Officer (November
1955-September 1996) of
Prudential Investments, Senior
Vice President and Chief
Financial Officer (April
1993-November 1995) of Prudential
Preferred Financial Services,
Managing Director (April
1991-April 1993) of Prudential
Investment Advisors and Senior
Vice President (July 1989-April
1991) of Prudential Capital
Corporation; Chairman and
Director of Prudential Series
Fund, Inc. and Director or
Trustee of funds within the
Prudential Mutual Funds.
Thomas T. Mooney (56) Director President of the Greater
Rochester Metro Chamber of
Commerce; former Rochester City
Manager; Trustee of Center for
Governmental Research, Inc.;
Director of Blue Cross of
Rochester, The Business Council
of New York State, Executive
Service Corps of Rochester,
Monroe County Water Authority,
Rochester Jobs, Inc., Monroe
County Industrial Development
Corporation and Northeast Midwest
Institute; President, Director
and Treasurer of First Financial
Fund, Inc. and The High Yield
Plus Fund, Inc. and Director or
Trustee of funds within the
Prudential Mutual Funds.
Stephen P. Munn (55) Director Chairman (since January 1994),
Director and President (since
1988) and Chief Executive Officer
(1988-December 1993) of Carlisle
Companies Incorporated
(manufacturer of industrial
products) and Director or Trustee
of funds within the
Prudential Mutual Funds.
B-18
<PAGE>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) WITH FUND DURING PAST FIVE YEARS
- ------------------------ --------- ----------------------
*Richard A. Redeker (54) Director Employee of Prudential
100 Mulberry Street Investments; formerly President,
Gateway Two Chief Executive Officer and
Newark, NJ 07102 Director (October 1993-September
1996) of Prudential Mutual Fund
Management, Inc. (PMF), Executive
Vice President, Director and
Member of the Operating Committee
(October 1993-September 1996) of
Prudential Securities, Director
(October 1993-September 1996) of
Prudential Securities Group,
Inc.; Executive Vice President
(July 1994-September 1996) of The
Prudential Investment
Corporation; Director (January
1994-September 1996) of
Prudential Mutual Fund
Distributors, Inc. and Prudential
Mutual Fund Services, Inc., and
Senior Executive Vice President
and Director (September
1978-September 1993) of Kemper
Financial Services, Inc.; and
Director or Trustee of
funds within the Prudential
Mutual Funds.
Robin B. Smith (58) Director Chairman and Chief Executive
Officer (since August 1996),
formerly President and Chief
Executive Officer (January
1989-August 1996) and President
and Chief Operating Officer
(September 1981-December 1988) of
Publishers Clearing House;
Director of BellSouth
Corporation, Texaco Inc., Spring
Industries Inc. and Kmart
Corporation and Director or
Trustee of funds within
the Prudential Mutual Funds.
Brian M. Storms (44) President President (since October 1998) of
and Director Prudential Investments; formerly
President (September 1996-October
1998) of Prudential Mutual Funds,
Annuities and Investment
Management Services; Managing
Director (July 1991-September
1996) of Fidelity Investment
Institutional Services Company,
Inc.; President, (October
1989-September 1991) of J.K.
Schofield; Senior Vice President
(September 1982- October 1989) of
INVEST Financial Corporation and
Director or Trustee of and
President of funds
within the Prudential Mutual
Funds.
Louis A. Weil, III (57) Director Publisher and Chief Executive
Officer (since January 1996) and
Director (since September 1991)
of Central Newspapers, Inc.;
Chairman of the Board (since
January 1996), Publisher and
Chief Executive Officer (August
1991-December 1995) of Phoenix
Newspapers, Inc.; formerly
Publisher (May 1989-March 1991)
of Time Magazine, President,
Publisher and Chief Executive
Officer (February 1986-August
1989) of The Detroit News and
member of the Advisory Board,
Chase Manhattan Bank-Westchester;
Director of The High Yield Income
Fund, Inc. and Director or
Trustee of funds
within the Prudential Mutual
Funds.
Clay T. Whitehead (59) Director President (since May 1983) of
National Exchange Inc. (new
business development firm) and
Director or Trustee of
funds within the Prudential
Mutual Funds.
Grace C. Torres (39) Treasurer First Vice President (since
and Principal December 1996) of PIFM; First
Financial and Vice President (since March 1993)
Accounting of Prudential Securities;
Officer formerly First Vice President
(March 1994-September 1996) of
PMF and Vice President (July
1989-March 1994) of Bankers Trust
Corporation.
Marguerite E. H. Morrison (42) Secretary Vice President and Associate
General Counsel (since December
1996) of PIFM, Vice President and
Associate General Counsel (since
September 1987) of Prudential
Securities; formerly Vice
President and Associate General
Counsel (June 1991-September
1996) of PMF.
Stephen M. Ungerman (44) Assistant Tax Director (since March 1996)
Treasurer of Prudential Investments;
formerly First Vice President
(February 1993-September 1996) of
PMF.
- ----------
* "Interested" Director, as defined in the Investment Company Act, by reason
of affiliation with Prudential Securities. The Prudential Insurance
Company of America or the Manager.
** Unless otherwise stated, the address is c/o Prudential Investments Fund
Management LLC, Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077.
B-19
<PAGE>
The Fund has Directors who, in addition to overseeing the actions of the
Fund's Manager, Subadviser and Distributor, decide upon matters of general
policy. The Directors also review the actions of the Fund's officers, who
conduct and supervise the daily business operations of the Fund.
Directors and officers of the Fund are also trustees, directors and
officers of some or all of the other investment companies distributed by
Prudential Investment Management Services LLC.
Pursuant to the Management Agreement with the Fund, the Manager pays all
compensation of officers and employees of the Fund as well as the fees and
expenses of all Directors of the Fund who are affiliated persons of the Manager.
The Fund currently pays each of its Directors who is not an affiliated person of
PIFM or the investment adviser annual compensation of $2000, in addition to
certain out-of-pocket expenses. The amount of annual compensation paid to each
Director may change as a result of the introduction of additional funds on the
boards of which the Directors will be asked to serve.
Directors may receive their Directors' fees pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of such Directors' fees which accrue interest at a rate
equivalent to the prevailing rate applicable to 90-day U.S. Treasury bills at
the beginning of each calendar quarter or, pursuant to a Commission exemptive
order, at the daily rate of return of the Fund. Payment of the interest so
accrued is also deferred and accruals become payable at the option of the
Director. The Fund's obligation to make payments of deferred Directors' fees,
together with interest thereon, is a general obligation of the Fund.
The Directors have adopted a retirement policy which calls for the
retirement of Directors on December 31 of the year in which they reach the age
of 72, except that retirement is being phased in for Directors who were age 68
or older as of December 31, 1993. Under this phase-in provision, Mr. Beach is
scheduled to retire on December 31, 1999.
The following table sets forth the aggregate compensation paid by the Fund
to the Directors who are not affiliated with the Manager for the fiscal year
ended December 31, 1998 and the aggregate compensation paid to such Directors
for service on the Fund's Board and the boards of all other investment companies
managed by PIFM (Fund Complex) for the calendar year ended December 31, 1998.
<TABLE>
<CAPTION>
TOTAL 1998
ESTIMATED COMPENSATION
PENSION OR ANNUAL FROM FUND
AGGREGATE RETIREMENT BENEFITS BENEFITS AND FUND
COMPENSATION ACCRUED AS PART OF UPON COMPLEX PAID
NAME OF DIRECTOR FROM FUND FUND EXPENSES RETIREMENT TO DIRECTORS
---------------- --------- ----------------- ---------- -------------
<S> <C> <C> <C> <C>
Edward D. Beach ................. $2,250 None N/A $ ( )**
Delayne Dedrick Gold ............ $2,250 None N/A $ ( )**
Robert F. Gunia+ ................ -- None N/A None
Douglas H. McCorkindale* ........ $2,250 None N/A $ ( )**
Mendel A. Melzer+ ............... -- None N/A $ ( )**
Thomas T. Mooney* ............... $2,250 None N/A $ ( )**
Stephen P. Munn ................. $2,250 None N/A $ ( )**
Richard A. Redeker+ ............. -- None N/A None
Robin B. Smith* ................. $2,250 None N/A $ ( )**
Brian M. Storms ................. -- None N/A None
Louis A. Weil III ............... $2,250 None N/A $ ( )**
Clay T. Whitehead ............... $2,250 None N/A $ ( )**
</TABLE>
- ----------
+ Directors who are "interested" do not receive compensation from the Fund
or any fund in the Fund Complex.
* Total compensation from all of the funds in the Fund Complex for the
calendar year ended December 31, 1998 includes amounts deferred at the
election of Directors under the funds' deferred compensation plans.
Including accrued interest, total compensation amounted to approximately
$ , $ and $ for Messrs. McCorkindale and Mooney and Ms.
Smith, respectively.
** Indicates number of funds/portfolios in Fund Complex (including the Fund)
to which aggregate compensation relates.
B-20
<PAGE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Directors of the Fund are eligible to purchase Class Z shares of the Fund
which are sold without either an initial sales charge or CDSC to a limited group
of investors. As of December 11, 1998, the Directors and officers of the Fund,
as a group, owned less than 1% of the outstanding common stock of the Fund.
As of December 11, 1998, Prudential Securities was record holder of
4,446,386 Class A shares (22.2%), 311,470 Class B shares (68.8%), 16,359 Class C
shares (55.1%) and 163,849 Class Z shares (56.9%) of the Fund. In the event of
any meetings of shareholders, Prudential Securities will forward, or cause the
forwarding of, proxy materials to the beneficial owners for which it is the
record holder.
As of December 11, 1998 the beneficial owners, directly or indirectly, of
more than 5% of the outstanding shares of any class of shares of the Fund were:
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME ADDRESS CLASS OF SHARES (% OF CLASS)
- ---- ------- ----------------- ----------------
<S> <C> <C> <C>
Smith Barney Inc. 333 West 34th St 1,311,538 Class A (6.5%)
New York, NY 10001-2483
Donaldson, Lufkin & P.O. Box 2052, 3,061 Class C (10.3%)
Jenrette Securities Corporation Jersey City, NJ 07303-2052
Richard Headley 2045 N. Green Bay Rd. 2,132 Class C (7.1%)
Racine, WI 53405-1503
Terri Headley 2045 N. Green Bay Rd., 1,536 Class C (5.1%)
Racine, WI 53405-1503
Prudential Bank and Trust Co., 53 W. Shore Dr., 2,446 Class C (8.2%)
C/F The IRA of Leona N. Murphy Arcadia, OK 73007-7107
Mrs. Mildred Weintraub TTEE, 274 Running Springs Dr. 4,241 Class C (14.3%)
Mildred Weintraub Trust, Palm Desert, CA 92211-3200
UA DTD 07/30/89
Brookie,Rosenkrantz, 3725 S. Ocean Dr. 2,692 Class C (9.9%)
Irwin Pechman & Apt. 1206
William Elstein CO-TTEES Hollywood, Fl 33019
Brookie Rosenkrantz
Rev. Liv. Tr. Va DTD 09/17/87
</TABLE>
B-21
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
(A) MANAGER AND INVESTMENT ADVISER
The manager of the Fund is Prudential Investments Fund Management LLC (the
Manager), Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077. The Manager serves as manager to all of the other investment
companies that, together with the Fund, comprise the "Prudential Mutual Funds."
See "How the Fund is Managed--Manager" in the Prospectus. As of December 31,
1998, the Manager managed and/or administered open-end and closed-end management
investment companies with assets of approximately $ billion. According to the
Investment Company Institute, as of December 31, 1998, the Prudential Mutual
Funds were the th largest family of mutual funds in the United States.
The Manager is a subsidiary of Prudential Securities and The Prudential
Insurance Company of America (Prudential). Prudential Mutual Fund Services LLC
(the Transfer Agent), a wholly-owned subsidiary of the Manager, serves as the
transfer agent for the Prudential Mutual Funds and in addition, provides
customer service, recordkeeping and management and administration services to
qualified plans.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), the Manager, subject to the supervision of the Fund's Board and in
conformity with the stated policies of the Fund, manages both the investment
operations of the Fund and the composition of the Fund's portfolio, including
the purchase, retention, disposition and loan of securities. In connection
therewith, the Manager is obligated to keep certain books and records of the
Fund. The Manager also administers the Fund's corporate affairs and, in
connection therewith, furnishes the Fund with office facilities, together with
those ordinary clerical and bookkeeping services which are not being furnished
by State Street Bank and Trust Company, the Fund's custodian (the Custodian) and
the Fund's Transfer Agent. The management services of the Manager for the Fund
are not exclusive under the terms of the Management Agreement and the Manager is
free to, and does, render management services to others.
For its services, the Manager receives, pursuant to the Management
Agreement, a fee at an annual rate of .75 of 1% of the Fund's average daily net
assets up to $500 million, .70 of 1% of such assets between $500 million and $1
billion and .65 of 1% of such assets in excess of $1 billion. The fee is
computed daily and payable monthly. The Management Agreement also provides that,
in the event the expenses of the Fund (including the fees of the Manager, but
excluding interest, taxes, brokerage commissions, distribution fees and
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business) for any fiscal year
exceed the lowest applicable annual expense limitation established and enforced
pursuant to the statutes or regulations of any jurisdiction in which the Fund's
shares are qualified for offer and sale, the compensation due to the Manager
will be reduced by the amount of such excess. No jurisdiction currently limits
the Fund's expenses.
In connection with its management of the business affairs of the Fund, the
Manager bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel
except the fees and expenses of Directors who are not affiliated persons of the
Manager or the Fund's investment adviser;
(b) all expenses incurred by the Manager or by the Fund in connection with
managing the ordinary course of the Fund's business, other than those assumed by
the Fund as described below; and
(c) the costs and expenses payable to The Prudential Investment
Corporation, doing business as Prudential Investments (the Subadviser), pursuant
to the subadvisory agreement between the Manager and the Subadviser (the
Subadvisory Agreement).
Under the terms of the Management Agreement, the Fund is responsible for
the payment of the following expenses: (a) the fees payable to the Manager, (b)
the fees and expenses of Directors who are not affiliated persons of the Manager
or the Fund's investment adviser, (c) the fees and certain expenses of the
Custodian and Transfer Agent, including the cost of providing records to the
Manager in connection with its obligation of maintaining required records of the
Fund and of pricing the Fund's shares, (d) the charges and expenses of legal
counsel and independent accountants for the Fund, (e) brokerage commissions and
any issue or transfer taxes chargeable to the Fund in connection with its
securities transactions, (f) all taxes and corporate fees payable by the Fund to
governmental agencies, (g) the fees of any trade associations of which the Fund
may be a member, (h) the cost of stock certificates representing shares of the
Fund, (i) the cost of fidelity and liability insurance, (j) certain organization
expenses of the Fund and the fees and expenses involved in registering and
maintaining registration of the Fund and of its shares with the Commission and
the states, including the preparation and printing of the Fund's registration
statements and prospectuses for such purposes, (k) allocable communications
expenses with respect to investor services and all expenses of shareholders' and
Directors' meetings and of preparing, printing and mailing reports, proxy
statements and prospectuses to shareholders in the amount necessary for
distribution to the shareholders, (l) litigation and indemnification expenses
and other extraordinary expenses not incurred in the ordinary course of the
Fund's business and (m) distribution fees.
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The Management Agreement provides that the Manager will not be liable for
any error of judgment or for any loss suffered by the Fund in connection with
the matters to which the Management Agreement relates, except a loss resulting
from willful misfeasance, bad faith, gross negligence or reckless disregard of
duty. The Management Agreement provides that it will terminate automatically if
assigned, and that it may be terminated without penalty by either party upon not
more than 60 days' nor lessthan 30 days' written notice. The Management
Agreement will continue in effect for a period of more than two years from the
date of execution only so long as such continuance is specifically approved at
least annually in conformity with the Investment Company Act.
For the fiscal years ended December 31, 1998, 1997 and 1996, the Manager
received management fees of $ , $1,549,812 and $2,317,938, respectively,
from the Fund.
The Manager has entered into a Subadvisory Agreement with the Subadviser,
a wholly-owned subsidiary of Prudential. The PI Subadvisory Agreement provides
that the Subadviser will furnish investment advisory services in connection with
the management of the Fund. In connection therewith, the Subadviser is obligated
to keep certain books and records of the Fund. The Subadviser has entered into
an agreement with PRICOA Asset Management Ltd. (PRICOA) under which PRICOA
provides investment advisory services to the Fund. The Manager continues to have
responsibility for all investment advisory services pursuant to the Management
Agreement and supervises the investment adviser's performance of such services.
The Subadviser is reimbursed by the Manager for the reasonable costs and
expenses incurred by the Subadviser in furnishing those services and PRICOA is
reimbursed for its reasonable costs and expenses.
The PI Subadvisory Agreement provides that it will terminate in the event
of its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The PI Subadvisory Agreement may be
terminated by the Fund, the Manager or the Subadviser upon not more than 60
days', nor less than 30 days', written notice. The PI Subadvisory Agreement
provides that it will continue in effect for a period of more than two years
from its execution only so long as such continuance is specifically approved at
least annually in accordance with the requirements of the Investment Company
Act.
(B) PRINCIPAL UNDERWRITER, DISTRIBUTOR AND RULE 12B-1 PLANS
Prudential Investment Management Services LLC (the Distributor), Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, acts as the
distributor of the shares of the Fund. Prior to June 1, 1998 Prudential
Securities Incorporated (Prudential Securities) was the Fund's Distributor. The
Distributor and Prudential Securities are subsidiaries of Prudential.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively the Plans) adopted by the Fund
under Rule 12b-1 under the Investment Company Act and 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 a
Distribution Agreement, none of which are reimbursed or paid for by the Fund.
See "How the Fund is Managed--Distributor" in the Prospectus.
The expenses incurred under the Plans include commissions and account
servicing fees paid to, or on account of brokers or financial institutions which
have entered into agreements with the Distributor, advertising expenses, the
cost of printing and mailing prospectuses to potential investors and indirect
and overhead costs of the Distributor associated with the sale of Fund shares,
including lease, utility, communications and sales promotion expenses. The
distribution and/or service fees may also be used by the Distributor to
compensate on a continuing basis brokers in consideration for the distribution,
marketing, administrative and other services and activities provided by brokers
with respect to the promotion of the sale of the Fund's shares and the
maintenance of related shareholder accounts.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize profit.
The distribution and/or service fees may also be used by the Distributor
to compensate on a continuing basis brokers in consideration for the
distribution, marketing, administrative and other services and activities
provided by brokers with respect to the promotion of the sale of the Fund's
shares and the maintenance of related shareholder accounts.
CLASS A. PLAN. Under the Class A Plan, the Fund may pay the Distributor
for its distribution-related activities with respect to Class A shares at an
annual rate of up to .30 of 1% of the average daily net assets of the Class A
shares. The Class A Plan provides that (1) up to .25 of 1% of the average daily
net assets of the Class A shares may be used to pay for personal service and/or
the maintainance of shareholder accounts (service fee) and (2) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30 of
1%. The Distributor has voluntarily limited its distribution related fees
payable under the Class A Plan to .15 of 1% of the average daily net assets of
the Class A shares. This voluntary waiver may be terminated at any time without
notice.
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<PAGE>
For the fiscal year ended December 31, 1998, the Distributor and
Prudential Securities received payments of approximately $ , under the
Class A Plan and spent approximately $ in distributing the Class A
shares. These amounts were primarily expended for payments of account servicing
fees to financial advisers and other persons who sell Class A shares. For the
fiscal year ended December 31, 1998, the Distributor and Prudential Securities
also received approximately $ in initial sales charges.
CLASS B AND CLASS C PLANS. 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 1% of the average daily
net assets of each of the Class B and Class C shares. The Class B Plan provides
that (1) up to .25 of 1% of the average daily net assets of the Class B shares
may be paid as a service fee and (2) up to .75 of 1% (not including the service
fee) of the average daily net assets of the Class B shares (asset based sales
charge) may be used as reimbursement for distribution-related expenses with
respect to the Class B shares. The Class C Plan provides that (1) up to .25 of
1% of the average daily net assets of the Class C shares may be paid as a
service fee for providing personal service and/or maintaining shareholder
accounts and (2) up to .75 of 1% of the average daily net assets of the Class C
shares may be paid for distribution-related expenses with respect to Class C
shares. The service fee (.25 of 1% of average daily net assets) is used to pay
for personal service and/or the maintenance of shareholder accounts. The
Distributor has voluntarily limited its distribution related fees payable under
both the Class B and Class C Plan to .75 of 1% of the average daily net assets
of the shares of each class. These voluntary waivers may be terminated at any
time without notice. The Distributor also receives contingent deferred sales
charges from certain redeeming shareholders.
CLASS B PLAN. For the fiscal year ended December 31, 1998, the Distributor
and Prudential Securities received $ from the Fund under the Class B
Plan and spent $ in distributing the Fund's Class B shares. It is estimated that
of the latter total amount, % ($ ) was spent on printing and mailing of
prospectuses to other than current shareholders; % ($ ) was spent on
compensation to broker-dealers for commissions to their representatives and
other expenses, including an allocation of overhead and other branch office
distribution-related expenses, incurred for distribution of Fund shares; and
% ($ ) in the aggregate for (1) payments of commissions and account
servicing fees to financial advisers ( % or $ ) and (2) an allocation of
overhead and other branch office distribution-related expenses for payments of
related expenses ( % or $ ). The term "overhead and other branch office
distribution-related expenses" represents (a) the expenses of operating
Prudential Securities' and Pruco Securities Corporation's (Prusec's) branch
offices in connection with the sale of Fund shares, including lease costs, the
salaries and employee benefits of operations and sales support personnel,
utility costs, communications costs and the costs of stationery and supplies,
(b) the costs of client sales seminars, (c) expenses of mutual fund sales
coordinators to promote the sale of Fund shares and (d) other incidental
expenses relating to branch promotion of Fund sales.
The Distributor (and Prudential Securities as its predecessor) also
receives the proceeds of contingent deferred sales charges paid by investors
upon certain redemptions of Class B shares. For the fiscal year ended December
31, 1998, the Distributor and Prudential Securities received approximately
$ in contingent deferred sales charges attributable to Class B shares.
CLASS C PLAN. For the fiscal year ended December 31, 1998, the Distributor
and Prudential Securities received $ and $ , respectively, under the
Class C Plan and spent $ in distributing Class C shares. It is estimated
that of the latter total amount, % ($ ) was spent on printing and
mailing of prospectuses to other than current shareholders; % ($ ) on
compensation to broker-dealers for commissions to representatives and other
expenses, including an allocation of overhead and other branch office
distribution related expenses incurred for distribution of Fund shares and %
($ ) on the aggregate of (1) payments of commissions and account servicing
fees to financial advisers ( % or $ ) and (2) an allocation of overhead
and other branch office distribution-related expenses ( % or $ ).
The Distributor (and Prudential Securities as its predecessor) also
receives the proceeds of contingent deferred sales charges paid by investors
upon certain redemptions of Class C shares. For the fiscal year ended December
31, 1998, the Distributor and Prudential Securities received approximately $
in contingent deferred sales charges attributable to Class C shares.
Distribution expenses attributable to the sale of Class A, Class B and
Class C shares of the Fund are allocated to each such class based upon the ratio
of sales of each such class to the sales of Class A, Class B and Class C shares
of the Fund other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize the
sale of another class.
The Class A, Class B and Class C Plans continue in effect from year to
year, provided that each such continuance is approved at least annually by a
vote of the Directors, including a vote of the Directors who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
Class A, Class B or Class C Plan or in any agreement related to the Plans (Rule
12b-1 Directors), cast in person at a meeting called for the purpose of voting
on such continuance. A Plan may be terminated at
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<PAGE>
any time, without penalty, by the vote of a majority of the Rule 12b-1 Directors
or by the vote of the holders of a majority of the outstanding shares of the
applicable class of the Fund on not more than 30 days' written notice to any
other party to the Plan. The Plans may not be amended to increase materially the
amounts to be spent for the services described therein without approval by the
shareholders of the applicable class (by both Class A and Class B shareholders,
voting separately, in the case of material amendments to the Class A Plan), and
all material amendments are required to be approved by the Directors in the
manner described above. Each Plan will automatically terminate in the event of
its assignment. The Fund will not be contractually obligated to pay expenses
incurred under any Plan if it is terminated or not continued.
Pursuant to each Plan, the Directors will review at least quarterly a
written report of the distribution expenses incurred on behalf of each class of
shares of the Fund by the Distributor. The report will include an itemization of
the distribution expenses and the purposes of such expenditures. In addition, as
long as the Plans remain in effect, the selection and nomination of Rule 12b-1
Directors shall be committed to the Rule 12b-1 Directors.
Pursuant to the Distribution Agreement, the Fund has agreed to indemnify
the Distributor to the extent permitted by applicable law against certain
liabilities under federal securities laws.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments 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 net asset value of shares sold by such
persons or otherwise.
FEE WAIVERS/SUBSIDIES
PIFM may from time to time waive all or a portion of its management fee
and subsidize all or a portion of the operating expenses of the Fund. In
addition, the Distributor has waived a portion of its distribution fees for the
Class A, Class B and Class C shares as described above. These voluntary waivers
may be terminated at any time without notice. Fee waivers and subsidies will
increase the Fund's total return.
(C) OTHER SERVICE PROVIDERS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash, and in that capacity maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. Subcustodians provide custodial
services for the Fund's foreign assets held outside theUnited States.
The Transfer Agent, Raritan Plaza One, Edison, New Jersey 08837, serves as
the transfer and dividend disbursing agent of the Fund. The Transfer Agent is a
wholly-owned subsidiary of the Manager. The Transfer Agent provides customary
transfer agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, the payment of dividends and distributions, and
related functions. For these services, the Transfer Agent receives an annual fee
of $ per shareholder account, a new account set-up fee of $ for each
manually-established account and a monthly inactive zero balance account fee of
$ per shareholder account. The Transfer Agent is also reimbursed for its
out-of-pocket expenses, including but not limited to postage, stationery,
printing, allocable communications expenses and other costs.
LLP, 1177 Avenue of the Americas, New York, New York 10036, serves as the
Fund's independent accountants and, in that capacity, audits the Fund's annual
financial statements.
BROKERAGE ALLOCATION AND OTHER PRACTICES
The Manager is responsible for decisions to buy and sell securities,
futures contracts and options on such securities and futures for the Fund, the
selection of brokers, dealers and futures commission merchants to effect the
transactions and the negotiation of brokerage commissions, if any. (For purposes
of this section, the term "Manager" includes the investment adviser.) On a
national securities exchange, broker-dealers may receive negotiated brokerage
commissions on Fund portfolio transactions, including options, futures, and
options on futures transactions and the purchase and sale of underlying
securities upon the exercise of options. On a foreign securities exchange,
commissions may be fixed. Orders may be directed to any broker or futures
commission merchant including, to the extent and in the manner permitted by
applicable law, Prudential Securities and its affiliates.
In the over-the-counter market, securities are generally traded on a "net"
basis with dealers acting as principal for their own accounts without a stated
commission, although the price of the security usually includes a profit to the
dealer. In underwritten offerings, securities are purchased at a fixed price
which includes an amount of compensation to the underwriter, generally
B-25
<PAGE>
referred to as the underwriter's concession or discount. On occasion, certain
money market instruments and U.S. Government agency securities may be purchased
directly from the issuer, in which case no commissions or discounts are paid.
The Fund will not deal with Prudential Securities or any affiliate in any
transaction in which Prudential Securities or any affiliate acts as principal
except in accordance with the rules of the Commission. Thus, it will not deal in
the over-the-counter market with Prudential Securities acting as market maker,
and it will not execute a negotiated trade with Prudential Securities if
execution involves Prudential Securities' acting as principal with respect to
any part of the Fund's order.
In placing orders for portfolio securities of the Fund, the Manager's
overriding objective is to obtain the best possible combination of price and
execution. The Manager seeks to effect such transaction at a price and
commission that provides the most favorable total cost of proceeds reasonably
attainable in the circumstances.
The factors that the Manager may consider in selecting a particular
broker, dealer of futures commission merchant (firms) are the Manager's
knowledge of negotiated commission rates currently available and other current
transaction costs; the nature of the portfolio transaction; the size of the
transaction; the desired timing of the trade; the activity existing and expected
in the market for the particular transaction; confidentiality; the execution,
clearance and settlement capabilities of the firms; the availability of research
and research related services provided through such firms; the Manager's
knowledge of the financial stability of the firms; the Manager's knowledge of
actual or apparent operational problems of firms; and the amount of capital, if
any, that would be contributed by firms executing the transaction. Given these
factors, the Fund may pay transactions costs in excess of that which another
firm might have charged for effecting the same transaction.
When the Manager selects a firm that executes orders or is a party to
portfolio transactions, relevant factors taken into consideration are whether
that firm has furnished research and research related products and/or services,
such as research reports, research compilations, statistical and economic data,
computer data bases, quotation equipment and services, research oriented
computer software, hardware and services, reports concerning the performance of
accounts, valuations of securities, investment related periodicals, investment
seminars and other economic services and consultations. Such services are used
in connection with some or all of the Manager's investment activities; some of
such services, obtained in connection with the execution of transactions for one
investment account, may be used in managing other accounts, and not all of these
services may be used in connection with the Fund.
The Manager maintains an internal allocation procedure to identify those
firms who have provided it with research and research related products and/or
services, and the amount that was provided, and to endeavor to direct sufficient
commissions to them to ensure the continued receipt of those services that the
Manager believes provides a benefit to the Fund and its other clients. The
Manager makes a good faith determination that the research and/or service is
reasonable in light of the type of service provided and the price and execution
of the related portfolio transactions.
When the Manager deems the purchase or sale of equities to be in the best
interests of the Fund or its other clients, including Prudential, the Manager
may, but is under no obligation to, aggregate the transactions in order to
obtain the most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the transactions, as well as the
expenses incurred in the transaction, will be made by the Manager in the manner
it considers to be most equitable and consistent with its fiduciary obligations
to its clients. The allocation of orders among firms and the commission rates
paid are reviewed periodically by the Fund's Directors. Portfolio securities may
not be purchased from any underwriting or selling syndicate of which Prudential
Securities or any affiliate, during the existence of the syndicate, is a
principal underwriter (as defined in the Investment Company Act), except in
accordance with rules of the Commission. This limitation, in the opinion of the
Fund, will not significantly affect the Fund's ability to pursue its present
investment objective. However, in the future in other circumstances, the Fund
may be at a disadvantage because of this limitation in comparison to other funds
with similar objectives but not subject to such limitations.
Subject to the above considerations, Prudential Securities may act as a
broker or futures commission merchant for the Fund. In order for Prudential
Securities or any affiliate to effect any portfolio transactions for the Fund,
the commissions, fees or other remuneration received by Prudential Securities or
any affiliate must be reasonable and fair compared to the commissions, fees or
other remuneration paid to other firms in connection with comparable
transactions involving similar securities or futures being purchased or sold on
an exchange or board of trade during a comparable period of time. This standard
would allow Prudential Securities or any affiliate to receive no more than the
remuneration which would be expected to be received by an unaffiliated firm in a
commensurate arm's-length transaction. Furthermore, the Directors of the Fund,
including a majority of the non-interested Directors, have adopted procedures
which are reasonably designed to provide that any commissions, fees or other
remuneration paid to Prudential Securities or any affiliate are consistent with
the foregoing standard. In accordance with Section 11(a) of the Securities
Exchange Act of 1934, as amended, Prudential Securities may not retain
compensation for effecting transactions on a national securities exchange for
the Fund unless the Fund has expressly authorized the retention of such
compensation. Prudential Securities must furnish to the Fund at least annually a
statement setting forth the total amount of all compensation retained by
Prudential Securities from transactions effected for the Fund during the
applicable period. Brokerage transactions
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<PAGE>
with Prudential Securities or any affiliate are also subject to such fiduciary
standards as may be imposed upon Prudential Securities or such affiliates by
applicable law.
The Fund paid no brokerage commissions, including none to Prudential
Securities or any affiliate, for the fiscal years ended December 31, [1998,]1997
and 1996.
[The Fund effected approximately % of the total dollar amount of its
transactions involving the payment of commissions to Prudential Securities
during the year ended December 31, 1998. Of the total brokerage commissions paid
during that period, $ (or %) were paid to firms which provide research,
statistical or other services to the Subadviser. The Manager has not separately
identified a portion of such brokerage commissions as applicable to the
provision of such research, statistical or other services.]
The Fund is required to disclose its holdings of securities of its regular
brokers and dealers (as defined under Rule 10b-1 of the Investment Company Act)
and their parents at December 31, 1998. As of December 31, 1998, the Fund held
securities of in the amount of $ .
CAPITAL SHARES, OTHER SECURITIES AND ORGANIZATION
The Fund is authorized to issue an unlimited number of shares of common
stock, $.01 per share divided into four classes, designated Class A, Class B,
Class C and Class Z shares, initially all of one series. Each class of common
stock represents an interest in the same assets of the Fund and is identical in
all respects except that (1) each class is subject to different sales charges
and distribution and/or service fees (except for Class Z shares, which are not
subject to any sales charges and distribution and/or service fees), which may
affect performance, (2) each class has exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and has
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class, (3) each
class has a different exchange privilege, (4) only Class B shares have a
conversion feature and (5) Class Z shares are offered exclusively for sale to a
limited group of investors. In accordance with the Fund's Articles of
Incorporation, the Directors may authorize the creation of additional series and
classes within such series, with such preferences, privileges, limitations and
voting and dividend rights as the Directors may determine. The voting rights of
the shareholders of a series or class can be modified only by the majority vote
of shareholders of that series or class.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances. Each share of
class is equal as to earnings, assets and voting privileges, except as noted
above, and each class of shares (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 the Fund is entitled to its
portion of all of the Fund's assets after all debt and expenses of the Fund have
been paid. Since Class B and Class C shares generally bear higher distribution
expenses than Class A shares, the liquidation proceeds to shareholders of those
classes are likely to be lower than to Class A shareholders and to Class Z
shareholders, whose shares are not subject to any distribution and/or service
fees.
The Fund 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 the 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.
Under the Articles of Incorporation, the Directors may authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed portfolios with distinct investment
objectives and policies and share purchase, redemption and net asset value
procedures) with such preferences, privileges, limitations and voting and
dividend rights as the Directors may determine. All consideration received by
the Fund for shares of any additional series, and all assets in which such
consideration is invested, would belong to that series (subject only to the
rights of creditors of that series) and would be subject to the liabilities
related thereto. Under the Investment Company Act, shareholders of any
additional series of shares would normally have to approve the adoption of any
advisory contract relating to such series and of any changes in the investment
policies related thereto. The Directors do not intend to authorize additional
series at the present time.
The Directors have the power to alter the number and the terms of office
of the Directors and they may at any time lengthen their own terms or make their
terms of unlimited duration and appoint their own successors, provided that
always at least a majority of the Directors have been elected by the
shareholders of the Fund. The voting rights of shareholders are not cumulative,
so that holders of more than 50 percent of the shares voting can, if they
choose, elect all Directors being selected, while the holders of the remaining
shares would be unable to elect any Directors.
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PURCHASE, REDEMPTION AND PRICING OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next
determined net asset value (NAV) per share plus a sales charge which, at the
election of the investor, may be imposed either (1) at the time of purchase
(Class A or Class C shares) and/or (2) on a deferred basis (Class B or Class C
shares). Class Z shares of the Fund are offered to a limited group of investors
at NAV without any sales charge. See "How to Buy, Sell and Exchange Shares of
the Fund" in the Prospectus.
Each class of shares represents an interest in the same assets of the Fund
and is identical in all respects except that (1) each class is subject to
different sales charges and distribution and/or service fees (except for Class Z
shares, which are not subject to any sales charges and distribution and/or
service fees), which may affect performance, (2) each class has exclusive voting
rights with respect to any matter submitted to shareholders that relates solely
to its arrangement and has separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the interests of
any other class, (3) each class has a different exchange privilege, (4) only
Class B shares have a conversion feature and (5) Class Z shares are offered
exclusively for sale to a limited group of investors. See "Distributor" and
"Shareholder Investment Account--Exchange Privilege."
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire,
an investor must complete an application and telephone the Transfer Agent at
(800) 225-1852 (toll-free) to receive an account number. The following
information will be requested: the investor's name, address, tax identification
number, class election, dividend distribution election, amount being wired and
wiring bank. Instructions should then be given by the investor to his/her bank
to transfer funds by wire to the Fund's Custodian, State Street Bank and Trust
Company, Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: The Global Total Return Fund, Inc., specifying on the wire the
account number assigned by the Transfer Agent and the investor's name and
identifying the class in which the investor is eligible to invest (Class A,
Class B, Class C or Class Z shares).
If an investor arranges 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,
the investor may purchase shares of the Fund as of that day.
In making a subsequent purchase order by wire, an investor should wire the
Custodian directly and should be sure that the wire specifies The Global Total
Return Fund, Inc. Class A, Class B, Class C or Class Z shares and the investor's
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.
ISSUANCE OF FUND SHARES FOR SECURITIES
Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to (1) reorganizations,(2) statutory mergers, or (3)
other acquisitions of portfolio securities that: (a) meet the investment
objective and policies of the Fund, (b) are liquid and not subject to
restrictions on resale, (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange or
market, and (d) are approved by the Fund's investment adviser.
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A* shares of the Fund are sold at a maximum sales charge of
4%, Class C* shares are sold with a 1% sales charge and Class B* and Class Z
shares are sold at NAV. Using the Fund's NAV at December 31, 1998, the maximum
offering price of the Fund's shares is as follows:
CLASS A
Net asset value and redemption price per Class A share ............ $
Maximum sales charge (4% of offering price) .......................
Maximum offering price to public .................................. $
=====
CLASS B
Net asset value, offering price and redemption price to public
per Class B share* ................................................ $
=====
CLASS C
Net asset value and redemption price per Class C share* ........... $
Sales charge (1% of offering price) ...............................
Offering price to public .......................................... $
=====
CLASS Z
Net asset value, redemption price and offering price to public
per Class Z share ................................................. $
=====
----------
* Class B and Class C shares are subject to a contingent deferred
sales charge on certain redemptions.
B-28
<PAGE>
SELECTING A PURCHASE ALTERNATIVE
The following is provided to assist investors in determining which method
of purchase best suits their 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 4 years
and do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 4% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6-year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for more than 4 years, but less than
5 years, and do not qualify for a reduced sales charge on Class A shares, the
sales charges and cumulative annual distribution-related fees would be
approximately the same for Class A, Class B and Class C shares. However, you
should consider purchasing Class B shares over Class A shares or Class C shares
because all of your money would be invested initially in the case of Class B
shares.
If you intend to hold your investment for longer than 5 years, you should
consider purchasing Class A shares over either Class B or Class C shares. This
is because the maximum sales charge plus the cumulative annual
distribution-related fee on Class A shares would be less than those of the Class
B and Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be
more advantageous for you to purchase Class A shares over either Class B or
class C shares regardless of how long you intend to hold your investment.
However, unlike Class B shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B and Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and for more than 5 years in the
case of Class C shares for the higher cumulative annual distribution-related fee
on those shares plus, in the case of Class C shares, the 1% initial sales charge
to exceed the initial sales charge plus cumulative annual distribution-related
fees on Class A shares. This does not take into account the time value of money,
which further reduces the impact of the higher Class B or Class C
distribution-related fee on the investment, fluctuations in NAV, the effect of
the return on the investment over this period of time or redemptions when the
CDSC is applicable.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES
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 401(a) 457 and 403(b)(7) of the
Internal Revenue Code, "rabbi trusts and non-qualified deferred compensation
plans that are sponsored by any employer that has a tax-qualified plan with
Prudential (collectively, Benefit Plans), provided that the Benefit Plan has
existing assets of at least $1 million invested in shares of Prudential Mutual
Funds (excluding money market funds other than those acquired pursuant to the
exchange privilege) or 250 eligible employees or participants. In the case of
Benefit Plans whose accounts are held directly with the Transfer Agent or
Prudential Securities and for which the Transfer Agent or Prudential Securities
does individual account recordkeeping (Direct Account Benefit Plans) and Benefit
Plans sponsored by 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 provides
administrative or recordkeeping services, provided that (1) the plan has at
least $1 million in existing assets or 250 eligible employees and (2) 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
PruArray Program (benefit plan recordkeeping service) (hereafter referred to as
a PruArray Plan). All Benefit Plans of a company (or affiliated companies under
common control) for which Prudential serves as plan administrator or
recordkeeper are aggregated in meeting the $1 million threshold provided that
Prudential has been notified in advance of the entitlement to the waiver of the
sales charge based on the aggregated assets. The term "existing assets" includes
stock issued by a plan sponsor, shares of Prudential Mutual Funds and shares of
certain unaffiliated mutual funds that participate in the PruArray Plan
(Participating Funds). "Existing assets" also include monies invested in The
Guaranteed Investment Account (GIA), a group annuity insurance product issued by
Prudential, The Guaranteed Insulated Separate Account, a separate account
operated by Prudential, and units of The Stable Value Fund (SVF), an
unaffiliated bank collective fund. Class A shares may also be purchased at NAV
by plans that have monies invested in GIA and SVF, provided (1) the purchase is
made with the proceeds of a redemption from either GIA or SVF and (2) Class A
shares are an investment option of the plan.
B-29
<PAGE>
PruArray Association Benefit Plans. Class A shares 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 Plan 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 (1) have retirement plan
assets in the aggregate of at least $1 million or 250 participants in the
aggregate and (2) 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 (1) employees who open an
IRA or Savings Accumulation Plan account with the Transfer Agent and (2) 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 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 the Distributor or the Transfer Agent, by:
o officers of the Prudential Mutual Funds (including the Fund),
o employees of the Distributor, Prudential Securities, the Manager and
their subsidiaries and members of the families of such persons who
maintain an "employee related" account at Prudential Securities or
the Transfer Agent,
o employees of subadvisers of the Prudential Mutual Funds provided
that purchases at NAV are permitted by such person's employer,
o 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,
o registered representatives and employees of brokers who have entered
into a selected dealer agreement with the Distributor provided that
purchases at NAV are permitted by such person's employer,
o 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-end non-money market fund sponsored by the financial adviser's
previous employer (other than a fund which imposes a distribution or
service fee of .25 of 1% or less) and (iii) the financial adviser
served as the client's broker on the previous purchase,
o 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 provides
administrative or recordkeeping services and further provided that
such purchase is made within 60 days of receipt of the Benefit Plan
distribution,
o orders placed by broker-dealers, investment advisers or financial
planners who have entered into a agreement with the Distributor, who
place trades for their own accounts or the accounts of their clients
and who charge a management, consulting or other fee for their
services (e.g., mutual fund "wrap" or asset allocation programs),
and
o orders placed by clients of broker-dealers, investment advisers or
financial planners who place trades for customer accounts if the
accounts are linked to the master account of such broker-dealer,
investment adviser or financial planner and the broker-dealer,
investment adviser or financial planner charges its clients a
separate fee for its services (e.g., mutual fund "supermarket
programs").
For an investor to obtain any reduction or waiver of the initial sales
charges, at the time of the sale either the Transfer Agent must be notified
directly by the investor or the Distributor must be notified by the broker
facilitating the transaction that the sale qualifies for the reduced or waived
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial charges are imposed upon Class A shares acquired
upon the reinvestment of dividends and distributions.
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential Mutual Funds, the purchases
may be combined to take advantage of the reduced sales charges applicable to
larger purchases. See "How to Buy, Sell and Exchange Shares of the Fund--How to
Buy Shares--Reducing or Waiving of Class A's Initial Sales Charge" in the
Prospectus.
An eligible group of related Fund investors includes any combination of
the following:
o an individual,
B-30
<PAGE>
o the individual's spouse, their children and their parents,
o the individual's and spouse's Individual Retirement Account (IRA),
o any company controlled by the individual (a person, entity or group
that holds 25% or more of the outstanding voting securities of a
company will be deemed to control the company, and a partnership
will be deemed to be controlled by each of its general partners),
o a trust created by the individual, the beneficiaries of which are
the individual, his or her spouse, parents or children,
o a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act
account created by the individual or the individual's spouse and
o one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).
The Transfer Agent, the Distributor or your broker must be notified at the
time of purchase that the investor is entitled to a reduced sales charge. The
reduced sales charges will be granted subject to confirmation of the investor's
holdings. The Combined Purchase and Cumulative Purchase Privilege does not apply
to individual participants in any retirement or group plans.
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) to determine the
reduced sales charge. However, the value of shares held directly with the
Transfer Agent and through your broker will not be aggregated to determine the
reduced sales charge. The value of existing holdings for purposes of determining
the reduced sales charge is calculated using the maximum offering price (NAV
plus maximum sales charge) as of the previous business day. The reduced sales
charges will be granted subject to confirmation of the investor's holdings.
Rights of accumulation are not available to individual participants in any
retirement or group plans.
LETTERS OF INTENT. Reduced sales charges are available to investors (or an
eligible group of related investors), including retirement and group plans, who
enter into a written Letter of Intent providing for the purchase, within a
thirteen-month period, of shares of the Fund and shares of other Prudential
Mutual Funds (Investment Letter of Intent). Retirement and group plans may also
qualify to purchase Class A shares at NAV by entering into a Letter of Intent
whereby they agree to enroll, within a thirteen-month period, a specified number
of eligible employees or participants (Participant Letter of Intent).
For purposes of the Investment Letter of Intent, all shares of the Fund
and shares of other Prudential Mutual Funds (excluding money market funds other
than those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent,
Prudential or its affiliates, and through your broker will not be aggregated to
determine the reduced sales charge.
A Letter of Intent permits a purchaser, in the case of an Investment
Letter of Intent, to establish a total investment goal to be achieved by any
number of investments over a thirteen-month period and, in the case of a
Participant Letter of Intent, to establish a minimum eligible employee or
participant enrollment goal over a thirteen-month period. Each investment made
during the period, in the case of an Investment Letter of Intent will receive
the reduced sales charge applicable to the amount represented by the goal, as if
it were a single investment. In the case of a Participant Letter of Intent, each
investment made during the period will be made at net asset value. Escrowed
Class A shares totaling 5% of the dollar amount of the Letter of Intent will be
held by the Transfer Agent in the name of the purchaser, except in the case of
retirement and group plans where the employer or plan sponsor will be
responsible for paying any applicable sales charge. The effective date of an
Investment Letter of Intent (except in the case of retirement and group plans)
may be back-dated up to 90 days, in order that any investments made during this
90-day period, valued at the purchaser's cost, can be applied to the fulfillment
of the Letter of Intent goal.
The Investment Letter of Intent does not obligate the investor to
purchase, nor the Fund to sell, the indicated amount. Similarly, the Participant
Letter of Intent does not obligate the retirement or group plan to enroll the
indicated number of eligible employees or participants. In the event the Letter
of Intent goal is not achieved within the thirteen-month period, the purchaser
(or the employer or plan sponsor in the case of any retirement or group plan) is
required to pay the difference between the sales charge otherwise applicable to
the purchases made during this period and sales charge actually paid. Such
payment may be made directly to the Distributor or, if not paid, the Distributor
will liquidate sufficient escrowed shares to obtain such difference. If the goal
is exceeded in an amount which qualifies for a lower sales charge, a price
adjustment is made by refunding to the purchaser the amount of excess sales
charge, if any, paid during the thirteen-month period. Investors electing to
purchase Class A shares of the Fund pursuant to a Letter of Intent should
carefully read such Letter of Intent.
B-31
<PAGE>
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will, in the
case of an Investment Letter of Intent, be granted subject to confirmation of
the investor's holdings or in the case of a Participant Letter of Intent,
subject to confirmation of the number of eligible employees or participants in
the retirement or group plan. Letters of Intent are not available to individual
participants in any retirement or group plans.
CLASS B SHARES
The offering price of Class B shares for investors choosing one of he
deferred sales charge alternatives is the NAV next determined following receipt
of an order in proper form by the Transfer Agent, a broker or the Distributor.
Although there is no sales charge imposed at the time of purchase, redemptions
of Class B shares may be subject to a CDSC. See "Sale of Shares--Contingent
Deferred Sales Charges", below.
The Distributor will pay, from its own resources, sales commissions of up
to 4% of the purchase price of Class B shares to brokers, financial advisers and
other persons who sell Class B shares at the time of sale. This facilitates the
ability of the Fund to sell the Class B shares without an initial sales charge
being deducted at the time of purchase. The Distributor anticipates that it will
recoup its advancement of sales commissions from the combination of the CDSC and
the distribution fee.
CLASS C SHARES
The offering price of Class C shares is the next determined NAV plus a 1%
sales charge. In connection with the sale of Class C shares, the Distributor
will pay, from its own resources, brokers, financial advisers and other persons
which distribute Class C shares a sales commission of up to 2% of the purchase
price at the time of the sale.
WAIVER OF INITIAL SALES CHARGE--CLASS C SHARES
Benefit Plans. Class C shares may be purchased at NAV, without payment of
an initial sales charge, by Benefit Plans (as defined above). In the case of
Benefit Plans whose accounts are held directly with the Transfer Agent or
Prudential Securities and for which the Transfer Agent of Prudential Securities
does individual account recordkeeping (Direct Account Benefit Plans) and Benefit
Plans sponsored by Prudential, Prudential Securities or its subsidiaries
(Prudential Securities or Subsidiary Prototype Benefit Plans). Class C shares
may be purchased at NAV by participants who are repaying the loans made from
such plans to the participant.
Prudential Retirement Plans. The initial sales charge will be waived with
respect to purchases of Class C shares by qualified and non-qualified retirement
and deferred compensation plans participating in the PruArray Plan and other
plans for which Prudential provides administrative or recordkeeping services.
Investment of Redemption Proceeds from Other Investment Companies.
Investors may purchases Class C shares at NAV, without the initial sales charge,
with the proceeds from the redemption of shares of any unaffiliated registered
investment company which were not held through an account with any Prudential
affiliate. Such purchases must be made within 60 days of the redemption.
Investors eligible for this waiver include: (1) investors purchasing shares
through an account at Prudential Securities; (2) investors purchasing shares
through an ADVANTAGE Account or an Investor Account with Prusec; and (3)
investors purchasing shares through other brokers. This waiver is not available
to investors who purchase shares directly from the Transfer Agent. You must
notify the Transfer Agent directly or through you broker if you are entitled to
this waiver and provide the Transfer Agent with such supporting documents as it
may deem appropriate.
CLASS Z SHARES
Class Z shares of the Fund currently are available for purchase by the
following categories of investors:
o pension, profit-sharing or other employee benefit plans qualified
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 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,
o participants in any fee-based program or trust program sponsored by
an affiliate of the Distributor which includes mutual funds as
investment options and for which the Fund is an available investment
option,
o certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential Mutual Funds are an available investment option,
o Benefit Plans for which an affiliate of the Distributor provides
administrative or recordkeeping services and as of September 20,
1996 (1) were Class Z shareholders of the Prudential Mutual Funds or
(2) executed a letter of intent to purchase Class Z shares of the
Prudential Mutual Funds,
B-32
<PAGE>
o current and former Directors/Trustees of he Prudential Mutual Funds
(including he Fund),
o employees of Prudential and/or Prudential Securities who participate
in a Prudential-sponsored employee savings plan, and
o Prudential with an investment of $10 million or more.
After a Benefit Plan qualifies to purchase Class Z shares, all subsequent
purchases will be for Class Z shares.
In connection with the sale of Class Z shares, the Manager, the
Distributor or one of their affiliates may pay brokers, financial advisers and
other persons which distribute shares a finder's fee from its own resources,
based on a percentage of the net asset value of shares sold by such persons.
Class Z shares of the Fund may also be purchased by certain savings,
retirement and deferred compensation plans, qualified or non-qualified under the
Internal Revenue Code of 1986, as amended (the Internal Revenue Code), provided
that (1) the plan purchases shares of the Fund pursuant to an investment
management agreement with The Prudential Insurance Company of America or its
affiliates, (2) the Fund is an available investment option under the agreement
and (3) the plan will participate in the PruArray Plan (benefit plan
recordkeeping services) sponsored by Prudential Mutual Fund Services LLC. These
plans include pension, profit-sharing, stock-bonus or other employee benefit
plans under Section 401 of the Internal Revenue Code and deferred compensation
and annuity plans under Sections 457 or 403(b)(7) of the Internal Revenue Code.
SALE OF SHARES
An investor can redeem shares at any time for cash at the NAV next
determined after the redemption request is received in proper form (in
accordance with procedures established by the Transfer Agent in connection with
investors' accounts) by the Transfer Agent, the Distributor or the investor's
broker. 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. If an investor is redeeming shares through a broker, the
broker must receive the sell order before the Fund computes its NAV for that day
(that is, 4:15 P.M., New York time) in order to receive that day's NAV. The
investor's broker will be responsible for furnishing all necessary documentation
to the Distributor and may charge the investor for its services in connection
with redeeming shares of the Fund.
If an investor holds shares of the Fund through Prudential Securities, her
or she must redeem the shares through Prudential Securities. Please contact your
Prudential Securities financial adviser.
If an investor holds shares in non-certificate form, a written request for
redemption signed by the investor exactly as the account is registered is
required. If an investor holds certificates, the certificates, signed in the
name(s) shown on the face of the certificates, must be received by the Transfer
Agent, the Distributor or the investor's broker in order for the redemption
request to be processed. If redemption is requested by a corporation,
partnership, trust or fiduciary, written evidence of authority acceptable to the
Transfer Agent must be submitted before such request will be accepted. All
correspondence and documents concerning redemptions should be sent to the Fund
in care of its Transfer Agent, Prudential Mutual Fund Services LLC, Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010, the
Distributor or to the investor's broker.
SIGNATURE GUARANTEE. If the proceeds of the redemption (1) exceed $50,000,
(2) are to be paid to a person other than the record owner, (3) are to be sent
to an address other than the address on the Transfer Agent's records, or (4) are
to be paid to a corporation, partnership, trust or fiduciary, 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 Plan, if the proceeds of the
redemption are invested in another investment option of the plan in the name of
the record holder and at the same address as reflected in the Transfer Agent's
records, a signature guarantee is not required.
Payment for shares presented for redemption will be made by check within
seven days after receipt by the Transfer Agent, the Distributor or the broker of
the certificate and/or written request, except as indicated below. If an
investor holds shares through Prudential Securities, payment for shares
presented for redemption will be credited to the investor's account at his or
her broker, unless the investor indicates otherwise. Such payment may be
postponed or the right of redemption suspended at times (1) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (2)
when trading on such Exchange is restricted, (3) when an emergency exists as a
result of which disposal by the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to determine
the value of its net assets, or (4) during any other period when the Commission,
by order, so permits; provided that applicable rules and regulations of the
Commission shall govern as to whether the conditions prescribed in (2), (3) or
(4) exist.
Payment for redemption of recently purchased shares will be delayed until
the Fund or its Transfer Agent has been advised that the purchase check has been
honored, which may take up to 10 calendar days from the time of receipt of the
purchase check by the Transfer Agent. Such delay may be avoided by purchasing
shares by wire or by certified or cashier's check.
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<PAGE>
REDEMPTION IN KIND. If the Directors determine 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. If your shares are redeemed in kind, you
would incur transaction costs in converting the assets into cash. The Fund,
however, has elected to be governed by Rule 18f-1 under the Investment Company
Act, under which the Fund is obligated to redeem shares solely in cash up to the
lesser of $250,000 or 1% of the NAV of the Fund during any 90-day period for any
one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the
Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose account
has a net asset value of less than $500 due to a redemption. The Fund will give
such shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No CDSC will be imposed on any such
involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If a shareholder redeems his or her shares
and has not previously exercised the repurchase privilege, the shareholder may
reinvest any portion or all of the proceeds of such redemption in shares of the
Fund at the NAV next determined after the order is received, which must be
within 90 days after the date of the redemption. Any CDSC paid in connection
with such redemption will be credited (in shares) to the shareholder's account.
(If less than a full repurchase is made, the credit will be on a pro rata
basis.) The shareholder must notify the Transfer Agent, either directly or
through the Distributor or the shareholder's broker, at the time the repurchase
privilege is exercised to adjust your account for the CDSC you previously paid.
Thereafter, any redemptions will be subject to the CDSC applicable at the time
of the redemption. See "Contingent Deferred Sales Charges" below. Exercise of
the repurchase privilege will generally not affect federal tax treatment of any
gain realized upon redemption. However, if the redemption was made within a 30
day period of the repurchase and if the redemption resulted in a loss, some or
all of the loss, depending on the amount reinvested, may not be allowed for
federal income tax purposes.
CONTINGENT DEFERRED SALES CHARGES.
Redemptions of Class B shares will be subject to a contingent deferred
sales charge or CDSC declining from 4% to zero over a seven year period. Class C
shares redeemed within 18 months of purchase (one year for Class C shares
purchased before November 2, 1998) will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to the
shareholder. The CDSC will be imposed on any redemption by a shareholder 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 the shareholders for shares during
the preceding six years, in the case of Class B shares, and 18 months, in the
case of Class C shares (one year for Class C shares purchased before November 2,
1998). 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 shares
or shares acquired through reinvestment of dividends or distributions are not
subject to a CDSC. The amount of any CDSC will be paid to and retained by the
Distributor.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See
"Shareholder Investment Account--Exchange Privilege."
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
CONTINENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEARS' SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENTS MADE REDEMPTION PROCEEDS
First ......................................... 5.0%
Second ........................................ 4.0%
Third ......................................... 3.0%
Fourth ........................................ 2.0%
Fifth ......................................... 1.0%
Sixth ......................................... 1.0%
Seventh and thereafter ........................ 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
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<PAGE>
reinvestment of dividends and distributions; then of amounts representing the
increase in NAV above the total amount of payment for the purchase of Fund
shares made during the preceding six years for Class B shares and 18 months for
Class C shares (one year for Class C shares purchased before November 2, 1998);
then of amounts representing the cost of shares held beyond the applicable CDSC
period; and finally, of amounts representing the cost of shares held for the
longest period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for
a cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the
gain or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder in, or 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 are:
(1) in the case of a tax-deferred retirement plan, a lump-sum or other
distribution after retirement;
(2) in the case of an IRA (including a Roth IRA), a lump-sum or other
distribution after attaining age 59 1/2 ore a periodic distribution based on
life expectancy;
(3) in the case of a Section 403(b) custodial account, a lump sum or other
distribution after attaining age 59 1/2; and
(4) 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 (that is,
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 Prudential Securities 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.
Finally, the CDSC will be waived to the extent that the proceeds from
shares redeemed one invested in Prudential Mutual Funds, the Guaranteed
Investment Account, the Guaranteed Insulated Separate Account or units of The
Stable Value Fund.
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on
certain redemptions 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
Directors of the Fund.
Shareholders must notify the Fund's Transfer Agent either directly or
through the brokers, at the time of redemption, that they 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.
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<PAGE>
In connection with these waivers, the Transfer Agent will require you to
submit the supporting documentation setforth below.
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
Death A copy of the shareholder's
death certificate or, in the
case of a trust, a copy of the
grantor's death certificate,
plus a copy of the trust
agreement identifying the
grantor.
Disability--An individual will be A copy of the Social Security
considered disabled if he or she is Administration award letter or a
unable to engage in any substantial letter from a physician on the
gainful activity by reason of any physician's letterhead stating
medically determinable physical or that the shareholder (or, in the
mental impairment which can be expected case of a trust, the grantor) is
to result in death or to be of permanently disabled. The letter
long-continued and indefinite duration. must also indicate the date of
disability.
Distribution from an IRA or 403(b) A copy of the distribution form
Custodial Account from the custodial firm
indicating (i) the date of birth
of the shareholder and (ii) that
the shareholder is over age 59
1/2 and is taking a normal
distribution--signed by the
shareholder.
Distribution from Retirement Plan A letter signed by the plan
administrator/trustee indicating
the reason for the distribution.
Excess Contributions A letter from the shareholder
(for an IRA) or the plan
administrator/trustee on company
letterhead indicating the amount
of the excess and whether or not
taxes have been paid.
The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS C SHARES
Prudential Retirement Plans. The CDSC will be waived on redemptions from
qualified and non-qualified retirement and deferred compensation plans that
participate in the PruArray Plan and other plans for which Prudential provides
administrative or recordkeeping services. The CDSC will also be waived on
redemptions from Benefit Plans sponsored by Prudential and its affiliates to the
extent that the redemption proceeds are invested in The Guaranteed Investment
Account, the Guaranteed Insulated Separate Account and units of The Stable Value
Fund.
Other Benefit Plans. The CDSC will be waived on redemptions from Benefit
Plans holding shares through a broker not affiliated with Prudential and for
which and broker provides administrative or recordkeeping services.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (1)
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 (2) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven
B-36
<PAGE>
years from the initial purchase (i.e., $1,000 divided by $2,100 (47.60%),
multiplied by 200 shares equals 95.24 shares). The Manager reserves the right to
modify the formula for determining the number of Eligible Shares in the future
as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A Shares than
Class B shares, the per share NAV of the Class A shares may be higher than that
of the Class B Shares at the time of conversion. Thus, although the aggregate
dollar value will be the same, you may receive fewer Class A shares than Class B
shares converted.
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been made
on the last day of the month, or for Class B shares acquired through exchange,
or a series of exchanges, on the last day of the month in which the original
payment for 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 would not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase of
such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (1) that the
dividends and other distributions paid on Class A, Class B, Class C and Class Z
shares will not constitute "preferential dividends" under the Internal Revenue
Code and (2) that the conversion of shares does not constitute a taxable event.
The conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Fund will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which the shares are held for the
investor by the Transfer Agent. If a stock certificate is desired, it must be
requested in writing for each transaction. Certificates are issued only for full
shares and may be redeposited in the Account at any time. There is no charge to
the investor for issuance of a certificate. The Fund makes available to the
shareholders the following privileges and plans.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund at net asset
value on the record date. An investor may direct the Transfer Agent in writing
not less than five (5) full business days prior to the record date to have
subsequent dividends and/or distributions sent in cash rather than reinvested.
In the case of recently purchased shares for which registration instructions
have not been received on the record date, cash payment will be made directly to
the broker. Any shareholder who receives a cash payment representing a dividend
or distribution may reinvest such distribution at NAV by returning the check or
the proceeds to the Transfer Agent within 30 days after the payment date. Such
investment will be made at the NAV per share next determined after receipt of
the check or proceeds by the Transfer Agent. Such shareholder will receive
credit for any CDSC paid in connection with the amount of proceeds being
reinvested.
EXCHANGE PRIVILEGE
The Fund makes available to its shareholders the privilege of exchanging
their shares of the Fund for shares of certain other Prudential Mutual Funds,
including one or more specified money market funds, subject in each case to the
minimum investment requirements of such funds. Shares of such other Prudential
Mutual Funds may also be exchanged for shares of the Fund. All exchanges are
made on the basis of the relative NAV next determined after receipt of an order
in proper form. An exchange will be treated as a redemption and purchase for tax
purposes. Shares may be exchanged for shares of another fund only if shares of
such fund may legally be sold under applicable state laws. For retirement and
group plans having a limited menu of Prudential Mutual Funds, the exchange
privilege is available for those funds eligible for investment in the particular
program.
It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
In order to exchange shares by telephone, an investor must authorize
telephone exchanges on his or her initial application form or by written notice
to the Transfer Agent and hold shares in non-certificate form. Thereafter, the
investor 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 the investor's protection and to prevent fraudulent
exchanges, telephone calls will be recorded and
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<PAGE>
the investor will be asked to provide his or her personal identification number.
A written confirmation of the exchange transaction will be sent to the investor.
Neither the Fund nor its agents will be liable for any loss, liability or cost
which results from acting upon instructions reasonably believed to be genuine
under the foregoing procedures. All exchanges will be made on the basis of the
relative NAV of the two funds next determined after the request is received in
good order.
If an investor holds shares through Prudential Securities, the shares must
be exchanged by contacting the investor's Prudential Securities financial
adviser.
If an investor holds 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.
An investor may also exchange shares by mail by writing to the Fund's
Transfer Agent, 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 investors should make exchanges by
mail by writing to the Transfer Agent, at the address noted above.
CLASS A. Shareholders of the Fund will be able to exchange their Class A
shares for Class A shares of certain other Prudential Mutual Funds and shares of
the money market funds specified below. No fee or sales load will be imposed
upon the exchange. Shareholders of money market funds who acquired such shares
upon exchange of Class A shares may use the exchange privilege only to acquire
Class A shares, of the Prudential Mutual Funds participating in the Class A
exchange privilege.
The following money market funds participate in the Class A exchange
privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets, Inc. (Class A Shares)
Prudential Tax-Free Money Fund, Inc.
CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B
and Class C shares of the Fund for Class B and Class C shares, respectively, of
certain other Prudential Mutual Funds and shares of the money market funds
specified above. No CDSC may be payable upon such exchange, but a CDSC may be
payable upon the redemption of Class B and Class C shares acquired as a result
of the exchange. The applicable sales charge will be that imposed by the Fund in
which shares were initially purchased and the purchase date will be deemed to be
the first day of the month after the initial purchase, rather than the date of
the exchange.
Class B and Class C shares of the Fund may also be exchanged for shares of
an eligible money market fund without imposition of any CDSC at the time of
exchange. Upon subsequent redemption from such money market fund or after
re-exchange into the Fund, such shares will be subject to the CDSC calculated by
excluding the time such shares were held in the money market fund. In order to
minimize the period of time in which shares are subject to a CDSC, shares
exchanged out of the money market fund will be exchanged on the basis of their
remaining holding periods, with the longest remaining holding periods being
transferred first. In measuring the time period shares are held in a money
market fund and "tolled" for purposes of calculating the CDSC holding period,
exchanges are deemed to have been made on the last day of the month. Thus, if
shares are exchanged into the Fund from a money market fund during the month
(and are held in the Fund at the end of the month), the entire month will be
included in the CDSC holding period. Conversely, if shares are exchanged into a
money market fund prior to the last day of the month (and are held in the money
market fund on the last day of the month), the entire month will be excluded
from the CDSC holding period. For purposes of calculating the seven year holding
period applicable to the Class B conversion feature, the time period during
which Class B shares were held in a money market fund will be excluded.
At any time after acquiring shares of other funds participating in the
Class B or Class C exchange privilege, a shareholder may again exchange those
shares (and any reinvested dividends and distributions) for Class B or Class C
shares of the Fund,
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<PAGE>
respectively without subjecting such shares to any CDSC. Shares of any fund
participating in the Class B or Class C exchange privilege that were acquired
through reinvestment of dividends or distributions may be exchanged for Class B
or Class C shares, respectively of other funds without being subject to any
CDSC.
CLASS Z. Class Z shares may be exchanged for Class Z shares of other
Prudential Mutual Funds.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV and for shareholders
who qualify to purchase Class Z shares. Under this exchange privilege, amounts
representing any Class B and Class C Shares which are not subject to a CDSC held
in such a shareholder's account will be automatically exchanged for Class A
shares for shareholders who qualify to purchase Class A shares at NAV on a
quarterly basis, unless the shareholder elects otherwise. Similarly,
shareholders who qualify to purchase Class Z shares will have their Class B and
Class C shares which are not subject to a CDSC and their Class A shares
exchanged for Class Z shares on a quarterly basis. Eligibility for this exchange
privilege will be calculated on the business day prior to the date of the
exchange. Amounts representing Class B or Class C shares which are not subject
to a CDSC include the following: (1) amounts representing Class B or Class C
shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the net asset value
above the total amount of payments for the purchase of Class B or Class C shares
and (3) amounts representing Class B or Class C shares held beyond the
applicable CDSC period. Class B and Class C shareholders must notify the
Transfer Agent either directly or through Prudential Securities, Prusec or
another broker that they are eligible for this special exchange privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at net asset
value.
[The Prudential Securities Cash Balance Pension Plan may only exchange its
Class Z shares for Class Z shares of those Prudential Mutual Funds which permit
investment by the Prudential Securities Cash Balance Pension Plan.]
Additional details about the exchange privilege and prospectuses for each
of the Prudential Mutual Funds are available from the Transfer Agent, the
Distributor or the investor's broker. The exchange privilege may be modified,
terminated or suspended on sixty days' notice, and any fund, including the Fund,
or the Distributor, has the right to reject any exchange application relating to
such fund's shares.
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average cost
per share is lower than it would be if a constant number of shares were bought
at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2011, the cost of four years at a private
college could reach $210,000 and over $90,000 at a public university.(1)
B-39
<PAGE>
The following chart shows how much you would need in monthly investments
to achieve specified lump sums to finance your investment goals.(2)
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
-------------------- -------- -------- -------- --------
25 Years ....................... $ 110 $ 165 $ 220 $ 275
20 Years ....................... 176 264 352 440
15 Years ....................... 296 444 592 740
10 Years ....................... 555 833 1,110 1,388
5 Years ....................... 1,371 2,057 2,742 3,428
See "Automatic Investment Plan."
- ----------
(1) Source information concerning the costs of education at public and
private universities is available from The College Board Annual Survey of
Colleges, 1993. Average costs for private institutions include tuition, fees,
room and board.
(2) The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not intended
to reflect the performance of an investment in shares of the Fund. The
investment return and principal value of an investment will fluctuate so that an
investor's shares when redeemed may be worth more or less than their original
cost.
AUTOMATIC INVESTMENT PLAN (AIP)
Under AIP, an investor may arrange to have a fixed amount automatically
invested in shares of the Fund monthly by authorizing his or her bank account or
brokerage account (including a Prudential Securities Command Account) to be
debited to invest specified dollar amounts in shares of the Fund. The investor's
bank must be a member of the Automatic Clearing House System. Share certificates
are not issued to AIP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, the Distributor or the investor's broker.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through the
Transfer Agent, the Distributor or an investor's broker. Such withdrawal plan
provides for monthly or quarterly checks in any amount, except as provided
below, up to the value of the shares in the shareholder's account. Withdrawals
of Class B or Class C shares may be subject to a CDSC.
In the case of shares held through the Transfer Agent (1) a $10,000
minimum account value applies, (2) withdrawals may not be for less than $100 and
(3) the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at NAV on
shares held under this plan.
The Transfer Agent, the Distributor or an investor's broker acts as an
agent for the shareholder in redeeming sufficient full and fractional shares to
provide the amount of the periodic withdrawal payment. The systematic withdrawal
plan may be terminated at any time, and the Distributor reserves the right to
initiate a fee of up to $5 per withdrawal, upon 30 days' written notice to the
shareholder.
Withdrawal payments should not be considered as dividends, yield or
income. If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with purchases of additional shares are
inadvisable because of the applicable sales charges to (1) the purchase of Class
A and Class C shares and (2) the redemption of Class B and Class C shares. Each
shareholder should consult his or her own tax adviser with regard to the tax
consequences of the plan, particularly used in connection with a retirement
plan.
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<PAGE>
TAX-DEFERRED RETIREMENT PLANS
Various qualified retirement plans, including a 401(k) plan, self-directed
individual retirement accounts and "tax-deferred accounts" under Section
403(b)(7) of the Internal Revenue Code are available through the Distributor.
These plans are for use by both self-employed individuals and corporate
employers. These plans permit either self-direction of accounts by participants,
or a pooled account arrangement. Information regarding the establishment of
these plans, the administration, custodial fees and other details are available
from Prudential Securities or the Transfer Agent.
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.
TAX-DEFERRED RETIREMENT ACCOUNTS
INDIVIDUAL RETIREMENT ACCOUNTS. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account until
the earnings are withdrawn. The following chart represents a comparison of the
earnings in a personal savings account with those in an IRA, assuming a $2,000
annual contribution, and 8% rate of return and a 39.6% federal income tax
bracket and shows how much more retirement income can accumulate within an IRA
as opposed to a taxable individual savings account.
TAX-DEFERRED COMPOUNDING(1)
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
------------- -------- --------
10 years $ 26,165 $ 31,291
15 years 44,675 58,649
20 years 68,109 98,846
25 years 97,780 157,909
30 years 135,346 244,692
- ----------
(1) The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings in
a traditional IRA account will be subject to tax when withdrawn from the
account. Distributions from a Roth IRA which meet the conditions required under
the Internal Revenue Code will not be subject to tax upon withdrawal from the
account.
MUTUAL FUND PROGRAMS
From time to time, the Fund may be included in a mutual fund program with
other Prudential Mutual Funds. Under such a program, a group of portfolios will
be selected and thereafter marketed collectively. Typically, these programs are
created with an investment theme, such as to seek greater diversification,
protection from interest rate movements or access to different management
styles. In the event such a program is instituted, there may be a minimum
investment requirement for the program as a whole. The Fund may waive or reduce
the minimum initial investment requirements in connection with such a program.
The mutual funds in the program may be purchased individually or as part
of a program. Since the allocation of portfolios included in the program may not
be appropriate for all investors, investors should consult their Prudential
Securities Financial Adviser or Prudential/Prusec Representative concerning the
appropriate blend of portfolios for them. If investors elect to purchase the
individual mutual funds that constitute the program in an investment ratio
different from that offered by the program, the standard minimum investment
requirements for the individual mutual funds will apply.
NET ASSET VALUE
The Fund's net asset value per share or NAV is determined by subtracting
its liabilities from the value of its assets and dividing the remainder by the
number of outstanding shares. NAV is calculated separately for each class. The
Directors have 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. The Fund will compute its NAV at 4:15
P.M., New York time, on each day the New York Stock Exchange is open for trading
except days on which no orders to purchase, sell or redeem Fund shares have been
received or on days on which changes in the value of the Fund's portfolio
investments do not affect NAV. In the event the New York Stock Exchange closes
early on any business day, the NAV of the Fund's shares will be determined at a
time between such closing and 4:15 P.M., New York time. The New York Stock
Exchange is closed on the following holidays: New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
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<PAGE>
Under the Investment Company Act, the Directors are responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Directors, the value of investments
listed on a securities exchange and NASDAQ National Market System securities
(other than options on stock and stock indices) are valued at the last sale
price of such exchange system on the day of valuation or, if there was no sale
on such day, the mean between the last bid and asked prices on such day, or at
the bid price on such day in the absence of an asked price. Corporate bonds
(other than convertible debt securities) and U.S. Government securities that are
actively traded in the over-the-counter market, including listed securities for
which the primary market is believed by the Manager in consultation with the
Subadviser to be over-the-counter, are valued on the basis of valuations
provided by an independent pricing agent or principal market maker which uses
information with respect to transactions in bonds, quotations from bond dealers,
agency ratings, market transactions in comparable securities and various
relationships between securities in determining value. Convertible debt
securities that are actively traded in the over-the-counter market, including
listed securities for which the primary market is believed by the Manager in
consultation with the Subadviser to be over-the-counter, are valued at the mean
between the last reported bid and asked prices provided by principal market
makers. Options on stock and stock indices traded on an exchange are valued at
the mean between the most recently quoted bid and asked prices on the respective
exchange and futures contracts and options thereon are valued at their last sale
prices as of the close of trading on the applicable commodities exchange or
board of trade or, if there was no sale on the applicable commodities exchange
or board of trade on such day, at the mean between the most recently quoted bid
and asked prices on such exchange or board of trade. Quotations of foreign
securities in a foreign currency are converted to U.S. dollar equivalents at the
current rate obtained from a recognized bank or dealer, and foreign currency
foreign contracts are valued at the current cost of covering or offsetting such
contacts. Should an extraordinary event, which is likely to affect the value of
the security, occur after the close of an exchange on which a portfolio security
is traded, such security will be valued at fair value considering factors
determined in good faith by the investment adviser under procedures established
by and under the general supervision of the Fund's Board of Directors.
Securities or other assets for which reliable market quotations are not
readily available or for which the pricing agent or principal market maker does
not provide a valuation or methodology or provides a valuation or methodology
that, in the judgment of the Manager or Subadviser (or Valuation Committee or
Board of Directors) does not represent fair value, are valued by the Valuation
Committee or Board of Directors in consultation with the Manager or Subadviser,
including its portfolio manager, traders, and its research and credit analysts,
on the basis of the following factors: cost of the security, transactions in
comparable securities, relationships among various securities and such other
factors as may be determined by the Manager, Subadviser, Board of Directors or
Valuation Committee to materially affect the value of the security. Short-term
debt securities are valued at cost, with interest accrued or discount amortized
to the date of maturity, if their original maturity was 60 days or less, unless
this is determined by the Directors not to represent fair value. Short-term
securities with remaining maturities of more than 60 days, for which market
quotations are readily available, are valued at their current market quotations
as supplied by an independent pricing agent or principal market maker.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger
distribution-related fee to which Class B and Class C shares are subject. The
NAV of Class Z shares will generally be higher than the NAV of Class A, Class B
or Class C shares as a result of the fact that the Class Z shares are not
subject to any distribution or service fee. it is expected, however, that the
NAV of the four classes will tend to converge immediately after the recording of
dividends, if any, which will differ by approximately the amount of the
distribution and/or service fee expense accrual differential among the classes.
TAXES, DIVIDENDS AND DISTRIBUTIONS
The Fund has elected to qualify and intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code.
This relieves the Fund (but not its shareholders) from paying federal income tax
on income and capital gains which are distributed to shareholders, and permits
net capital gains of the Fund (i.e., the excess of net long-term capital gains
over net short-term capital losses) to be treated as long-term capital gains of
the shareholders, regardless of how long shares in the Fund are held. Net
capital gains of the Fund which are available for distribution to shareholders
will be computed by taking into account any capital loss carryforward of the
Fund. The Fund had a capital loss carryforward for federal income tax purposes
at December 31, 1998 of approximately $ which expires in 2002.
Qualification of the Fund as a regulated investment company requires,
among other things, that (a) the Fund derive at least 90% of its annual gross
income (without reduction for losses from the sale or other disposition of
securities or foreign currencies) from dividends, interest, payments with
respect to securities loans and gains from the sale or other disposition of
securities or options thereon or foreign currencies, or other income (including
but not limited to, gains from options, futures or forward contracts) derived
with respect to its business of investing in such securities or currencies; (b)
the Fund diversify its holdings so that, at the end of each quarter of the
taxable year, (i) at least 50% of the value of the Fund's assets is represented
by
B-42
<PAGE>
cash, U.S. Government securities and other securities limited in respect of any
one issuer to an amount not greater than 5% of the value of the Fund's assets
and 10% of the outstanding voting securities of such issuer, and (ii) not more
than 25% of the value of its assets is invested in the securities of any one
issuer (other than U.S. Government securities); and (c) the Fund distribute to
its shareholders at least 90% of its net investment income and net short-term
gains (i.e., the excess of net short-term capital gains over net long-term
capital losses) in each year.
Gains or losses on sales of securities by the Fund will be treated as
long-term capital gains or losses if the securities have been held by it for
more than one year, except in certain cases where the Fund acquires a put or
writes a call thereon or otherwise holds on offsetting position with respect to
the securities. Other gains or losses on the sale of securities will be
short-term capital gains or losses. Gains and losses on the sale, lapse or other
termination of options on securities will be treated as gains and losses from
the sale of securities. Other gains or losses on the sale of securities will be
short term as gains and losses from the sale of securities. If an option written
by the Fund on securities lapses or is terminated through a closing transaction,
such as a repurchase by the Fund of the option from its holder, the Fund will
generally realize short-term capital gain or loss. If securities are sold by the
Fund pursuant to the exercise of a call option written by it, the Fund will
include the premium received in the sale proceeds of the securities delivered in
determining the amount of gain or loss on the sale. Certain of the Fund's
transactions may be subject to wash sale, short sale, constructive sale,
straddle and anti-conversion provisions of the Internal Revenue Code which may,
among other things, require the Fund to defer recognition of losses. In
addition, debt securities acquired by the Fund may be subject to original issue
discount and market discount rules which, respectively, may cause the Fund to
accrue income in advance of the receipt of cash with respect of interest or
cause gains to be treated as ordinary income.
"Regulated futures contracts" and certain listed options which are not
"equity options" constitute "Section 1256 contracts" and will be required to be
marked to market" for federal income tax purposes at the end of the fund's
taxable year; that is, treated as having be sold at market value. Except with
respect to certain forward foreign currency exchange contracts, sixty percent of
any gain or loss recognized on such "deemed sales" and on actual dispositions
will be treated as long-term capital gain or loss, and the remainder will be
treated as short-term capital gain or loss. Gain or loss on the sale lapse or
other termination of options on narrowly-based stock indices will be capital
gain or loss and will be long-term or short-term depending on the holding period
of the option. In addition, positions which are part of a "straddle" are to be
subject to rules which apply certain wash sale and short sale provisions of the
internal Revenue Code. The Fund may e required to defer the recognition of
losses on positions it holds to the extent of any unrecognized gain on
offsetting positions held by the Fund.
Gains or losses attributable to fluctuations in exchange rates which occur
between the time the Fund accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time the
Fund actually collects such receivables or pays such liabilities are treated as
ordinary income or ordinary loss. similarly, gains or losses on foreign currency
forward contracts or dispositions of debt securities dominated in a foreign
currency attributable to fluctuations in the value of the foreign currency
between the date of acquisition of the security and the date of disposition also
are treated as ordinary gain or loss. These gains, referred to under the
Internal Revenue Code as "Section 988" gains or losses, increase or decrease the
amount of the Fund's investment company taxable income available to be
distributed to its shareholders as ordinary income, rather than increasing or
decreasing the amount of the Fund's net capital gain. If Section 988 losses
exceed other investment company taxable income during a taxable year, the Fund
would not be able to make any ordinary dividend distributions, or distributions
made before the losses were realized would be recharacterized as a return of
capital to shareholders, rather than as an ordinary dividend, reducing each
shareholder's basis in his or her Fund shares.
Shareholders electing to receive dividends and distributions in the form
of additional shares will have a cost basis for federal income tax purposes in
each share so received equal to the net asset value of a share of the Fund on
the reinvestment date.
Any dividends or distributions paid shortly after a purchase by an
investor may have the effect of reducing the per share net asset value of the
investor's shares by the per share amount of the dividends or distributions.
Furthermore, such dividends or distributions, although in effect a return of
capital, are subject to federal income taxes. Therefore, prior to purchasing
shares of the Fund, the investor should carefully consider the impact of
dividends, including capital gains distributions, which are expected to be or
have been announced.
Dividends and distributions may also be subject to state and local taxes.
Any loss realized on a sale, redemption or exchange of shares of the Fund
by a shareholder will be disallowed to the extent the shares are replaced within
a 61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the Fund.
B-43
<PAGE>
The per share dividends on Class B and Class C shares will be lower than
the per share dividends on Class A and Class Z shares as a result of the higher
distribution-related fee applicable to the Class B and Class C shares. The per
share distributions of net capital gains, if any, will be paid in the same
amount for Class A, Class B, Class C and Class Z shares. See "Net Asset Value."
The Fund is required to distribute 98% of its ordinary income in the same
calendar year in which it is earned. The Fund is also required to distribute
during the calendar year 98% of the capital gain net income it earned during the
twelve months ending on October 31 of such calendar year. In addition, the Fund
must distribute during the calendar year any undistributed ordinary income and
undistributed capital gain net income from the prior year or the twelve-month
period ending on October 31 of such prior calendar year, respectively. To the
extent it does not meet these distribution requirements, the Fund will be
subject to a non-deductible 4% excise tax on the undistributed amount. for
purposes of this excise tax, income on which the Fund pays income tax is treated
as distributed.
The Fund may, from time to time, invest in Passive Foreign Investment
Companies (PFICs) PFICs re foreign corporations which derive a majority of their
income from passive sources. for tax purposes, the Fund's investments in PFICs
may subject the Fund to federal income taxes on certain income and gains
realized by the fund. the Fund would be able to avoid such taxes and interest by
electing to "mark-to-market" its investments in PFICs (i.e., treat them as sold
for fair market value at the end of the year).
Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or eliminate
such taxes. It is impossible to determine in advance the effective rate of
foreign tax to which the Fund will be subject, since the amount of the Fund's
assets to be invested in various countries is not known.
Foreign shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the Fund.
PERFORMANCE INFORMATION
AVERAGE ANNUAL TOTAL RETURN. The Fund may from time to time advertise its
average annual total return. Average annual total return is determined
separately for Class A, Class B, Class C and Class Z shares.
Average annual total return is computed according to the following
formula:
P(1+T)^n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year periods at the end of the 1, 5 or
10 year periods (or fractional portion thereof) .
Average annual total return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal or
state income taxes that may be payable upon redemption.
Below are the average annual total returns for the Fund's share classes
for the periods ended December 31, 1998.
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION
------ ------- -------- ---------
Class A (7-7-86)
Class B N/A N/A (1-15-96)
Class C N/A N/A (1-15-96)
Class Z N/A N/A (3-17-97)
Before January 15, 1996, the Fund was a closed-end investment company.
AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for the Class A, Class
B, Class C and Class Z shares.
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed according to the following formula:
ERV-P
-----
P
Where: P = a hypothetical initial payment of $1,000.
ERV = ending redeemable value at the end of the one, five or
ten year periods of a hypothetical $1,000 payment made at the beginning of the
1, 5 or 10 year periods (or fractional portion thereof).
B-44
<PAGE>
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
Below are the aggregate total returns for the Fund's share classes for the
periods ended December 31, 1998.
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION
Class A (7-7-86)
Class B N/A N/A (1-15-96)
Class C N/A N/A (1-15-96)
Class Z N/A N/A (3-17-97)
YIELD. The Fund may from time to time advertise its yield as calculated
over a 30-day period. Yield is calculated separately for Class A, Class B, Class
C and Class Z shares. The yield will be computed by dividing the Fund's net
investment income per share earned during this 30-day period by the maximum
offering price per share on the last day of this period. Yield is calculated
according to the following formula:
YIELD = 2[((a - b)/cd + 1)^6 - 1]
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
Yield fluctuates and an annualized yield quotation is not a representation
by the Fund as to what an investment in the Fund will actually yield for any
given period.
The Fund's 30-day yields for the 30 days ended December 31, 1998, were
%, %, % and % for the Class A, Class B, Class C and Class Z
shares, respectively.
The Fund also may include comparative performance information in
advertising or marketing the Fund's shares. Such performance information may
include data from Lipper, Inc., Morningstar Publication, Inc. other industry
publications, business periodicals and market indices. Set forth below is a
chart which compares the performance of different types of investments over the
long term and the rate of inflation.(1)
[The following table was depicted as a bar graph in the printed materials.]
PERFORMANCE
COMPARISON OF DIFFERENT
TYPES OF INVESTMENTS
OVER THE LONG TERM
(1/1926 - 9/1998)
Common Stocks Long-Term Govt. Bonds Inflation
------------- --------------------- ---------
11.0% 5.1% 3.1%
(1) Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation--1998
Yearbook" (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. Common stock returns
are based on the Standard & Poor's 500 Stock Index, a market-weighted, unmanaged
index of 500 common stocks in a variety of industry sectors. It is a commonly
used indicator of broad stock price movements. This chart is for illustrative
purposes only, and is not intended to represent the performance of any
particular investment or fund. Investors cannot invest directly in an index.
Past Performance is not a guarantee of future results.
B-45
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF
DECEMBER 31, 1997 THE GLOBAL TOTAL RETURN FUND, INC.
================================================================================
PRINCIPAL
AMOUNT US$
(000) DESCRIPTION VALUE (NOTE 1)
- --------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--87.6%
- --------------------------------------------------------------------------------
AUSTRALIA--6.5%
A$ 2,750 Federal National Mortgage
Association,
6.375%, 8/15/07 $ 1,806,237
7,000 New South Wales Treasury
Corporation,
6.50%, 5/1/06 4,619,277
8,000 Queensland Treasury
Corporation,
8.00%, 8/14/01 5,586,800
------------
12,012,314
- --------------------------------------------------------------------------------
CANADA--8.6%
C$ 7,000 British Columbia Provincial
Bond,
7.75%, 6/16/03 5,377,849
8,800 Canadian Government Bond,
9.00%, 12/1/04 7,344,955
4,500 Province of Quebec,
6.50%, 10/1/07 3,246,710
------------
15,969,514
- --------------------------------------------------------------------------------
DENMARK--6.4%
Danish Government Bonds,
DKr 40,000 7.00%, 12/15/04 6,379,066
32,750 8.00%, 3/15/06 5,544,112
------------
11,923,178
- --------------------------------------------------------------------------------
GERMANY--12.8%
German Government Bonds,
DM 2,000 6.75%, 4/22/03 1,204,309
18,000 7.375%, 1/3/05 11,279,753
6,200 6.00%, 1/5/06 3,605,635
8,500 6.25%, 1/4/24 4,926,645
5,000 Republic of Colombia,
7.25%, 12/21/00 2,871,579
------------
23,887,921
- --------------------------------------------------------------------------------
GREECE--1.2%
GRD 680,000 Hellenic Republic,
12.60%, 12/31/03 2,314,638
- --------------------------------------------------------------------------------
NETHERLANDS--3.4%
Dutch Government Bonds,
NLG 7,500 7.00%, 6/15/05 4,103,372
3,750 7.50%, 1/15/23 2,245,276
------------
6,348,648
- --------------------------------------------------------------------------------
SPAIN--3.7%
Spanish Government Bonds,
Pts 125,000 10.30%, 6/15/02 992,504
750,000 8.20%, 2/28/09 5,931,302
------------
6,923,806
- --------------------------------------------------------------------------------
SWEDEN--2.0%
SEK 29,000 Swedish Government Bond,
6.00%, 2/9/05 3,684,177
- --------------------------------------------------------------------------------
UNITED KINGDOM--8.3%
BP 300 Powergen PLC,
8.875%, 3/26/03 526,984
400 Republic of Argentina,
11.50%, 8/14/01 665,163
United Kingdom Treasury Bonds,
3,650 7.75%, 9/8/06 6,536,909
3,700 8.75%, 8/25/17 7,749,874
------------
15,478,930
- --------------------------------------------------------------------------------
UNITED STATES--34.7%
CORPORATE BONDS--3.2%
US$ 1,000 Banco Ganadero Colombian Bond
(Colombia),
9.75%, 8/26/99 1,027,500
2,900 Financiera Energetica Nacional
(Colombia),
9.00%, 11/8/99 3,016,000
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-46
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF
DECEMBER 31, 1997 THE GLOBAL TOTAL RETURN FUND, INC.
================================================================================
PRINCIPAL
AMOUNT US$
(000) DESCRIPTION VALUE (NOTE 1)
- --------------------------------------------------------------------------------
CORPORATE BONDS (CONT'D.)
US$ 1,000 Petroleas Mexicano (Mexico),
FRN,
6.71875%, 3/8/99 $ 985,000
1,000 Romanian Commercial Bank,
9.125%, 3/10/00 995,000
------------
6,023,500
SOVEREIGN BONDS--6.0%
3,500 Ministry of Finance (Russia),
10.00%, 6/26/07 3,249,750
1,250 Municipality of Rio De Janeiro
(Brazil),
10.375%, 7/12/99 1,253,125
1,440 Republic of Argentina, FRN,
6.6875%, 3/31/05, Ser. L 1,287,072
1,963 Republic of Brazil, IDU, FRN,
6.8125%, 1/1/01 1,869,281
1,888 Republic of Croatia, FRN,
6.625%, 7/31/06 1,718,293
800 Republic of Lithuania,
7.125%, 7/22/02 758,000
1,000 Oman Sultanate (India),
7.125%, 3/20/02 1,012,500
------------
11,148,021
SUPRANATIONAL BONDS--2.6%
4,800 Corporacion Andina de Fomento,
7.375%, 7/21/00 4,884,000
- --------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS--22.9%
United States Treasury Bond,
8,250 6.625%, 2/15/27 8,949,022
United States Treasury Notes,
12,000 6.75%, 6/30/99 12,185,640
5,000 6.125%, 9/30/00 5,052,350
11,810 7.875%, 11/15/04 13,203,226
3,100 6.25%, 2/15/07 3,198,797
------------
42,589,035
------------
64,644,556
------------
Total long-term investments
(cost US$164,252,387) 163,187,682
------------
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS--8.8%
- --------------------------------------------------------------------------------
HUNGARIAN--0.6%
HUF 230,000 Hungarian Government Bond,
23.50%, 5/17/98 1,139,835
- --------------------------------------------------------------------------------
INDONESIA--0.3%
IDR 2,000,000 Asia Pulp And Paper, NCD,
14.45%(a), 1/27/98 356,059
2,000,000 Bakrie Brothers, NCD,
17.50%(a), 2/19/98 163,643
------------
519,702
- --------------------------------------------------------------------------------
UNITED STATES--7.9%
REPURCHASE AGREEMENT--7.6%
US$ 14,222 Joint Repurchase Agreement
Account,
6.63%, 1/2/98 (Note 5) 14,222,000
- --------------------------------------------------------------------------------
SUPRANATIONAL BONDS--0.3%
500 Corporacion Andina de Fomento,
6.625%, 10/14/98 503,750
------------
14,725,750
------------
Total short-term investments
(cost US$17,682,135) 16,385,287
------------
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS--96.4%
(cost $181,934,522) 179,572,969
Other assets in excess of
liabilities--3.6% 6,657,003
------------
Net Assets--100% $186,229,972
============
- ---------------
Portfolio securities are classified according to the security's
currency denomination.
(a) Percentages quoted represent yield-to-maturity as of purchase date.
FRN--Floating Rate Note.
IDU--Interest Due and Unpaid Bonds.
NCD--Negotiable Certificate of Deposit.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-47
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES THE GLOBAL TOTAL RETURN FUND, INC.
================================================================================
<TABLE>
<CAPTION>
ASSETS DECEMBER 31, 1997
-----------------
<S> <C>
Investments, at value (cost $181,934,522)............................................................... $ 179,572,969
Foreign currency, at value (cost $1,532,836)............................................................ 1,520,037
Cash.................................................................................................... 10,280
Interest receivable..................................................................................... 4,625,891
Forward currency contracts--amount receivable from counterparties....................................... 1,584,875
Receivable for Fund shares sold......................................................................... 48,024
Other assets............................................................................................ 6,339
---------------
Total assets......................................................................................... 187,368,415
---------------
LIABILITIES
Payable for Fund shares reacquired...................................................................... 453,313
Forward currency contracts--amount payable to counterparties............................................ 299,519
Accrued expenses........................................................................................ 238,472
Management fee payable.................................................................................. 121,481
Distribution fee payable................................................................................ 25,658
---------------
Total liabilities.................................................................................... 1,138,443
---------------
NET ASSETS.............................................................................................. $ 186,229,972
===============
Net assets were comprised of:
Common stock, at par................................................................................. $ 236,284
Paid-in capital in excess of par..................................................................... 189,707,864
---------------
189,944,148
Undistributed net investment income.................................................................. 785,449
Accumulated net realized loss on investments......................................................... (3,315,029)
Net unrealized depreciation on investments and foreign currencies.................................... (1,184,596)
---------------
Net assets, December 31, 1997........................................................................... $ 186,229,972
===============
Class A:
Net asset value and redemption price per share
($183,054,467 / 23,225,736 shares of common stock issued and outstanding)......................... $7.88
Maximum sales charge (4% of offering price)............................................................. .33
-----
Maximum offering price to public........................................................................ $8.21
=====
Class B:
Net asset value, offering price and redemption price per share
($2,300,087 / 291,662 shares of common stock issued and outstanding).............................. $7.89
=====
Class C:
Net asset value, offering price and redemption price per share
($189,569 / 24,042 shares of common stock issued and outstanding)................................. $7.89
=====
Class Z:
Net asset value, offering price and redemption price per share
($685,849 / 86,983 shares of common stock issued and outstanding)................................. $7.88
=====
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-48
<PAGE>
THE GLOBAL TOTAL RETURN FUND, INC.
STATEMENT OF OPERATIONS
================================================================================
Year Ended
NET INVESTMENT INCOME December 31, 1997
-----------------
Income
Interest and discount earned (net of
foreign withholding taxes of
$290).............................. $ 16,779,396
-------------
Expenses
Management fee........................ 1,549,812
Distribution fee--Class A............. 307,192
Distribution fee--Class B............. 9,344
Distribution fee--Class C............. 2,984
Transfer agent's fees and expenses.... 405,000
Custodian's fees and expenses......... 224,000
Reports to shareholders............... 128,000
Registration fees..................... 111,000
Legal fees and expenses............... 42,000
Audit fee and expenses................ 36,000
Directors' fees....................... 27,000
Insurance............................. 6,000
Miscellaneous......................... 27,101
-------------
Total expenses..................... 2,875,433
-------------
Net investment income.................... 13,903,963
-------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS
Net realized gain on:
Investment transactions............... (1,564,339)
Foreign currency transactions......... 9,410,711
-------------
7,846,372
-------------
Net change in unrealized appreciation
(depreciation) on:
Investments........................... (13,503,125)
Foreign currencies.................... 912,282
-------------
(12,590,843)
-------------
Net loss on investments and foreign
currencies............................ (4,744,471)
-------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS................ $ 9,159,492
=============
THE GLOBAL TOTAL RETURN FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
INCREASE (DECREASE) Year Ended December 31,
IN NET ASSETS ---------------------------------
1997 1996
------------- -----------------
Operations:
Net investment income........ $ 13,903,963 $ 20,756,821
Net realized gain on
investment and foreign
currency transactions..... 7,846,372 24,249,957
Net change in unrealized
appreciation
(depreciation) on
investments and foreign
currencies transactions... (12,590,843) (12,340,523)
------------- ---------------
Net increase in net assets
resulting from
operations................ 9,159,492 32,666,255
------------- ---------------
Dividends and distributions
(Note 1)
Dividends from net
investment income
Class A................... (16,523,696) (20,751,908)
Class B................... (108,586) (4,899)
Class C................... (32,330) (14)
Class Z................... (23,135) --
------------- ---------------
(16,687,747) (20,756,821)
------------- ---------------
Distributions in excess of
net investment income
Class A................... (4,744,012) (14,747,171)
Class B................... (44,626) (8,065)
Class C................... (14,046) (12)
Class Z................... (11,622) --
------------- ---------------
(4,814,306) (14,755,248)
------------- ---------------
Fund share transactions (net of
conversions) (Note 6)
Net proceeds from shares
sold...................... 6,921,618 12,515,494
Net asset value of shares
issued in reinvestment of
dividends and
distributions............. 4,960,184 5,694,812
Cost of shares reacquired.... (43,255,074) (344,489,874)(a)
------------- ---------------
Net decrease in net assets
from Fund share
transactions.............. (31,373,272) (326,279,568)
------------- ---------------
Total decrease.................. (43,715,833) (329,125,382)
------------- ---------------
NET ASSETS
Beginning of year............... 229,945,805 559,071,187
------------- ---------------
End of year..................... $ 186,229,972 $ 229,945,805
============= ===============
- ---------------
(a) Net of $4,870,794 redemption fee retained by the Fund.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-49
<PAGE>
Notes to Financial Statements THE GLOBAL TOTAL RETURN FUND, INC.
================================================================================
The Global Total Return Fund, Inc., (the "Fund") is an open-end, non-diversified
management investment company whose investment objective is to seek total
return, the components of which are current income and capital appreciation. The
Fund invests primarily in governmental (including supranational),
semi-governmental or governmental agency debt securities or in short-term bank
debt securities or deposits in the United States and in foreign countries
denominated in U.S. dollars or in foreign currencies, including debt securities
issued or guaranteed by the U.S. Government and foreign governments, their
agencies, authorities or instrumentalities (U.S. Government Securities and
Foreign Government Securities, respectively). The remainder is generally
invested in corporate debt securities or longer term bank debt securities. The
bonds are primarily of investment grade, i.e., bonds rated within the four
highest quality grades as determined by Moody's Investor's Service or Standard &
Poor's Rating's Group, or in unrated securities of equivalent quality. In
addition the Fund is permitted to invest up to 10% of the Fund's total assets in
bonds rated below investment grade with a minimum rating of B, or on unrated
securities of equivalent quality. The ability of the issuers of debt securities
held by the Fund to meet their obligations may be affected by economic and
political developments in a specific country or region.
- --------------------------------------------------------------------------------
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Securities Valuation: In valuing the Fund's assets, quotations of foreign
securities in a foreign currency are converted to U.S. dollar equivalents at the
then current currency value. Portfolio securities that are actively traded in
the over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued at the mean between the
most recently quoted bid and asked prices provided by principal market makers.
Any security for which the primary market is on an exchange is valued at the
last sale price on such exchange on the day of valuation or, if there was no
sale on such day, the last bid price quoted on such day. Forward currency
exchange contracts are valued at the current cost of covering or offsetting the
contract on the day of valuation. Securities and assets for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the direction of the Board of Directors of the Fund.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
In connection with transactions in repurchase agreements with U.S. financial
institutions, it is the Fund's policy that its custodian or designated
subcustodians under triparty repurchase agreements as the case may be, take
possession of the underlying collateral securities, the value of which exceeds
the principal amount of the repurchase transaction including accrued interest.
To the extent that any repurchase transaction exceeds one business day, the
value of the collateral is marked-to-market on a daily basis to ensure the
adequacy of the collateral. If the seller defaults and the value of the
collateral declines or if bankruptcy proceedings are commenced with respect to
the seller of the security, realization of the collateral by the Fund may be
delayed or limited.
Foreign Currency Translation: The books and records of the Fund are maintained
in United States dollars. Foreign currency amounts are translated into United
States dollars on the following basis:
(i) market value of investment securities, other assets and liabilities--at the
current rates of exchange.
(ii) purchases and sales of investment securities, income and expenses--at the
rates of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the year, the Fund does not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of the securities held at year-end. Similarly, the Fund does not isolate
the effect of changes in foreign exchange rates from the fluctuations arising
from changes in the market prices of long-term debt securities sold during the
year. Accordingly, such realized foreign currency gains and losses are included
in the reported net realized gains on investment transactions.
Net realized gains or losses on foreign currency transactions represent net
foreign exchange gains or losses from sales and maturities of short-term
securities and forward currency contracts, disposition of foreign currencies,
currency gains or losses realized between the trade and settlement dates on
securities transactions, and the difference between the amounts of interest,
discount and foreign taxes recorded on the Fund's books and the U.S. dollar
equivalent amounts actually received or paid. Net currency gains and losses from
valuing foreign currency denominated assets (excluding investments) and
liabilities at year-end exchange rates are reflected as a component of net
unrealized appreciation or depreciation on investments and foreign currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of U.S. companies as a result of,
among other factors, the possibility of political or economic instability and
the level of governmental supervision and regulation of foreign securities
markets.
Forward Currency Contracts: A forward currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. The Fund enters into forward currency contracts in order to hedge its
exposure to changes in foreign currency exchange rates on its
- --------------------------------------------------------------------------------
B-50
<PAGE>
NOTES TO FINANCIAL STATEMENTS THE GLOBAL TOTAL RETURN FUND, INC.
================================================================================
foreign portfolio holdings or on specific receivables and payables denominated
in a foreign currency. The contracts are valued daily at current exchange rates
and any unrealized gain or loss is included in net unrealized appreciation or
depreciation on investments and foreign currencies. Gain or loss is realized on
the settlement date of the contract equal to the difference between the
settlement value of the original and renegotiated forward contracts. This gain
or loss, if any, is included in net realized gain (loss) on foreign currency
transactions. Risks may arise upon entering into these contracts from the
potential inability of the counterparties to meet the terms of their contracts.
Security Transactions and Net Investment Income: Security transactions are
recorded on the trade date. Realized and unrealized gains and losses from
security and currency transactions are calculated on the identified cost basis.
Interest income, which is comprised of three elements: state coupon, original
issue discount and market discount, is recorded on the accrual basis. Expenses
are recorded on the accrual basis, which may require the use of certain
estimates by management.
Net investment income (other than distribution fees), and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Taxes: It is the Fund's policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to shareholders. Therefore, no federal
income or excise tax provision is required.
Withholding taxes on foreign interest have been provided for in accordance with
the Fund's understanding of the applicable country's tax rules and rates.
Dividends and Distributions: Dividends are declared quarterly. Distributions of
capital gains, if any, will be declared at least annually. Dividends and
distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
foreign currency transactions.
Reclassification of Capital Accounts: The Fund accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to increase undistributed net investment income by
$5,599,755, increase accumulated net realized loss on investments by $5,422,120,
and decrease paid in capital in excess of par by $177,635 for realized foreign
currency gains realized and recognized during the year ended December 31, 1997.
Net investment income, net realized gains and net assets were not affected by
this change.
- --------------------------------------------------------------------------------
NOTE 2. AGREEMENTS
The Fund has a management agreement with Prudential Investments Fund Management
LLC ("PIFM"). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ("PIC"); PIC, through an agreement with PRICOA Asset
Management Ltd. ("PRICOA"), furnishes investment advisory services in connection
with the management of the Fund. PIFM pays for the cost of the subadviser's
services, compensation of officers of the Fund, occupancy and certain clerical
and bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly at an annual
rate of .75 of 1% of the Fund's average daily net assets up to $500 million, .70
of 1% of such assets between $500 million and $1 billion, and .65 of 1% of such
assets in excess of $1 billion.
The Fund has a distribution agreement with Prudential Securities Incorporated
("PSI"), which acts as the distributor of the Class A, B, C and Z shares of the
Fund. The Fund compensates PSI for distributing and servicing the Fund's Class
A, Class B and Class C shares, pursuant to plans of distribution (the "Class A,
B and C Plans"), regardless of expenses actually incurred by PSI. The
distribution fees are accrued daily and payable monthly. No distribution or
service fees are paid to PSI as distributor of the Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net assets of the Class A, B, and C shares, respectively.
Such expenses under the Plans were .15 of 1%, .75 of 1% and .75 of 1% of the
average daily net assets of the Class A, B and C shares, respectively, for the
year ended December 31, 1997.
PSI has advised the Fund that it has received approximately $37,800 in front-end
sales charges resulting from sales of Class A shares during the year ended
December 31, 1997. From these fees, PSI paid such sales charges to Pruco
Securities Corporation, an affiliated broker-dealer, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Fund that for the year ended December 31, 1997, it received
approximately $6,000 and $4,900 in contingent deferred sales charges imposed
upon certain redemptions by Class B and Class C shareholders, respectively.
PSI, PIFM, PIC and PRICOA are indirect, wholly owned subsidiaries of The
Prudential Insurance Company of America.
- --------------------------------------------------------------------------------
B-51
<PAGE>
NOTES TO FINANCIAL STATEMENTS THE GLOBAL TOTAL RETURN FUND, INC.
================================================================================
The Fund, along with other affiliated registered investment companies (the
"Funds"), entered into a credit agreement (the "Agreement") with an unaffiliated
lender. The maximum commitment under the Agreement is $200,000,000. Interest on
any such borrowings outstanding will be at market rates. The purpose of the
Agreement is to serve as an alternative source of funding for capital share
redemptions. The Fund did not borrow any amounts pursuant to the Agreement
during the year ended December 31, 1997. The Funds pay a commitment fee at an
annual rate of .055 of 1% on the unused portion of the credit facility. The
commitment fee is accrued and paid quarterly on a pro rata basis by the Funds.
The Agreement expired on December 30, 1997 and has been extended through
December 29, 1998 under the same terms.
- --------------------------------------------------------------------------------
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services LLC ("PMFS"), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent and during the year ended December 31, 1997,
the Fund incurred fees of approximately $288,000 for the services of PMFS. As of
December 31, 1997, approximately $22,000 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to nonaffiliates.
- --------------------------------------------------------------------------------
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term investments
for the year ended December 31, 1997, aggregated $76,351,527 and $101,047,961,
respectively.
At December 31, 1997, the Fund had outstanding forward currency contracts to
purchase and sell foreign currencies as follows:
<TABLE>
<CAPTION>
VALUE AT
FOREIGN CURRENCY SETTLEMENT DATE CURRENT APPRECIATION
PURCHASE CONTRACTS PAYABLE VALUE (DEPRECIATION)
- ---------------------- ---------------- ----------- --------------
<S> <C> <C> <C>
German Deutschemarks,
expiring 4/30/98..... $ 3,938,862 $ 3,794,268 $ (144,594)
Greek Drachma,
expiring 4/30/98..... 1,736,178 1,686,859 (49,319)
Norwegian Krone,
expiring 1/29/98..... 5,830,150 5,728,556 (101,594)
---------------- ----------- --------------
$ 11,505,190 $11,209,683 $ (295,507)
================ =========== ==============
</TABLE>
<TABLE>
<CAPTION>
VALUE AT
FOREIGN CURRENCY SETTLEMENT DATE CURRENT
SALE CONTRACTS RECEIVABLE VALUE APPRECIATION
- ---------------------- ---------------- ----------- -------------
<S> <C> <C> <C>
Australian Dollars,
expiring 1/29/98..... $ 12,191,648 $12,038,352 $ 153,296
French Francs,
expiring 1/29/98..... 8,748,331 8,651,912 96,419
Greek Drachma,
expiring 4/30/98..... 3,938,862 3,941,094 (2,232)
Indonesian Rupiah,
expiring 1/27/98..... 764,380 361,304 403,076
Indonesian Rupiah,
expiring 2/19/98..... 761,084 358,551 402,533
Netherlands Guilders,
expiring 1/29/98..... 26,991,491 26,671,790 319,701
Swiss Francs,
expiring 1/29/98..... 11,157,895 10,949,825 208,070
------------ ----------- -----------
$ 64,553,691 $62,972,828 $ 1,580,863
============ =========== ===========
</TABLE>
The United States federal income tax basis of the Fund's investments at December
31, 1997 was $181,964,820 and, accordingly, net unrealized depreciation for
United States federal income tax purposes was $2,391,851 (gross unrealized
appreciation--$5,515,033; gross unrealized depreciation--$(7,906,884)).
For federal income tax purposes, the Fund had a capital loss carryforward as of
December 31, 1997 of approximately $2,165,900 which expires in 2002. Such
carryforward is after utilization of approximately $2,817,100 to offset net
taxable gains recognized during the year ended December 31, 1997. Accordingly,
no capital gains distribution is expected to be paid to shareholders until net
capital gains have been realized in excess of such amount.
- --------------------------------------------------------------------------------
NOTE 5. JOINT REPURCHASE AGREEMENT ACCOUNT
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or federal agency obligations. As of December 31, 1997, the
Fund had a 1.21% undivided interest in the joint account. The undivided interest
for the Fund represents $14,222,000 in the principal amount. As of such date,
each repurchase agreement in the joint account and the collateral therefor were
as follows:
Credit Suisse First Boston Corp., 6.75%, in the principal amount of
$342,000,000, repurchase price $342,128,250, due 1/2/98. The value of the
collateral including accrued interest was $353,486,750.
Deutsche Morgan Grenfell, 6.80%, in the principal amount of $200,000,000,
repurchase price $200,075,555, due 1/2/98. The value of the collateral including
accrued interest was $204,000,314.
- --------------------------------------------------------------------------------
B-52
<PAGE>
NOTES TO FINANCIAL STATEMENTS THE GLOBAL TOTAL RETURN FUND, INC.
================================================================================
SBC Warburg Dillon Read, Inc., 6.55%, in the principal amount of $142,000,000,
repurchase price $142,051,672, due 1/2/98. The value of the collateral including
accrued interest was $144,862,841.
Morgan Stanely, Dean Witter, Discover & Co., 5.95%, in the principal amount of
$151,553,000, repurchase price $151,603,097, due 1/2/98. The value of the
collateral including accrued interest was $154,584,932.
Salomon Smith Barney Inc., 6.75%, in the principal amount of $342,000,000,
repurchase price $342,128,250, due 1/2/98. The value of the collateral including
accrued interest was $350,295,372.
- --------------------------------------------------------------------------------
NOTE 6. CAPITAL
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 4%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase. A special exchange privilege is also available for
shareholders who qualified to purchase Class A shares at net asset value.
Effective March 17, 1997, the Fund commenced offering Class Z shares. Class Z
shares are not subject to any sales or redemption charge and are offered
exclusively for sale to a limited group of investors.
There are 2 billion authorized shares of common stock at $.01 par value per
share, divided equally into Class A, B, C and Z shares. As of December 31, 1997
Prudential owned 13,481 Class A shares, 25 Class B shares, 26 Class C shares and
26 Class Z shares.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A SHARES AMOUNT
- ------- ----------- -------------
<S> <C> <C>
Year ended December 31, 1997:
Shares sold....................... 376,715 $ 3,080,935
Shares issued in reinvestment of
dividends and distributions..... 594,942 4,768,393
Shares reacquired................. (5,157,652) (42,386,320)
----------- -------------
Net decrease in shares outstanding
before conversion............... (4,185,995) $ (34,536,992)
Shares issued upon conversion from
Class B......................... 2,660 21,866
----------- -------------
Net decrease in shares
outstanding..................... (4,183,335) $ (34,515,126)
=========== =============
January 15, 1996(a) through
December 31, 1996:
Shares sold....................... 1,452,073 $ 12,309,850
Shares issued in reinvestment of
dividends and distributions..... 677,779 5,685,377
Shares reacquired................. (40,928,480) (344,455,702)(b)
----------- -------------
Net decrease in shares
outstanding..................... (38,798,628) $(326,460,475)
=========== =============
<CAPTION>
Class B SHARES AMOUNT
- ------- ----------- -------------
<S> <C> <C>
Year ended December 31, 1997:
Shares sold....................... 288,417 $ 2,365,066
Shares issued in reinvestment of
dividends and distributions..... 14,347 114,426
Shares reacquired................. (29,348) (240,044)
----------- -------------
Net increase in shares outstanding
before conversion............... 273,416 $ 2,239,448
Shares reacquired upon conversion
into Class A.................... (2,660) (21,866)
----------- -------------
Net increase in shares
outstanding..................... 270,756 $ 2,217,582
=========== =============
January 15, 1996(a) through
December 31, 1996:
Shares sold....................... 23,745 $ 205,444
Shares issued in reinvestment of
dividends and distributions..... 1,121 9,422
Shares reacquired................. (3,960) (34,172)
----------- -------------
Net increase in shares
outstanding..................... 20,906 $ 180,694
=========== =============
<CAPTION>
Class C
- -------
Year ended December 31, 1997:
Shares sold....................... 95,257 $ 776,731
Shares issued in reinvestment of
dividends and distributions..... 5,489 43,719
Shares reacquired................. (76,729) (605,145)
----------- -------------
Net increase in shares
outstanding..................... 24,017 $ 215,305
=========== =============
January 15, 1996(a) through
December 31, 1996:
Shares sold....................... 23 $ 200
Shares issued in reinvestment of
dividends and distributions..... 2 13
----------- -------------
Net increase in shares
outstanding..................... 25 $ 213
=========== =============
<CAPTION>
Class Z
- -------
March 17, 1997(c) through
December 31, 1997:
Shares sold....................... 85,634 $ 698,886
Shares issued in reinvestment of
dividends and distributions..... 4,243 33,646
Shares reacquired................. (2,894) (23,565)
----------- -------------
Net increase in shares
outstanding..................... 86,983 $ 708,967
=========== =============
</TABLE>
- ---------------
(a) Prior to January 15, 1996, the Fund operated as a closed-end, investment
company.
(b) Net of $4,870,794 redemption fee retained by the Fund.
(c) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
B-53
<PAGE>
FINANCIAL HIGHLIGHTS THE GLOBAL TOTAL RETURN FUND, INC.
================================================================================
<TABLE>
<CAPTION>
Class A (b)
------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------
1997(c) 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........................ $ 8.38 $ 8.44 $ 7.46 $ 8.76 $ 8.10
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income..................................... .55 .62 .54 .52 .64
Net realized and unrealized gain (loss) on investment and
foreign currencies..................................... (.18) .32 1.25 (1.22) .74
-------- -------- -------- -------- --------
Total from investment operations....................... .37 .94 1.79 (.70) 1.38
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment income...................... (.68) (.62) (.54) (.17) (.30)
Distributions in excess of net investment income.......... (.19) (.50) (.27) -- --
Distributions from capital gains.......................... -- -- -- (.13) (.23)
Distributions in excess of capital gains.................. -- -- -- -- (.19)
Tax return of capital distributions....................... -- -- -- (.30) --
-------- -------- -------- -------- --------
Total distributions.................................... (.87) (1.12) (.81) (.60) (.72)
-------- -------- -------- -------- --------
Redemption fee retained by Fund........................... -- .12 -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year.............................. $ 7.88 $ 8.38 $ 8.44 $ 7.46 $ 8.76
======== ======== ======== ======== ========
Per share market price, end of year....................... N/A N/A $ 8.25 $ 6.13 $ 8.00
======== ======== ========
TOTAL INVESTMENT RETURN BASED ON (a):
Market price........................................... N/A N/A 49.23% (16.12)% 16.50%
Net asset value........................................ 4.55% 13.15% 25.45% (8.10)% 18.12%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)............................. $183,054 $229,770 $559,071 $493,645 $579,942
Average net assets (000).................................. $204,795 $299,026 $549,407 $536,230 $567,128
Ratios to average net assets:
Expenses, including distribution fees.................. 1.39% 1.33% 1.02% 1.04% 1.02%
Expenses, excluding distribution fees.................. 1.24% 1.18% 1.02% 1.04% 1.02%
Net investment income.................................. 6.73% 7.01% 6.50% 6.45% 7.67%
FOR CLASS A, B, C, AND Z SHARES:
Portfolio turnover rate................................ 43% 32% 256% 583% 370%
</TABLE>
- ---------------
(a) Total investment return based on net asset value is calculated assuming a
purchase of shares on the first day and a sale on the last day of each year
reported and includes reinvestment of dividends and distributions. Total
return does not consider the effect of sales load. Prior to January 15, 1996
the Fund operated as a closed-end investment company and total investment
return was calculated based on market value assuming a purchase of common
stock at the current market value on the first day and a sale at the current
market value on the last day of each year reported. Dividends and
distributions are assumed for purposes of this calculation to be reinvested
at prices obtained under the dividend reinvestment plan. This calculation
does not reflect brokerage commissions.
(b) Prior to January 15, 1996 the Fund operated as a closed-end investment
company.
(c) Calculated based upon weighted average shares outstanding during the year.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-54
<PAGE>
Financial Highlights THE GLOBAL TOTAL RETURN FUND, INC.
================================================================================
<TABLE>
<CAPTION>
Class B Class C
----------------------------- -----------------------------
January 15, January 15,
1996(d) 1996(d)
Year Ended Through Year Ended Through
December 31, December 31, December 31, December 31,
1997(f) 1996 1997(f) 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...................... $ 8.39 $ 8.51 $ 8.39 $ 8.51
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income..................................... .49 .57 .49 .57
Net realized and unrealized gain (loss) on investment and
foreign currencies..................................... (.16) .26 (.16) .26
------ ------ ------ ------
Total from investment operations....................... .33 .83 .33 .83
------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from net investment income...................... (.64) (.57) (.64) (.57)
Distributions in excess of net investment income.......... (.19) (.50) (.19) (.50)
------ ------ ------ ------
Total distributions.................................... (.83) (1.07) (.83) (1.07)
------ ------ ------ ------
Redemption fee retained by Fund........................... -- .12 -- .12
------ ------ ------ ------
Net asset value, end of period............................ $ 7.89 $ 8.39 $ 7.89 $ 8.39
====== ====== ====== ======
TOTAL INVESTMENT RETURN(a):............................... 3.98% 11.99% 3.98% 11.99%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................... $2,300 $ 175 $ 190 $ 210(b)
Average net assets (000).................................. $1,246 $ 52 $ 397 $ 204(b)
Ratios to average net assets:
Expenses, including distribution fees.................. 1.99% 1.93%(c) 1.99% 1.93%(c)
Expenses, excluding distribution fees.................. 1.24% 1.18%(c) 1.24% 1.18%(c)
Net investment income.................................. 6.13% 6.41%(c) 6.05% 6.41%(c)
</TABLE>
Class Z
------------
March 17,
1997(e)
through
December 31,
1997(f)
------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...................... $ 8.32
------
INCOME FROM INVESTMENT OPERATIONS
Net investment income..................................... .39
Net realized and unrealized gain (loss) on investment and
foreign currencies..................................... .05
------
Total from investment operations....................... .44
------
LESS DISTRIBUTIONS
Dividends from net investment income...................... (.69)
Distributions in excess of net investment income.......... (.19)
------
Total distributions.................................... (.88)
------
Redemption fee retained by Fund........................... --
------
Net asset value, end of period............................ $ 7.88
======
TOTAL INVESTMENT RETURN(a):............................... 5.56%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................... $ 686
Average net assets (000).................................. $ 257
Ratios to average net assets:
Expenses, including distribution fees.................. 1.24%(c)
Expenses, excluding distribution fees.................. 1.24%(c)
Net investment income.................................. 5.41%(c)
- ----------
(a) Total investment 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 return does not
consider the effect of sales load. Total returns for periods of less than
a full year are not annualized.
(b) Figure is actual and not rounded to nearest thousand.
(c) Annualized.
(d) Commencement of offering of Class B and Class C shares.
(e) Commencement of offering of Class Z shares.
(f) Calculated based upon weighted average shares outstanding during the
period.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-55
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS THE GLOBAL TOTAL RETURN FUND, INC.
================================================================================
To the Shareholders and Board of Directors of
The Global Total Return Fund, Inc.
1177 Avenue of the Americas
New York, New York
February 13, 1998
- --------------------------------------------------------------------------------
B-56
<PAGE>
PORTFOLIO OF INVESTMENTS AS
OF JUNE 30, 1998 (UNAUDITED) THE GLOBAL TOTAL RETURN FUND, INC.
================================================================================
PRINCIPAL
AMOUNT US$
(000) DESCRIPTION VALUE (NOTE 1)
- --------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--81.2%
- --------------------------------------------------------------------------------
AUSTRALIA--6.0%
A$ 2,750 Federal National Mortgage
Association,
6.375%, 8/15/07 $ 1,755,976
13,700 New South Wales Treasury
Corporation,
6.50%, 5/1/06 8,837,808
------------
10,593,784
- --------------------------------------------------------------------------------
CANADA--4.1%
C$ 5,750 British Columbia Provincial
Bond,
6.00%, 6/9/08 4,042,509
4,500 Province of Quebec,
6.50%, 10/1/07 3,238,811
------------
7,281,320
- --------------------------------------------------------------------------------
DENMARK--6.9%
Danish Government Bonds,
DKr 40,000 7.00%, 12/15/04 6,508,386
32,750 8.00%, 3/15/06 5,686,368
------------
12,194,754
- --------------------------------------------------------------------------------
GERMANY--13.8%
German Government Bonds,
DM 18,000 7.375%, 1/3/05 11,469,343
7,700 6.00%, 1/5/06 4,603,944
8,500 6.25%, 1/4/24 5,298,542
5,000 Republic of Colombia,
7.25%, 12/21/00 2,845,765
------------
24,217,594
- --------------------------------------------------------------------------------
GREECE--2.0%
GRD 680,000 Hellenic Republic,
12.70%, 12/31/03 2,273,291
350,000 Hellenic Republic, FRN,
9.20%, 3/21/02 1,137,319
------------
3,410,610
- --------------------------------------------------------------------------------
HUNGARY--1.4%
Hungarian Government Bonds,
HUF 250,000 16.50%, 7/24/99 1,141,530
300,000 16.00%, 4/12/00 1,353,464
------------
2,494,994
- --------------------------------------------------------------------------------
NETHERLANDS--3.7%
Dutch Government Bonds,
NLG 7,500 7.00%, 6/15/05 4,186,911
3,750 7.50%, 1/15/23 2,384,975
------------
6,571,886
- --------------------------------------------------------------------------------
NEW ZEALAND--3.9%
NZ$ 6,700 Federal National Mortgage
Association,
7.25%, 6/20/02 3,428,871
3,300 International Bank of
Reconstruction Development,
7.25%, 5/27/03 1,715,356
3,100 New Zealand Government Bond,
8.00%, 4/15/04 1,705,379
------------
6,849,606
- --------------------------------------------------------------------------------
RUSSIA--0.4%
European Bank of Reconstruction
Development,
RUB 5,300 31.00%, 5/5/00 535,611
4,500 Zero Coupon, 5/28/02 144,370
------------
679,981
- --------------------------------------------------------------------------------
SPAIN--4.0%
Spanish Government Bonds,
Pts 125,000 10.30%, 6/15/02 981,861
750,000 8.20%, 2/28/09 6,123,196
------------
7,105,057
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-57
<PAGE>
PORTFOLIO OF INVESTMENTS AS
OF JUNE 30, 1998 (UNAUDITED) THE GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
PRINCIPAL
AMOUNT US$
(000) DESCRIPTION VALUE (NOTE 1)
- --------------------------------------------------------------------------------
SWEDEN--2.2%
SEK 29,000 Swedish Government Bond,
6.00%, 2/9/05 $ 3,868,964
- --------------------------------------------------------------------------------
UNITED KINGDOM--4.5%
BP 300 Powergen PLC,
8.875%, 3/26/03 532,793
400 Republic of Argentina,
11.50%, 8/14/01 686,388
United Kingdom Treasury Strip,
9,100 7.75%, 9/8/06 834,067
450 Zero Coupon, 12/7/15 5,882,301
------------
7,935,549
- --------------------------------------------------------------------------------
UNITED STATES--28.3%
CORPORATE BONDS--2.8%
US$ 1,000 Banco Ganadero Colombian Bond
(Colombia),
9.75%, 8/26/99 1,025,000
2,900 Financiera Energetica Nacional
(Colombia),
9.00%, 11/8/99 2,914,500
1,000 Romanian Commercial Bank,
9.125%, 3/10/00 962,500
------------
4,902,000
SOVEREIGN BONDS--5.8%
US$ 3,500 Ministry of Finance (Russia),
10.00%, 6/26/07 2,660,000
1,250 Municipality of Rio De Janeiro
(Brazil),
10.375%, 7/12/99 1,250,000
1,000 Oman Sultanate (India),
7.125%, 3/20/02 1,020,000
1,425 Republic of Argentina, FRN,
6.625%, 3/31/05, Ser. L 1,257,563
1,750 Republic of Brazil, IDU, FRN,
6.875%, 1/1/01 1,662,500
1,849 Republic of Croatia, FRN,
6.50%, 7/31/06 1,645,517
800 Republic of Lithuania
7.125%, 7/22/02 774,000
------------
10,269,580
SUPRANATIONAL BONDS--2.8%
Corporacion Andina de Fomento,
4,800 7.375%, 7/21/00 4,917,600
- --------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS--16.9%
7,200 United States Treasury Bond,
6.625%, 2/15/27 8,122,320
United States Treasury Notes,
5,000 6.125%, 9/30/00 5,061,700
11,810 7.875%, 11/15/04 13,264,047
3,100 6.25%, 2/15/07 3,246,289
------------
29,694,356
------------
49,783,536
------------
Total long-term investments
(cost US$145,488,760) 142,987,635
------------
SHORT-TERM INVESTMENTS--18.0%
- --------------------------------------------------------------------------------
GERMANY--1.9%
DM 6,000 Time Deposit,
3.25%, 7/6/98 3,318,676
- --------------------------------------------------------------------------------
MEXICO--0.4%
MP 8,000 Mexican Cetes,
20.50%(a), 9/17/98 793,013
- --------------------------------------------------------------------------------
POLAND--1.4%
Polish Treasury Bills,
PLZ 2,700 20.45%(a), 8/12/98 756,084
3,800 20.15%(a), 2/17/99 950,790
1,200 20.35%(a), 3/3/99 297,128
2,000 20.095%(a), 4/28/99 478,512
------------
2,482,514
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-58
<PAGE>
THE GLOBAL TOTAL RETURN FUND, INC.
PORTFOLIO OF INVESTMENTS AS OF JUNE 30, 1998 (UNAUDITED)
================================================================================
PRINCIPAL
AMOUNT US$
(000) DESCRIPTION VALUE (NOTE 1)
- --------------------------------------------------------------------------------
UNITED STATES--14.3%
CORPORATE BOND--0.6%
US$ 1,000 Petroleas Mexicano (Mexico),
FRN,
6.6875%, 3/8/99 $ 985,000
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT--7.7%
13,534 Joint Repurchase Agreement
Account
5.72%, 7/1/98 (Note 5) 13,534,000
- --------------------------------------------------------------------------------
SUPRANATIONAL BOND--0.3%
Corporacion Andina de Fomento,
500 6.625%, 10/14/98 502,000
- --------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATION--5.7%
United States Treasury Notes,
10,000 6.75%, 6/30/99 10,120,300
------------
25,141,300
------------
Total short-term investments
(cost US$31,798,279) 31,735,503
------------
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS--99.2%
(cost $177,287,039) 174,723,138
Other assets in excess of
liabilities--0.8% 1,440,540
------------
Net Assets--100% $176,163,678
============
- ----------
Portfolio securities are classified according to the security's currency
denomination.
(a) Percentages quoted represent yield-to-maturity as of purchase date.
FRN--Floating Rate Note.
IDU--Interest Due and Unpaid Bonds.
PLC--Public Limited Company (British Corporation).
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-59
<PAGE>
STATEMENT OF ASSETS AND
LIABILITIES (UNAUDITED) THE GLOBAL TOTAL RETURN FUND, INC.
================================================================================
<TABLE>
<CAPTION>
ASSETS JUNE 30, 1998
-------------
<S> <C>
Investments, at value (cost $177,287,039) ................................ $ 174,723,138
Foreign currency, at value (cost $635,145) ............................... 631,470
Interest receivable ...................................................... 3,025,547
Forward currency contracts--amount receivable from
counterparties ......................................................... 176,650
Receivable for investments sold .......................................... 136,054
Receivable for Fund shares sold .......................................... 44,627
Other assets ............................................................. 4,595
-------------
Total assets .......................................................... 178,742,081
-------------
LIABILITIES
Payable for investments purchased ........................................ 1,659,338
Forward currency contracts--amount payable to counterparties ............. 395,439
Accrued expenses and other liabilities ................................... 200,530
Payable for Fund shares reacquired ....................................... 189,250
Management fee payable ................................................... 110,370
Distribution fee payable ................................................. 23,476
-------------
Total liabilities ..................................................... 2,578,403
-------------
NET ASSETS ............................................................... $ 176,163,678
=============
Net assets were comprised of:
Common stock, at par .................................................. $ 221,950
Paid-in capital in excess of par ...................................... 178,204,223
-------------
178,426,173
Distributions in excess of net investment income ...................... (140,086)
Accumulated net realized gain on investments .......................... 769,137
Net unrealized depreciation on investments and foreign currencies ..... (2,891,546)
-------------
Net assets, June 30, 1998 ................................................ $ 176,163,678
=============
Class A:
Net asset value and redemption price per share
($170,680,385 / 21,504,537 shares of common
stock issued and outstanding) ..................................... $7.94
Maximum sales charge (4% of offering price) .............................. .33
-----
Maximum offering price to public ......................................... $8.27
=====
Class B:
Net asset value, offering price and redemption price per share
($3,239,085 / 407,921 shares of common stock issued and outstanding) $7.94
=====
Class C:
Net asset value, offering price and redemption price per share
($219,575 / 27,653 shares of common stock issued and outstanding) .. $7.94
=====
Class Z:
Net asset value, offering price and redemption price per share
($2,024,633 / 254,922 shares of common stock issued and outstanding) $7.94
=====
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-60
<PAGE>
THE GLOBAL TOTAL RETURN FUND, INC.
STATEMENT OF OPERATIONS (UNAUDITED)
================================================================================
Six Months
Ended
NET INVESTMENT INCOME June 30, 1998
-------------
Income
Interest and discount earned (net of
foreign withholding taxes of $290) ...................... $ 6,943,411
-----------
Expenses
Management fee ............................................. 681,761
Distribution fee--Class A .................................. 133,212
Distribution fee--Class B .................................. 9,828
Distribution fee--Class C .................................. 790
Transfer agent's fees and expenses ......................... 164,000
Custodian's fees and expenses .............................. 112,000
Reports to shareholders .................................... 37,000
Registration fees .......................................... 25,000
Audit fee and expenses ..................................... 18,000
Directors' fees ............................................ 13,000
Legal fees and expenses .................................... 12,000
Insurance .................................................. 1,000
Miscellaneous .............................................. 5,661
-----------
Total expenses .......................................... 1,213,252
-----------
Net investment income ......................................... 5,730,159
-----------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS
Net realized gain on:
Investment transactions .................................... 606,390
Foreign currency transactions .............................. 2,888,864
-----------
3,495,254
-----------
Net change in unrealized appreciation (depreciation) on:
Investments ................................................ (202,348)
Foreign currencies ......................................... (1,504,602)
-----------
(1,706,950)
-----------
Net gain on investments and foreigncurrencies ................. 1,788,304
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ..................................... $ 7,518,463
===========
THE GLOBAL TOTAL RETURN FUND, INC.
Statement of Changes in Net Assets (Unaudited)
================================================================================
Six Months
Ended Year Ended
INCREASE (DECREASE) June 30, December 31,
IN NET ASSETS 1998 1997
------------- -------------
Operations:
Net investment income ................. $ 5,730,159 $ 13,903,963
Net realized gain on investment
and foreign currency
transactions ....................... 3,495,254 7,846,372
Net change in unrealized
depreciation on investments
and foreign currencies ............. (1,706,950) (12,590,843)
------------- -------------
Net increase in net assets
resulting from operations .......... 7,518,463 9,159,492
------------- -------------
Dividends and distributions (Note 1)
Dividends from net investment
income
Class A ............................ (5,783,585) (16,523,696)
Class B ............................ (85,532) (108,586)
Class C ............................ (6,477) (32,330)
Class Z ............................ (51,102) (23,135)
------------- -------------
(5,926,696) (16,687,747)
------------- -------------
Distributions in excess of net
investment income
Class A ............................ (136,703) (4,744,012)
Class B ............................ (2,022) (44,626)
Class C ............................ (153) (14,046)
Class Z ............................ (1,208) (11,622)
------------- -------------
(140,086) (4,814,306)
------------- -------------
Fund share transactions (net of
conversions) (Note 6)
Net proceeds from shares sold ......... 5,544,676 6,921,618
Net asset value of shares
issued in reinvestment of
dividends and
distributions ...................... 1,510,427 4,960,184
Cost of shares reacquired ............. (18,573,078) (43,255,074)
------------- -------------
Net decrease in net assets from
Fund share transactions ............ (11,517,975) (31,373,272)
------------- -------------
Total decrease ........................... (10,066,294) (43,715,833)
------------- -------------
NET ASSETS
Beginning of period ...................... 186,229,972 229,945,805
------------- -------------
End of period(a) ......................... $ 176,163,678 $ 186,229,972
============= =============
- ----------
(a) Includes undistributed (distributions in
excess of) net investment income of $ (140,086) $ 785,449
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-61
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) THE GLOBAL TOTAL RETURN FUND, INC.
================================================================================
The Global Total Return Fund, Inc., (the "Fund") is an open-end, nondiversified
management investment company whose investment objective is to seek total
return, the components of which are current income and capital appreciation. The
Fund invests primarily in governmental (including supranational),
semi-governmental or governmental agency debt securities or in short-term bank
debt securities or deposits in the United States and in foreign countries
denominated in U.S. dollars or in foreign currencies, including debt securities
issued or guaranteed by the U.S. Government and foreign governments, their
agencies, authorities or instrumentalities (U.S. Government Securities and
Foreign Government Securities, respectively). The remainder is generally
invested in corporate debt securities or longer term bank debt securities. The
bonds are primarily of investment grade, i.e., bonds rated within the four
highest quality grades as determined by Moody's Investor's Service or Standard &
Poor's Rating's Group, or in unrated securities of equivalent quality. In
addition the Fund is permitted to invest up to 10% of the Fund's total assets in
bonds rated below investment grade with a minimum rating of B, or on unrated
securities of equivalent quality. The ability of the issuers of debt securities
held by the Fund to meet their obligations may be affected by economic and
political developments in a specific country or region.
- --------------------------------------------------------------------------------
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Securities Valuation: In valuing the Fund's assets, quotations of foreign
securities in a foreign currency are converted to U.S. dollar equivalents at the
then current currency value. Portfolio securities that are actively traded in
the over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued at the mean between the
most recently quoted bid and asked prices provided by principal market makers.
Any security for which the primary market is on an exchange is valued at the
last sale price on such exchange on the day of valuation or, if there was no
sale on such day, the last bid price quoted on such day. Forward currency
exchange contracts are valued at the current cost of covering or offsetting the
contract on the day of valuation. Securities and assets for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the direction of the Board of Directors of the Fund.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
In connection with transactions in repurchase agreements with U.S. financial
institutions, it is the Fund's policy that its custodian or designated
subcustodians under triparty repurchase agreements as the case may be, take
possession of the underlying collateral securities, the value of which exceeds
the principal amount of the repurchase transaction including accrued interest.
To the extent that any repurchase transaction exceeds one business day, the
value of the collateral is marked-to-market on a daily basis to ensure the
adequacy of the collateral. If the seller defaults and the value of the
collateral declines or if bankruptcy proceedings are commenced with respect to
the seller of the security, realization of the collateral by the Fund may be
delayed or limited.
Foreign Currency Translation: The books and records of the Fund are maintained
in United States dollars. Foreign currency amounts are translated into United
States dollars on the following basis:
(i) market value of investment securities, other assets and liabilities--at the
current rates of exchange.
(ii) purchases and sales of investment securities, income and expenses--at the
rates of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the period, the Fund does not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of the securities held at period-end. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of long-term debt securities sold
during the period. Accordingly, such realized foreign currency gains and losses
are included in the reported net realized gains on investment transactions.
Net realized gains or losses on foreign currency transactions represent net
foreign exchange gains or losses from sales and maturities of short-term
securities and forward currency contracts, disposition of foreign currencies,
currency gains or losses realized between the trade and settlement dates on
securities transactions, and the difference between the amounts of interest,
discount and foreign taxes recorded on the Fund's books and the U.S. dollar
equivalent amounts actually received or paid. Net currency gains and losses from
valuing foreign currency denominated assets (excluding investments) and
liabilities at period-end exchange rates are reflected as a component of net
unrealized appreciation or depreciation on investments and foreign currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of U.S. companies as a result of,
among other factors, the possibility of political or economic instability and
the level of governmental supervision and regulation of foreign securities
markets.
Forward Currency Contracts: A forward currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. The Fund enters into forward currency contracts in order to hedge its
exposure to changes in foreign currency exchange rates on its foreign portfolio
holdings or on specific receivables and payables denominated in a foreign
currency. The contracts are valued daily at current
- --------------------------------------------------------------------------------
B-62
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) THE GLOBAL TOTAL RETURN FUND, INC.
================================================================================
exchange rates and any unrealized gain or loss is included in net unrealized
appreciation or depreciation on investments and foreign currencies. Gain or loss
is realized on the settlement date of the contract equal to the difference
between the settlement value of the original and renegotiated forward contracts.
This gain or loss, if any, is included in net realized gain (loss) on foreign
currency transactions. Risks may arise upon entering into these contracts from
the potential inability of the counterparties to meet the terms of their
contracts.
Security Transactions and Net Investment Income: Security transactions are
recorded on the trade date. Realized and unrealized gains and losses from
security and currency transactions are calculated on the identified cost basis.
Interest income, which is comprised of three elements: stated coupon, original
issue discount and market discount, is recorded on the accrual basis. Expenses
are recorded on the accrual basis, which may require the use of certain
estimates by management.
Net investment income (other than distribution fees), and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Taxes: It is the Fund's policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to shareholders. Therefore, no federal
income or excise tax provision is required.
Withholding taxes on foreign interest have been provided for in accordance with
the Fund's understanding of the applicable country's tax rules and rates.
Dividends and Distributions: Dividends are declared quarterly. Distributions of
capital gains, if any, will be declared at least annually. Dividends and
distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
foreign currency transactions.
Reclassification of Capital Accounts: The Fund accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to decrease undistributed net investment income by $588,912
and increase accumulated net realized gain on investments by $588,912 for
realized foreign currency losses realized and recognized during the six months
ended June 30, 1998. Net investment income, net realized gains and net assets
were not affected by this change.
NOTE 2. AGREEMENTS
The Fund has a management agreement with Prudential Investments Fund Management
LLC ("PIFM"). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ("PIC"); PIC, through an agreement with PRICOA Asset
Management Ltd. ("PRICOA"), furnishes investment advisory services in connection
with the management of the Fund. PIFM pays for the cost of the subadviser's
services, compensation of officers of the Fund, occupancy and certain clerical
and bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly at an annual
rate of .75 of 1% of the Fund's average daily net assets up to $500 million, .70
of 1% of such assets between $500 million and $1 billion, and .65 of 1% of such
assets in excess of $1 billion.
The Fund had a distribution agreement with Prudential Securities Incorporated
("PSI"), which acted as the distributor of the Class A, B, C and Z shares of the
Fund. The Fund compensated PSI for distributing and servicing the Fund's Class
A, Class B and Class C shares, pursuant to plans of distribution (the "Class A,
B and C Plans"), regardless of expenses actually incurred by PSI. The
distribution fees were accrued daily and payable monthly. No distribution or
service fees were paid to PSI as distributor of the Class Z shares of the Fund.
Effective July 1, 1998, Prudential Investment Management Services LLC ("PIMS")
became the distributor of the Fund and is serving the Fund under the same terms
and conditions as under the arrangement with PSI.
Pursuant to the Class A, B and C Plans, the Fund compensated PSI for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net assets of the Class A, B, and C shares, respectively.
Such expenses under the Plans were .15 of 1%, .75 of 1% and .75 of 1% of the
average daily net assets of the Class A, B and C shares, respectively, for the
period ended June 30, 1998.
PSI has advised the Fund that it has received approximately $8,200 in front-end
sales charges resulting from sales of Class A shares during the period ended
June 30, 1998. From these fees, PSI paid such sales charges to Pruco Securities
Corporation, an affiliated broker-dealer, which in turn paid commissions to
salespersons and incurred other distribution costs.
PSI has advised the Fund that for the six months ended June 30, 1998, it
received approximately $2,300 and $600 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PSI, PIFM, PIC, PIMS and PRICOA are indirect, wholly owned subsidiaries of The
Prudential Insurance Company of America.
- --------------------------------------------------------------------------------
B-63
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) THE GLOBAL TOTAL RETURN FUND, INC.
================================================================================
The Fund, along with other affiliated registered investment companies (the
"Funds"), entered into a credit agreement (the "Agreement") with an unaffiliated
lender. The maximum commitment under the Agreement is $200,000,000. Interest on
any such borrowings outstanding will be at market rates. The purpose of the
Agreement is to serve as an alternative source of funding for capital share
redemptions. The Fund did not borrow any amounts pursuant to the Agreement
during the six months ended June 30, 1998. The Funds pay a commitment fee at an
annual rate of .055 of 1% on the unused portion of the credit facility. The
commitment fee is accrued and paid quarterly on a pro rata basis by the Funds.
The Agreement expires on December 29, 1998.
- --------------------------------------------------------------------------------
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services LLC ("PMFS"), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent and during the six months ended June 30,
1998, the Fund incurred fees of approximately $130,300 for the services of PMFS.
As of June 30, 1998, approximately $22,000 of such fees were due to PMFS.
Transfer agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to nonaffiliates.
- --------------------------------------------------------------------------------
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term investments
for the six months ended June 30, 1998, aggregated $35,271,415 and $46,539,470,
respectively.
At June 30, 1998, the Fund had outstanding forward currency contracts to
purchase and sell foreign currencies as follows:
Value at
Foreign Currency Current Settlement Date
Purchase Contract Value Payable Appreciation
- ---------------------- ---------- ---------------- ------------
Japanese Yen,
expiring 7/30/98..... $1,691,546 $1,671,807 $ 19,739
========== ========== ========
Value at
Foreign Currency Current Settlement Date Appreciation/
Sale Contracts Value Receivable (Depreciation)
- ---------------------- ----------- ---------------- --------------
Australian Dollars,
expiring 7/30/98..... $16,858,770 $ 16,498,321 $ (360,449)
French Francs,
expiring 7/30/98..... 8,580,758 8,623,605 42,847
Japanese Yen,
expiring 7/30/98..... 1,706,797 1,671,807 (34,990)
Netherlands Guilders,
expiring 7/30/98..... 8,705,728 8,751,989 46,261
Swiss Francs,
expiring 7/30/98..... 11,102,410 11,170,213 67,803
----------- ------------ ----------
$46,954,463 $ 46,715,935 $ (238,528)
=========== ============ ==========
The United States federal income tax basis of the Fund's investments at June 30,
1998 was $177,317,337 and, accordingly, net unrealized depreciation for United
States federal income tax purposes was $2,594,199 (gross unrealized
appreciation--$3,744,820; gross unrealized depreciation--$(6,339,019).
For federal income tax purposes, the Fund had a capital loss carryforward as of
December 31, 1997 of approximately $2,165,900 which expires in 2002.
Accordingly, no capital gains distribution is expected to be paid to
shareholders until net capital gains have been realized in excess of such
amount.
- --------------------------------------------------------------------------------
NOTE 5. JOINT REPURCHASE AGREEMENT ACCOUNT
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or federal agency obligations. As of June 30, 1998, the Fund
had a 1.09% undivided interest in the joint account. The undivided interest for
the Fund represents $13,534,000 in the principal amount. As of such date, each
repurchase agreement in the joint account and the collateral therefor were as
follows:
Bear, Stearns & Co. Inc., 5.85%, in the principal amount of $345,000,000,
repurchase price $345,056,063, due 7/1/98. The value of the collateral including
accrued interest was $353,215,323.
Goldman Sachs & Co. Inc., 5.20%, in the principal amount of $206,264,000,
repurchase price $206,293,794, due 7/1/98. The value of the collateral including
accrued interest was $210,389,609.
Salomon Smith Barney Inc., 5.70%, in the principal amount of $345,000,000,
repurchase price $345,054,625, due 7/1/98. The value of the collateral including
accrued interest was $352,383,850.
SBC Warburg Dillon Read Inc., 5.93%, in the principal amount of $345,000,000,
repurchase price $345,056,829, due 7/1/98. The value of the collateral including
accrued interest was $352,174,874.
- --------------------------------------------------------------------------------
NOTE 6. CAPITAL
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 4%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase. A special exchange privilege is also available for
shareholders who qualified to purchase Class A shares at net asset value. Class
Z shares are not subject to any sales or redemption charge and are offered
exclusively for sale to a limited group of investors.
There are 2 billion authorized shares of common stock at $.01 par value per
share, divided equally into Class A, B, C and Z shares. As of June 30, 1998
Prudential owned 13,481 Class A shares, 25 Class B shares, 26 Class C shares and
26 Class Z shares.
- --------------------------------------------------------------------------------
B-64
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) THE GLOBAL TOTAL RETURN FUND, INC.
================================================================================
Transactions in shares of common stock were as follows:
Class A Shares Amount
- ------- ------ ------
Six months ended June 30, 1998:
Shares sold ................................ 211,891 $ 1,705,512
Shares issued in reinvestment of
dividends and distributions .............. 172,976 1,381,277
Shares reacquired .......................... (2,107,538) (16,931,983)
------------ ------------
Net decrease in shares outstanding
before conversion ........................ (1,722,671) $(13,845,194)
Shares issued upon conversion from
Class B .................................. 1,472 11,910
------------ ------------
Net decrease in shares outstanding ......... (1,721,199) $(13,833,284)
============ ============
Year ended December 31, 1997:
Shares sold ................................ 376,715 $ 3,080,935
Shares issued in reinvestment of
dividends and distributions .............. 594,942 4,768,393
Shares reacquired .......................... (5,157,652) (42,386,320)
------------ ------------
Net decrease in shares outstanding
before conversion ........................ (4,185,995) $(34,536,992)
Shares issued upon conversion from
Class B .................................. 2,660 21,866
------------ ------------
Net decrease in shares outstanding ......... (4,183,335) $(34,515,126)
============ ============
Class B
- -------
Six months ended June 30, 1998:
Shares sold ................................ 138,603 $ 1,113,616
Shares issued in reinvestment of
dividends and distributions .............. 9,039 72,214
Shares reacquired .......................... (29,911) (239,318)
------------ ------------
Net increase in shares outstanding
before conversion ........................ 117,731 946,512
Shares reacquired upon conversion
into Class A ............................. (1,472) (11,910)
------------ ------------
Net increase in shares
outstanding .............................. 116,259 $ 934,602
============ ============
Year ended December 31, 1997:
Shares sold ................................ 288,417 $ 2,365,066
Shares issued in reinvestment of
dividends and distributions .............. 14,347 114,426
Shares reacquired .......................... (29,348) (240,044)
------------ ------------
Net increase in shares outstanding
before conversion ........................ 273,416 $ 2,239,448
Shares reacquired upon conversion
into Class A ............................. (2,660) (21,866)
------------ ------------
Net increase in shares outstanding ......... 270,756 $ 2,217,582
============ ============
Class C Shares Amount
- ------- ------ ------
Six months ended June 30, 1998:
Shares sold ................................ 3,893 $ 31,062
Shares issued in reinvestment of
dividends and distributions .............. 697 5,571
Shares reacquired .......................... (979) (8,225)
------------ ------------
Net increase in shares outstanding ......... 3,611 $ 28,408
============ ============
Year ended December 31, 1997:
Shares sold ................................ 95,257 $ 776,731
Shares issued in reinvestment of
dividends and distributions .............. 5,489 43,719
Shares reacquired .......................... (76,729) (605,145)
------------ ------------
Net increase in shares outstanding ......... 24,017 $ 215,305
============ ============
Class Z
- -------
Six months ended June 30, 1998:
Shares sold ................................ 334,507 $ 2,694,486
Shares issued in reinvestment of
dividends and distributions .............. 6,431 51,365
Shares reacquired .......................... (172,999) (1,393,552)
------------ ------------
Net increase in shares outstanding ......... 167,939 $ 1,352,299
============ ============
March 17, 1997(a) through December 31, 1997:
Shares sold ................................ 85,634 $ 698,886
Shares issued in reinvestment of
dividends and distributions .............. 4,243 33,646
Shares reacquired .......................... (2,894) (23,565)
------------ ------------
Net increase in shares outstanding ......... 86,983 $ 708,967
============ ============
- ----------
(a) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
B-65
<PAGE>
FINANCIAL HIGHLIGHTS (UNAUDITED) THE GLOBAL TOTAL RETURN FUND, INC.
================================================================================
<TABLE>
<CAPTION>
Class A (b)
---------------------------------------------------------------------------
Six Months
Ended Year Ended December 31,
June 30, ------------------------------------------------------------
1998(c) 1997(c) 1996 1995 1994 1993
--------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 7.88 $ 8.38 $ 8.44 $ 7.46 $ 8.76 $ 8.10
--------- -------- -------- -------- -------- --------
Income from investment operations
Net investment income......................... .25 .55 .62 .54 .52 .64
Net realized and unrealized gain (loss) on
investment and foreign currencies.......... .08 (.18) .32 1.25 (1.22) .74
--------- -------- -------- -------- -------- --------
Total from investment operations........... .33 .37 .94 1.79 (.70) 1.38
--------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment income.......... (.26) (.68) (.62) (.54) (.17) (.30)
Distributions in excess of net investment
income..................................... (.01) (.19) (.50) (.27) -- --
Distributions from capital gains.............. -- -- -- -- (.13) (.23)
Distributions in excess of capital gains...... -- -- -- -- -- (.19)
Tax return of capital distributions........... -- -- -- -- (.30) --
--------- -------- -------- -------- -------- --------
Total distributions........................ (.27) (.87) (1.12) (.81) (.60) (.72)
--------- -------- -------- -------- -------- --------
Redemption fee retained by Fund............... -- -- .12 -- -- --
--------- -------- -------- -------- -------- --------
Net asset value, end of period................ $ 7.94 $ 7.88 $ 8.38 $ 8.44 $ 7.46 $ 8.76
========= ======== ======== ======== ======== ========
Per share market price, end of period......... N/A N/A N/A $ 8.25 $ 6.13 $ 8.00
======== ======== ========
TOTAL INVESTMENT RETURN BASED ON (A):
Market price............................... N/A N/A N/A 49.23% (16.12)% 16.50%
Net asset value............................ 4.33% 4.55% 13.15% 25.45% (8.10)% 18.12%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 170,680 $183,054 $229,770 $559,071 $493,645 $579,942
Average net assets (000)...................... $ 179,088 $204,795 $299,026 $549,407 $536,230 $567,128
Ratios to average net assets:
Expenses, including distribution fees...... 1.33%(d) 1.39% 1.33% 1.02% 1.04% 1.02%
Expenses, excluding distribution fees...... 1.18%(d) 1.24% 1.18% 1.02% 1.04% 1.02%
Net investment income...................... 6.31%(d) 6.73% 7.01% 6.50% 6.45% 7.67%
FOR CLASS A, B, C, AND Z SHARES:
Portfolio turnover rate.................... 21% 43% 32% 256% 583% 370%
</TABLE>
- ----------
(a) Total investment return based on net asset value 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 return does not consider the effect of sales load. Prior to January
15, 1996 the Fund operated as a closed-end investment company and total
investment return was calculated based on market value assuming a purchase
of common stock at the current market value on the first day and a sale at
the current market value on the last day of each period reported.
Dividends and distributions are assumed for purposes of this calculation
to be reinvested at prices obtained under the dividend reinvestment plan.
This calculation does not reflect brokerage commissions. Total investment
returns for periods of less than a full year are not annualized.
(b) Prior to January 15, 1996 the Fund operated as a closed-end investment
company.
(c) Calculated based upon weighted average shares outstanding during the
period.
(d) Annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-66
<PAGE>
FINANCIAL HIGHLIGHTS (UNAUDITED) THE GLOBAL TOTAL RETURN FUND, INC.
================================================================================
<TABLE>
<CAPTION>
Class B Class C
--------------------------------------------- ----------------------------
January 15,
Six Months 1996(d) Six Months Year Ended
Ended Year Ended Through Ended December
June 30, December 31, December 31, June 30, 31,
1998(f) 1997(f) 1996 1998(f) 1997(f)
----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 7.89 $ 8.39 $ 8.51 $ 7.89 $ 8.39
------- ------ ------ ------ -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income......................... .23 .49 .57 .23 .49
Net realized and unrealized gain (loss) on
investment and foreign currencies.......... .07 (.16) .26 .07 (.16)
------- ------ ------ ------ -------
Total from investment operations........... .30 .33 .83 .30 .33
------- ------ ------ ------ -------
LESS DISTRIBUTIONS
Dividends from net investment income.......... (.24) (.64) (.57) (.24) (.64)
Distributions in excess of net investment
income..................................... (.01) (.19) (.50) (.01) (.19)
------- ------ ------ ------ -------
Total distributions........................ (.25) (.83) (1.07) (.25) (.83)
------- ------ ------ ------ -------
Redemption fee retained by Fund............... -- -- .12 -- --
------- ------ ------ ------ -------
Net asset value, end of period................ $ 7.94 $ 7.89 $ 8.39 $ 7.94 $ 7.89
======= ====== ====== ====== =======
TOTAL INVESTMENT RETURN(a):................... 3.89% 3.98% 11.99% 3.89% 3.98%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 3,239 $2,300 $ 175 $ 220 $ 190
Average net assets (000)...................... $ 2,642 $1,246 $ 52 $ 212 $ 397
Ratios to average net assets:
Expenses, including distribution fees...... 1.93%(c) 1.99% 1.93%(c) 1.93%(c) 1.99%
Expenses, excluding distribution fees...... 1.18%(c) 1.24% 1.18%(c) 1.18%(c) 1.24%
Net investment income...................... 5.75%(c) 6.13% 6.41%(c) 5.72%(c) 6.05%
<CAPTION>
Class C Class Z
------------ ----------------------------
January 15, March 17,
1996(d) Six Months 1997(e)
Through Ended through
December 31, June 30, December 31,
1996 1998(f) 1997(f)
------------ ----------- ------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 8.51 $ 7.88 $ 8.32
------ ------- ------
Income from investment operations
Net investment income......................... .57 .26 .39
Net realized and unrealized gain (loss) on
investment and foreign currencies.......... .26 .08 .05
------ ------- ------
Total from investment operations........... .83 .34 .44
------ ------- ------
Less distributions
Dividends from net investment income.......... (.57) (.27) (.69)
Distributions in excess of net investment
income..................................... (.50) (.01) (.19)
------ ------- ------
Total distributions........................ (1.07) (.28) (.88)
------ ------- ------
Redemption fee retained by Fund............... .12 -- --
------ ------- ------
Net asset value, end of period................ $ 8.39 $ 7.94 $ 7.88
====== ======= ======
TOTAL INVESTMENT RETURN(a):................... 11.99% 4.27% 5.56%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 210(b) $ 2,025 $ 686
Average net assets (000)...................... $ 204(b) $ 1,366 $ 257
Ratios to average net assets:
Expenses, including distribution fees...... 1.93%(c) 1.18%(c) 1.24%(c)
Expenses, excluding distribution fees...... 1.18%(c) 1.18%(c) 1.24%(c)
Net investment income...................... 6.41%(c) 6.56%(c) 5.41%(c)
</TABLE>
- ----------
(a) Total investment 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 investment return does
not consider the effect of sales load. Total investment returns for
periods of less than a full year are not annualized.
(b) Figure is actual and not rounded to nearest thousand.
(c) Annualized.
(d) Commencement of offering of Class B and Class C shares.
(e) Commencement of offering of Class Z shares.
(f) Calculated based upon weighted average shares outstanding during the
period.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-67
<PAGE>
APPENDIX I--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk, providing balance.
Asset allocation among different types of securities within an overall
investment portfolio helps to reduce risk and to potentially provide stable
returns, while enabling investors to work toward their financial goal(s). Asset
allocation is also a strategy to gain exposure to better performing asset
classes while maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable returns.
Owning a portfolio of securities mitigates the individual risks (and returns) of
any one security. Additionally, diversification among types of securities
reduces the risks and (general returns) of any one type of security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, i.e., principal and interest
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks, such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will fluctuate.
However, owning a security for a long period of time may help investors offset
short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
STANDARD DEVIATION
Standard deviation is an absolute (non-relative) measure of volatility
which, for a mutual fund, depicts how widely the returns varied over a certain
period of time. When a fund has a high standard deviation, its range of
performance has been very wide, implying greater volatility potential. Standard
deviation is only one of several measures of a fund's volatility.
I-1
<PAGE>
APPENDIX II--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart shows the long-term performance of various asset classes and
the rate of inflation.
[GRAPHIC OMITTED]
Source: Stocks, Bonds, Bills, and Inflation 1998 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart is for illustrative
purposes only and is not indicative of the past, present or future performance
of any asset class or any Prudential Mutual Fund.
Generally, stock returns are due to capital appreciation and the reinvestment of
any gains. Bond returns are due to reinvesting interest. Also, stock prices are
usually are more volatile than bond prices over the long-term. Small stock
returns for 1926-1980 are those of stocks comprising the 5th quintile of the New
York Stock Exchange. Thereafter, returns are those of the Dimensional Fund
Advisors (DFA) Small Company Fund. Common stock returns are based on the S&P
Composite Index, a market-weighted, unmanaged index of 500 stocks (currently) in
a variety of industries. It is often used as a broad measure of stock market
performance.
Long-term government bond returns are measured using a constant one-bond
portfolio with a maturity of roughly 20 years. Treasury bill returns are for a
one-month bill. Treasuries are guaranteed by the government as to the timely
payment of principal and interest; equities are not. Inflation is measured by
the consumer price index (CPI).
II-1
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1987
through 1998. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "Risk/Return Summary--Fees and Expenses" in the prospectus.
The net effect of the deduction of the operating expenses of a mutual fund on
these historical total returns, including the compounded effect over time, could
be substantial.
Historical Total Returns of Different Bond Market Sectors
[NEW ART TO COME]
(1) Lehman Brothers Treasury Bond Index is an unmanaged index made up of over
150 public issues of the U.S. Treasury having maturities of at least one year.
(2) Lehman Brothers Mortgage-Backed Securities Index is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
(3) Lehman Brothers Corporate Bond Index includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.
(4) Lehman Brothers High Yield Bond Index is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one year.
(5) Salomon Brothers World Government Index (Non U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the U.S.,
but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
II-2
<PAGE>
This chart illustrates the performance of major world stock markets for the
period from December 31, 1986 through December 31, 1997. It does not represent
the performance of any Prudential Mutual Fund.
Average Annual Total Returns of Major World Stock Markets 12/31/86-12/31/97 (in
U.S. Dollars)
[ART]
Source: Morgan Stanley Capital International (MSCI) and Lipper Analytical
Services, Inc. as of 12/31/97. Used with permission. Morgan Stanley Country
indices are unmanaged indices which include those stocks making up the largest
two-thirds of each country's total stock market capitalization. Return reflect
the reinvestment of all distributions. This chart is for illustrative purposes
only and is not indicative of the past, present or future performance of any
specific investment. Investors cannot invest directly in stock indices.
This chart shows the growth of a hypothetical $10,000 investment made in the
stocks representing the S&P 500 stock index with and without reinvested
dividends.
[ART]
Source: Stocks, Bonds, Bills, and Inflation 1998 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart is used for illustrative
purposes only and is not intended to represent the past, present or future
performance of any Prudential Mutual Fund. Common stock total return is based on
the Standard & Poor's 500 Stock Index, a market-value-weighted index made up of
500 of the largest stocks in the U.S. based upon their stock market value.
Investors cannot invest directly in indices.
WORLD STOCK MARKET CAPITALIZATION BY REGION
WORLD TOTAL: $12.5 TRILLION
[ART]
Source: Morgan Stanley Capital International December 31, 1998. Used with
permission. This chart represents the capitalization of major world stock
markets as measured by the Morgan Stanley Capital International (MSCI) World
Index. The total market capitalization is based on the value of approximately
1577 companies in 22 countries (representing approximately 60% of the aggregate
market value of the stock exchanges). This chart is for illustrative purposes
only and does not represent the allocation of any Prudential Mutual Fund.
II-3
<PAGE>
This chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.
[CAMERA READY GRAPH]
Source: Stocks, Bonds, Bills, and Inflation 1998 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex Sinquefield). Used
with permission. All rights reserved. The chart illustrates the historical yield
of the long-term U.S. Treasury Bond from 1926-1997. Yields represent that of an
annually renewed one-bond portfolio with a remaining maturity of approximately
20 years. This chart is for illustrative purposes and should not be construed to
represent the yields of any Prudential Mutual Fund.
The following chart, although not relevant to share ownership in the Fund,
may provide useful information about the effects of a hypothetical investment
diversified over different asset portfolios. The chart shows the range of annual
total returns for major stock and bond indices for the period from December 31,
1997 through December 31, 1996. The horizontal "Best Returns Zone" band shows
that a hypothetical blended portfolio constructed on one-third U.S. stock (S&P
500), one-third foreign stock (EAFE Index), and one-third U.S. Bonds (Lehman
Index) would have eliminated the "highest highs" and "lowest lows" of any single
asset class.
[CAMERA READY GRAPH]
- ----------
* Source: Prudential Investment Corporation based on data from Lipper Inc.
Past performance is not indicative of future results. the S&P 500 Index is
a weighted, unmanaged index comprised of 500 stocks which provides a broad
indication of stock price movements. The Morgan Stanley EAFE Index is an
unmanaged index comprised of 20 overseas stock markets in Europe,
Australia, New Zealand and the Far East. The Lehman Aggregate Index
includes all publicly-issued investment grade debt with maturities over
one year, including U.S. government and agency issues, 15 and 30 year
fixed-rate government mortgage securities, dollar denominated SEC
registered corporate and government securities, as well as asset-backed
securities. Investors cannot directly in stock or bond market indices.
II-4
<PAGE>
APPENDIX III--INFORMATION RELATING TO PRUDENTIAL
Set forth below is information relating to The Prudential Insurance
Company of America (Prudential) and its subsidiaries as well as information
relating to the Prudential Mutual Funds. See "How the Fund is Managed--Manager"
in the Prospectus. The data will be used in sales materials relating to the
Prudential Mutual Funds. Unless otherwise indicated, the information is as of
December 31, 1997 and is subject to change thereafter. All information relies on
data provided by The Prudential Investment Corporation (PIC) or from other
sources believed by the Manager to be reliable. Such information has not been
verified by the Fund.
INFORMATION ABOUT PRUDENTIAL
The Manager and PIC(1) are subsidiaries of Prudential, which is one of the
largest diversified services institutions in the world and, based on total
assets, the largest insurance company in North America as of December 31, 1997.
Principal products and services include life and health insurance, other
healthcare products, property and casualty insurance, securities brokerage,
asset management, investment advisory services and real estate brokerage.
Prudential (together with its subsidiaries) employs more than 79,000 persons
worldwide, and maintains a sales force of approximately 10,100 agents and 6,500
domestic and international financial advisors. Prudential is a major issuer of
annuities, including variable annuities. Prudential seeks to develop innovative
products and services to meet consumer needs in each of its business areas.
Prudential uses the rock of Gibraltar as its symbol. The Prudential rock is a
recognized brand name throughout the world.
Insurance. Prudential has been engaged in the insurance business since
1875. It insures or provides financial services to nearly 40 million people
worldwide. Long one of the largest issuers of life insurance, the Prudential has
25 million life insurance policies in force today with a face value of almost $1
trillion. Prudential has the largest capital base ($12.1 billion) of any life
insurance company in the United States. Prudential provides auto insurance for
more than 1.5 million cars and insures more than 1.2 million homes.
Money Management. Prudential is one of the largest pension fund managers
in the country, providing pension services to 1 in 3 Fortune 500 firms. It
manages $36 billion of individual retirement plan assets, such as 401(k) plans.
As of December 31, 1997, Prudential had more than $370 billion in assets under
management. Prudential Investments, a business group of Prudential (of which
Prudential Mutual Funds is a key part), manages over $211 billion in assets of
institutions and individuals. In Pensions & Investments, May 12, 1996,
Prudential was ranked third in terms of total assets under management.
Real Estate. The Prudential Real Estate Affiliates, the fourth largest
real estate brokerage network in the United States, has more than 37,000 brokers
and agents and more than 1,100 offices throughout the United States.(2)
Healthcare. Over two decades ago, Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.9
million Americans receive healthcare from a Prudential managed care membership.
Financial Services. The Prudential Savings Bank FSB, a wholly-owned
subsidiary of the Prudential, has nearly $1 billion in assets and serves nearly
1.5 million customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
As of October 30, 1997 Prudential Investments Fund Management is the
eighteenth largest mutual fund companies in the country, with over 2.5 million
shareholders invested in more than 50 mutual fund portfolios and variable
annuities with more than 3.7 million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage
over $55 billion in mutual fund and variable annuity assets. Some of
Prudential's portfolio managers have over 20 years of experience managing
investment portfolios.
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
The Wall Street Journal, The New York Times, Barron's and USA Today.
- ----------
(1) PIC serves as the Subadviser to substantially all of the Prudential Mutual
Funds. Wellington Management Company serves as the subadviser to Global
Utility Fund, Inc., Nicholas-Applegate Capital Management as the
subadviser to Nicholas-Applegate Fund, Inc., Jennison Associates Capital
Corp. as one of the subadvisers to The Prudential Investment Portfolios,
Inc. and Mercator Asset Management LP as the subadviser to International
Stock Series, a portfolio of Prudential World Fund, Inc. There are
multiple subadvisers for The Target Portfolio Trust.
(2) As of December 31, 1996.
III-1
<PAGE>
Equity Funds. Forbes magazine listed Prudential Equity Fund among twenty
mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995.
Honorees are chosen annually among mutual funds (excluding sector funds) which
are open to new investors and have had the same management for at least five
years. Forbes considers, among other criteria, the total return of a mutual fund
in both bull and bear markets as well as a fund's risk profile. Prudential
Equity Fund is managed with a "value" investment style by PIC. In 1995,
Prudential Securities introduced Prudential Jennison Fund, a growth-style equity
fund managed by Jennison Associates LLC, a premier institutional equity manager
and a subsidiary of Prudential.
High Yield Funds. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor
approximately 200 issues held in the Prudential High Yield Fund (currently the
largest fund of its kind in the country) along with 100 or so other high yield
bonds, which may be considered for purchase.(3) Non-investment grade bonds, also
known as junk bonds or high yield bonds, are subject to a greater risk of loss
of principal and interest including default risk than higher-rated bonds.
Prudential high yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services
from almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from Pulp and Paper Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to
collect detailed information on which to trade. From natural gas prices in the
Rocky Mountains to the results of local municipal elections, a Prudential
portfolio manager or trader is able to monitor it if it's important to a
Prudential Mutual Fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and
foreign government securities a year. PIC seeks information from government
policy makers. In 1995, Prudential's portfolio managers met with several senior
U.S. and foreign government officials, on issues ranging from economic
conditions in foreign countries to the viability of index-linked securities in
the United States.
Prudential Mutual Funds' portfolio managers and analysts met with over
1,200 companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
Prudential Mutual Fund global equity managers conducted many of their
visits overseas, often holding private meetings with a company in a foreign
language (our global equity managers speak 7 different languages, including
Mandarin Chinese).
Trading Data.(4) On an average day, Prudential Mutual Funds' U.S. and
foreign equity trading desks traded $77 million in securities representing over
3.8 million shares with nearly 200 different firms. Prudential Mutual Funds'
bond trading desks traded $157 million in government and corporate bonds on an
average day. That represents more in daily trading than most bond funds tracked
by Lipper even have in assets.(5) Prudential Mutual Funds' money market desk
traded $3.2 billion in money market securities on an average day, or over $800
billion a year. They made a trade every 3 minutes of every trading day. In 1994,
the Prudential Mutual Funds effected more than 40,000 trades in money market
securities and held on average $20 billion of money market securities.(6)
Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services LLC, the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On an
annual basis, that represents approximately 1.8 million telephone calls
answered.
- ----------
(3) As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.
(4) Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios
of the Prudential Series Fund and institutional and non-US accounts
managed by Prudential Mutual Fund Investments, a division of PIC, for the
year ended December 31, 1995.
(5) Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate
U.S. Government, Short Investment Grade Debt, Intermediate Investment
Grade Debt, General U.S. Treasury, General U.S. Government and Mortgage
Funds.
(6) As of December 31, 1994.
III-2
<PAGE>
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 6,000 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
Annuities. As of December 31, 1997, assets held by Prudential Securities for its
clients approximated $235 billion. During 1997, over 29,000 new customer
accounts were opened each month as Prudential Securities.(7)
Prudential Securities has a two-year Financial Advisor training program
plus advanced education programs, including Prudential Securities "university,"
which provides advanced education in a wide array of investment areas.
In 1995, Prudential Securities' equity research team ranked 8th in
Institutional Investor magazine's 1995 "All America Research Team" survey. Three
Prudential Securities' analysts were ranked as first-team finishers.(8)
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architects(SM), a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis system
that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
advisor or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- ----------
(7) As of December 31, 1997.
(8) On an annual basis, Institutional Investor magazine surveys more than 700
institutional money managers, chief investment officers and research
directors, asking them to evaluate analysts in 76 industry sectors. Scores
are produced by taking the number of votes awarded to an individual
analyst and weighing them based on the size of the voting institution. In
total, the magazine sends its survey to approximately 2,000 institutions
and a group of European and Asian institutions.
III-3
<PAGE>
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
a. (1) Amended and Restated Articles of Incorporation.(1)
(2) Amendment to Articles of Incorporation.(1)
(3) Articles Supplementary.(2)
(4) Articles Supplementary.*
b. Amended and Restated By-Laws.(1)
c. Instruments defining rights of shareholders.(1)
d. (1) Form of Amended Management Agreement between the Registrant and
Prudential Mutual Fund Management, Inc.(1)
(2) Form of Amended Subadvisory Agreement between Prudential Mutual
Fund Management, Inc. and The Prudential Investment Corporation.(1)
(3) Form of Sub-Investment Management Agreement between the
Prudential Investment Corporation and PRICOA Asset Management
Limited.*
e. (1) Distribution Agreement between the Registrant and Prudential
Investment Management Services LLC.*
(2) Form of Selected Dealer Agreement.*
g. Form of Custodian Contract between the Registrant and State Street
Bank and Trust Company. (1)
h. Form of Transfer Agency and Service Agreement between the Registrant
and Prudential Mutual Fund Services, Inc. (1)
m. (1) Amended and Restated Distribution and Service Plan for Class A
Shares.*
(2) Amended and Restated Distribution and Service Plan for Class B
Shares.*
(3) Amended and Restated Distribution and Service Plan for Class C
Shares.*
n. Financial Data Schedules filed as Exhibit 27 for electronic
purposes.*
o. Amended Rule 18f-3 Plan.*
- ----------
1. Incorporated by reference to Registration Statement on Form N-1A filed on or
about November 3, 1995 (File No. 33-63943).
2. Incorporated by reference to Registrant's Post-Effective Amendment No. 2 to
its Registration Statement on Form N-1A filed on or about February 28, 1997
(File No. 33-63943).
*Filed herewith.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
ITEM 25. INDEMNIFICATION
As permitted by Sections 17(h) and (i) of the Investment Company Act of
1940, as amended (1940 Act) and pursuant to Article VII of the Fund's By-Laws
(Exhibit (b) to the Registration Statement), officers, directors, employees and
agents of the Registrant will not be liable to the Registrant, any stockholder,
officer, director, employee, agent or other person for any action or failure to
act, except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
Section 2-418 of Maryland General Corporation Law permits indemnification of
directors who acted in good faith and reasonably believed that the conduct was
in the best interests of the Registrant. As permitted by Section 17(i) of the
1940 Act, pursuant to Section 10 of the Distribution Agreement (Exhibit (e)(1)
to the Registration Statement), the Distributor of the Registrant may be
indemnified against liabilities which it may incur, except liabilities arising
from bad faith, gross negligence, willful misfeasance or reckless disregard of
duties.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (Securities Act) may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the foregoing provisions
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the 1940 Act and is, therefore, unenforceable. In the event that
a claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in connection with the successful defense
of any action, suit or proceeding) is asserted against the Registrant by such
C-1
<PAGE>
director, officer or controlling person in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1940 Act and will be governed by the final
adjudication of such issue.
The Registrant has purchased an insurance policy insuring its officers and
directors against liabilities, and certain costs of defending claims against
such officers and directors, to the extent such officers and directors are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and directors under certain circumstances.
Section 9 of the Management Agreement (Exhibit (d)(1) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit (d)(2) to the
Registration Statement) limit the liability of Prudential Investments Fund
Management LLC (PIFM) and The Prudential Investment Corporation (PIC),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective duties or from reckless
disregard by them of their respective obligations and duties under the
agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and the Distribution Agreement in a manner consistent
with Release No. 11330 of the Securities and Exchange Commission under the 1940
Act so long as the interpretation of Sections 17(h) and 17(i) of such Act remain
in effect and are consistently applied.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) Prudential Investments Fund Management LLC (PIFM).
See "How the Fund is Managed--Manager" in the Prospectus constituting Part
A of this Registration Statement and "Investment Advisory and Other Services" in
the Statement of Additional Information constituting Part B of this Registration
Statement.
The business and other connections of the officers of PIFM are listed in
Schedules A and D of Form ADV of PIFM as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104).
The business and other connections of PIFM's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077.
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS
- ---------------- ------------------ ---------------------
Brian M. Storms Officer-in-Charge, President, Prudential Mutual Funds &
President, Chief Annuities (PMF&A); Officer-In-Charge,
Executive Officer President, Chief Executive Officer
and Chief and Chief Operating Officer, PIFM
Operating Officer
Robert F. Gunia Executive Vice Vice President, Prudential Investments;
President Executive Vice President and
and Treasurer Treasurer, PIFM, Senior Vice
President, Prudential Securities
Incorporated
Neil A. McGuinness Executive Vice Executive Vice President and Director
President of Marketing, PMF&A; Executive Vice
President, PIFM
Robert J. Sullivan Executive Vice Executive Vice President, PMF&A;
President Executive Vice President, PIFM
(b) The Prudential Investment Corporation (PIC)
See "How the Fund is Managed--Investment Adviser" in the Prospectus
constituting Part A of this Registration Statement and "Investment Advisory and
Other Services" in the Statement of Additional Information constituting Part B
of this Registration Statement.
C-2
<PAGE>
The business and other connections of PIC's directors and executive
officers are as set forth below. Except as otherwise indicated, the address of
each person is Prudential Plaza, Newark, NJ 07102.
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ---------------- ----------------- ---------------------
E. Michael Chairman of the Chief Executive Officer of Prudential
Caulfield Board, Investments (PIC) of The Prudential
President and Insurance Company of America
Chief Executive (Prudential)
Officer and
Director
Mendel A. Melzer, Senior Vice Chief Investment Officer of Prudential
CFA President and Mutual Funds; President of Private
Gateway Center Director Asset Management Group of Prudential
Two
100 Mulberry
Street
Newark, NJ 07102
John R. Vice President Senior Vice President, Prudential; Vice
Strangfeld, Jr. and Director President and Director, PIC
(c) PRICOA Asset Management Ltd. (PRICOA)
See "How the Fund is Managed--Investment Adviser" in the Prospectus
constituting Part A of this Registration Statement and "Investment Advisory and
Other Services" in the Statement of Additional Information constituting Part B
of this Registration Statement.
The business and other connections of PRICOA's directors and officers are
as set forth below. The address of each person is Cutlers Court, 100 Piccadilly,
London, WIV9FN England.
POSITION WITH
NAME AND ADDRESS PRICOA PRINCIPAL OCCUPATIONS
- ---------------- ------------- ---------------------
Simon J. Wells CEO and Director CEO and Director, PRICOA; Employee of
PIC and Prudential-Bache Securities
(U.K.) Inc.
J. Gabriel Irwin Chairman and Chairman and Director, PRICOA; Employee
Director of PIC and Prudential-Bache Securities
(U.K.) Inc.
Peter G. Spenser Financial
Compliance
Officer and Financial Compliance Officer and
Director Director, PRICOA
Stephen Auth Director Director, PRICOA
Jean-Yves Chereau Director Director, PRICOA
Paul Lowenstein Director Director, PRICOA
William N. Jones Secretary Secretary, PRICOA
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Prudential Investment Management Services LLC (PIMS)
PIMS is distributor for Cash Accumulation Trust, Command Government Fund,
Command Money Fund, Command Tax-Free Fund, The Global Total Return Fund, Inc.,
Global Utility Fund, Inc., Nicholas-Applegate Fund, Inc. (Nicholas-Applegate
Growth Equity Fund), Prudential Balanced Fund, Prudential California Municipal
Fund, Prudential Distressed Securities Fund, Inc., Prudential Diversified Bond
Fund, Inc., Prudential Emerging Growth Fund, Inc., Prudential Equity Fund, Inc.,
Prudential Equity Income Fund, Prudential Europe Growth Fund, Inc., Prudential
Global Genesis Fund, Inc., Prudential Global Limited Maturity Fund, Inc.,
Prudential Government Income Fund, Inc., Prudential Government Securities Trust,
Prudential High Yield Fund, Inc., Prudential High Yield Total Return Fund, Inc.,
Prudential Index Series Fund, Prudential Institutional Liquidity Portfolio,
Inc., Prudential Intermediate Global Income Fund, Inc., Prudential International
Bond Fund, Inc., Prudential Mid-Cap Value Fund, Prudential MoneyMart Assets,
Inc., Prudential Mortgage Income Fund, Inc., Prudential Municipal Bond Fund,
Prudential Municipal Series Fund, Prudential National Municipals Fund, Inc.,
Prudential Natural Resources Fund, Inc., Prudential Pacific Growth Fund, Inc.,
Prudential Real Estate Securities Fund, Prudential Small-Cap Quantum Fund, Inc.,
Prudential Small Company Value Fund, Inc., Prudential Special Money Market Fund,
Inc., Prudential Structured Maturity Fund, Inc., Prudential 20/20 Focus Fund,
Prudential Tax Free Money Fund, Inc., Prudential Utility Fund, Inc., Prudential
World Fund, Inc. and The Target Portfolio Trust.
C-3
<PAGE>
(b) Information concerning the directors and officers of PIMS is set forth
below. Except as otherwise indicated the address of each person is 751 Broad
Street, Newark, New Jersey 07102.
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME UNDERWRITER REGISTRANT
- ---- ------------- -------------
E. Michael Caulfield .. President None
Mark R. Fetting ....... Executive Vice President None
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102
Jean D. Hamilton ...... Executive Vice President None
Ronald P. Joelson ..... Executive Vice President None
Brian M. Storms ....... Executive Vice President None
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102
John R. Strangfeld .... Executive Vice President None
Mario A. Mosse ........ Senior Vice President and Chief Operating
Officer None
Scott S. Wallner ...... Vice President, Secretary and Chief Legal
Officer None
Michael G. Williamson . Vice President, Comptroller and Chief
Financial Officer None
C. Edward Chaplin ..... Treasurer None
(c) Registrant has no principal underwriter who is not an affiliated
person of the Registrant.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the Rules thereunder are maintained at the
offices of State Street Bank and Trust Company, One Heritage Drive, North
Quincy, Massachusetts 02171, The Prudential Investment Corporation, Prudential
Plaza, 751 Broad Street, Newark, New Jersey 07102, the Registrant, Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, PRICOA Asset
Management Ltd., 115 Houndsditch, London EC3A 7BU and Prudential Mutual Fund
Services LLC, Raritan Plaza One, Edison, New Jersey 08837. Documents required by
Rules 31a-1(b)(5), (6), (7), (9), (10) and (11), 31a-1(f), 31a-1(b)(4) and (11)
and 31a-1(d) will be kept at Gateway Center Three, 100 Mulberry Street, Newark,
New Jersey, 07102-4077, and the remaining accounts, books and other documents
required by such other pertinent provisions of Section 31(a) and the Rules
promulgated thereunder will be kept by State Street Bank and Trust Company and
Prudential Mutual Fund Services LLC.
ITEM 29. MANAGEMENT SERVICES
Other than as set forth under the captions "How the Fund is Managed" in
the Prospectus and the captions "Investment Advisory and Other Services" in the
Statement of Additional Information, constituting Parts A and B, respectively,
of this Post-Effective Amendment to the Registration Statement, Registrant is
not a party to any management-related service contract.
ITEM 30. UNDERTAKING
Not Applicable.
C-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment
Company Act, the Fund has duly caused this Post-Effective Amendment to the
Registration Statement to be signed on its behalf by the undersigned, duly
authorized, in the City of Newark, and State of New Jersey, on the 29th day of
December, 1998.
THE GLOBAL TOTAL RETURN FUND, INC.
/s/ Brian M. Storms
----------------------------------
BRIAN M. STORMS, PRESIDENT
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Edward D. Beach Director December 29, 1998
- -------------------------------
EDWARD D. BEACH
/s/ Delayne Dedrick Gold Director December 29, 1998
- -------------------------------
DELAYNE DEDRICK GOLD
/s/ Robert F. Gunia Director December 29, 1998
- -------------------------------
ROBERT F. GUNIA
/s/ Douglas H. McCorkindale Director December 29, 1998
- -------------------------------
DOUGLAS H. MCCORKINDALE
/s/ Mendel A. Melzer Director December 29, 1998
- -------------------------------
MENDEL A. MELZER
/s/ Thomas T. Mooney Director December 29, 1998
- -------------------------------
THOMAS T. MOONEY
/s/ Stephen P. Munn Director December 29, 1998
- -------------------------------
STEPHEN P. MUNN
/s/ Richard A. Redeker Director December 29, 1998
- -------------------------------
RICHARD A. REDEKER
/s/ Robin B. Smith Director December 29, 1998
- -------------------------------
ROBIN B. SMITH
/s/ Brian M. Storms President and Director December 29, 1998
- -------------------------------
BRIAN M. STORMS
/s/ Louis A. Weill, III Director December 29, 1998
- -------------------------------
LOUIS A. WEILL, III
/s/ Clay T. Whitehead Director December 29, 1998
- -------------------------------
CLAY T. WHITEHEAD
/s/ Grace C. Torres Treasurer and Principal December 29, 1998
- ------------------------------- Financial and Accounting
GRACE C. TORRES Officer
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
ITEM 23. EXHIBITS
a. (1) Amended and Restated Articles of Incorporation.(1)
(2) Amendment to Articles of Incorporation.(1)
(3) Articles Supplementary.(2)
(4) Articles Supplementary.*
b. Amended and Restated By-Laws.(1)
c. Instruments defining rights of shareholders.(1)
d. (1) Form of Amended Management Agreement between the Registrant and
Prudential Mutual Fund Management, Inc. (1)
(2) Form of Amended Subadvisory Agreement between Prudential Mutual
Fund Management, Inc. and The Prudential Investment Corporation. (1)
(3) Form of Sub-Investment Management Agreement between the
Prudential Investment Corporation and PRICOA Asset Management
Limited.*
e. (1) Distribution Agreement between the Registrant and Prudential
Investment Management Services LLC.*
(2) Form of Selected Dealer Agreement.*
g. Form of Custodian Contract between the Registrant and State Street
Bank and Trust Company. (1)
h. Form of Transfer Agency and Service Agreement between the Registrant
and Prudential Mutual Fund Services, Inc. (1)
m. (1) Amended and Restated Distribution and Service Plan for Class A
Shares.*
(2) Amended and Restated Distribution and Service Plan for Class B
Shares.*
(3) Amended and Restated Distribution and Service Plan for Class C
Shares.*
n. Financial Data Schedules filed as Exhibit 27 for electronic
purposes.*
o. Amended Rule 18f-3 Plan.*
- ----------
1. Incorporated by reference to Registration Statement on Form N-1A filed on or
about November 3, 1995 (File No. 33-63943).
2. Incorporated by reference to Registrant's Post-Effective Amendment No. 2 to
its Registration Statement on Form N-1A filed on or about February 28, 1997
(File No. 33-63943).
* Filed herewith.
ARTICLES SUPPLEMENTARY
of
THE GLOBAL TOTAL RETURN FUND, INC.
The Global Total Return Fund, Inc., a Maryland corporation having its
principal office in Baltimore, Maryland (hereinafter called the "Corporation"),
hereby certifies to the State Department of Assessments and Taxation of Maryland
that:
FIRST: In accordance with Article IV of the Charter of the Corporation and
the Maryland General Corporation Law, the Board of Directors has reclassified
the unissued shares of its Class C Common Stock (par value $.01 per share) by
changing certain terms and conditions as follows:
Effective November 2, 1998, all newly-issued Class C Shares of Common Stock
shall be subject to a front-end sales charge, a contingent deferred sales
charge, and a Rule 12b-1 distribution fee as determined by the Board of
Directors from time to time in accordance with the Investment Company Act of
1940, as amended, and as disclosed in the current prospectus for such shares.
IN WITNESS WHEREOF, The Global Total Return Fund, Inc. has caused these
presents to be signed in its name and on its behalf by its Vice President and
witnessed by its Assistant Secretary on October 30, 1998.
WITNESS: THE GLOBAL TOTAL
RETURN FUND, INC.
/s/ MARGUERITE E.H. MORRISON By: /s/ ROBERT F. GUNIA
- ---------------------------- -----------------------
Marguerite E. H. Morrison, Robert F. Gunia, Vice President
Assistant Secretary
THE UNDERSIGNED, Vice President of The Global Total Return Fund, Inc., who
executed on behalf of the Corporation Articles Supplementary of which this
Certificate is made a part, hereby acknowledges in the name and on behalf of
said Corporation the foregoing Articles Supplementary to be in the corporate act
of said Corporation and hereby certifies that the matters and facts set forth
herein with respect to the authorization and approval thereof are true in all
material respects under the penalties of perjury.
/s/ ROBERT F. GUNIA
-------------------
Robert F. Gunia, Vice President
A M E N D M E N T
TO SUB-INVESTMENT MANAGEMENT AGREEMENT ("AGREEMENT")
BETWEEN THE PRUDENTIAL INVESTMENT CORPORATION
("INVESTMENT MANAGER")
AND
PRICOA ASSET MANAGEMENT LIMITED ("SUB-INVESTMENT MANAGER")
This Amendment to the Agreement dated September 30, 1997, is dated February
11, 1998, and effective as of January 1, 1998.
WHEREAS, the parties have agreed that the Sub-Investment Manager will
provide investment advisory services to the registered investment companies
established under the Investment Company Act of 1940, the investment companies
organized under the laws of the Grand Duchy of Luxembourg and the insurance
company general accounts, listed on Schedule A ;
NOW THEREFORE, it is agreed as follows:
1. Section 12 of the Agreement is hereby amended to read as follows:
Termination. Sub-Investment Manager may terminate this Agreement on
60 days' written notice to Investment Manager, with respect to
managed accounts and investment companies. Investment Manager may
terminate Sub-Investment Manager's appointment as an investment
manager at any time upon written notice which will take effect
immediately upon receipt. With respect to the registered investment
companies, the agreement also (i) may be terminated without the
payment of any penalty, by the board of directors of such registered
investment company or by a vote of majority of the outstanding voting
securities on note more than 60 days' written notice to the
Sub-Investment Manager; (ii) shall continue in effect for a period
more than two years from the date of execution, only so long as such
continuance is specifically approved at least annually in conformity
with the requirements of the Investment Company Act of 1940; and
(iii) shall terminate automatically for a particular registered
investment company upon the termination of Investment Manager's
Sub-Advisory Agreement for such registered investment company.
Termination of this Agreement will be without prejudice to the
completion of transactions already initiated and accordingly, despite
termination of this Agreement, Sub-Investment Manager shall be
entitled to:
a. settle or close out all transactions entered into or for which
the order was placed with a broker or which was otherwise
initiated or agreed by Sub-Investment Manager on Investment
Manager's behalf hereunder, in good faith before Sub-Investment
Manager received notice of termination (or, if later, the
expiration of such notice); and
b. require Investment Manager to pay all outstanding fees and
expenses including those incurred pursuant to paragraph (a)
above.
2. Section 13 of the Agreement is hereby amended to read as follows:
No Assignment Sub-Investment Manager may not make on assignment
(as that term is defined in the Investment Advisers Act of 1940) of
this Agreement without the prior written consent of Investment
Manager. This Agreement, with respect to registered investment
companies, shall not be assigned by either party hereto and shall
automatically terminate forthwith in the event of such assignment (as
that term is defined in the Investment Company Act of 1940).
3. Schedules A and B to the Agreement are hereby amended and
substituted by the attached Schedules A and B, respectively:
IN WITNESS WHEREOF, the parties have caused this Amendment to be signed as
of the date indicated above.
THE PRUDENTIAL INVESTMENT CORPORATION
BY:_________________________________________
NAME: Jonathan M. Greene
------------------
TITLE: Senior Vice President
--------------------
PRICOA ASSET MANAGMENT LIMITED
BY:_________________________________________
NAME:______________________________________
TITLE:______________________________________
BY:_________________________________________
NAME:______________________________________
TITLE:_______________________________________
<PAGE>
SCHEDULE A (amended)
TO THE SUB-INVESTMENT MANAGEMENT AGREEMENT BETWEEN
THE PRUDENTIAL INVESTMENT CORPORATION AND
PRICOA ASSET MANAGEMENT LIMITED
SCHEDULE OF REMUNERATION
<TABLE>
<CAPTION>
List of Funds Annual Fee
-------------- ----------
<C> <S> <C>
Bond Funds Prudential International Bond Fund, Inc.
- ----------
(formerly The Global Government Plus Fund, Inc.) Cost + 5%of cost
The Global Total Return Fund, Inc. Cost + 5% of cost
Prudential Intermediate Global Income Fund, Inc. Cost + 5% of cost
Prudential Global Limited Maturity Fund, Inc. Cost + 5% of cost
Money Market Funds PRICOA World Wide Investors Portfolio, Global Bond Fund 30 basis points
- ------------------
PRICOA Money Market Portfolio, Deutsche Mark Series 30 basis points
PRICOA Money Market Portfolio, Pound Sterling Series 0 basis points
Equity Funds Prudential General Account:
- ------------
-European Portion of the Small Cap Account Cost + 5% of cost
-European Small Cap Account Cost + 5% of cost
-European Large Cap Account Cost + 5% of cost
-European Portion of the Global Small Cap Account Cost + 5% of cost
Prudential Group Trust Account (Pru Plan)
-European Portion of International Large Cap Account Cost + 5% of cost
-European Portion of International Small Cap Account Cost + 5% of cost
TOLI GLOBAL-Roche Retiree Welfare Investment Trust Cost +5% of cost
Prudential Global Genesis Fund, Inc. Cost +5% of cost
Prudential Europe Growth Fund, Inc. Cost + 5% of cost
PRICOA World Wide Investors Portfolio, European Growth Fund 55 basis points
</TABLE>
1. The fee payable for each quarter is calculated at the above rates on the
average funds under management during the quarter.
2. Sub-Investment Manager will invoice Investment Manager at the end of
each quarter for actual fees due as calculated in accordance with 1 above
and invoices will be payable within 30 days of invoice date.
<PAGE>
3. Investment Manager will undertake to use best endeavors to prepay each
quarter's estimated fees at the beginning of the relevant quarter (1
January, 1 April, 1 July, 1 October)
4. Fees are calculated pro-rata where funds are not managed for the full
term of a calendar quarter.
This amended schedule is deemed to be effective from the commencement of
this agreement.
For The Prudential Investment Corporation
By:_______________________________
Date:
For PRICOA Asset Management Limited
Director: ____________________ Director: _________________________
Date: ________________________ Date:______________________
<PAGE>
SCHEDULE B
TO THE SUB-INVESTMENT MANAGEMENT AGREEMENT BETWEEN
THE PRUDENTIAL INVESTMENT CORPORATION AND
PRICOA ASSET MANAGEMENT LTD
INVESTMENT GUIDELINES FOR CLIENT ACCOUNTS
The investment guidelines for the following Prudential Mutual Funds are as set
out in each fund's statutory documentation:
PRUDENTIAL INTERNATIONAL BOND FUND, INC. (formerly, The Global Government Plus
Fund, Inc.)
The Fund's investment objective is to seek total return, the components of which
are current income and capital appreciation. The Fund attempts to achieve its
objective by investing primarily in debt securities issued or guaranteed by
governments, semi-government entities, governmental agencies, supranational
entities and other governmental entities in the United States and in other
countries and denominated in the currencies of such countries.
The Fund's detailed investment polices and investment restrictions are set out
in the Fund's Prospectus dated August 8, 1997 and the Fund's Statement of
Additional Information dated August 8, 1997.
THE GLOBAL TOTAL RETURN FUND, INC.
The Fund's investment objective is to seek total return, the components of which
are current income and capital appreciation. The Fund attempts to achieve its
objective by investing, under normal circumstances, at least 65% of its total
assets in governmental (including supranational), semi-governmental or
government agency debt securities or in short-term bank debt securities or
deposits in the United States and in foreign countries denominated in US dollars
or in foreign currencies, including debt securities issued or guaranteed by the
US Government and foreign governments, their agencies, authorities or
instrumentalities. The remainder is generally invested in corporate debt
securities or longer term bank debt securities.
The Fund will invest primarily in investment grade securities or in non-rated
securities determined by the Fund's investment adviser to be of equivalent
quality. The Fund may invest up to 10% of its total assets in debt securities
rated below investment grade, with a minimum rating of B, by either S&P or
Moody's or by another NRSRO, or, if unrated, are deemed to be of equivalent
quality by the investment adviser.
The Fund's detailed investment policies and investment restrictions are set out
in the Fund's Prospectus dated March 4, 1998.
PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC.
The Fund's objective is to seek to maximize total return, the components of
which are current income and capital appreciation. The Fund will attempt to
achieve its objective by investing primarily in obligations issued or guaranteed
by the US Government, its agencies, authorities or instrumentalities and in
obligations issued or guaranteed by certain foreign governments,
quasi-governmental entities, governmental agencies, supranational entities or
any of their political subdivisions or instrumentalities. The Fund will invest
primarily in investment grade securities or in non-rated securities determined
by the Fund's investment adviser to be of equivalent quality. The Fund may
invest up to 10% of its total assets in debt securities rated below investment
grade, with a minimum rating of B, by either S&P or Moody's or by another NRSRO,
or if unrated, are deemed to be of equivalent quality by the investment adviser.
<PAGE>
The Fund's detailed investment policies and investment restrictions are set out
in the Fund's Prospectus dated March 4, 1998 and the Fund's Statement of
Additional Information dated
March 4, 1998.
PRUDENTIAL GLOBAL LIMITED MATURITY FUND, INC.
The Fund's investment objective is to maximize total return, the components of
which are current income and capital appreciation. The Fund seeks to achieve its
objective by investing primarily in a portfolio of debt securities denominated
in the US dollar and a range of foreign currencies. The Fund will maintain a
weighted average maturity of more than 2, but less than 5, years with the
maturity for any individual security generally not exceeding 10 years. The Fund
may also invest up to 20% of its total assets in debt securities rated below
investment grade, with a minimum rating of B, by either S&P or Moody's or by
another NRSRO, or, if unrated, are deemed to be of equivalent quality by the
investment adviser.
The Fund's detailed investment policies and investment restrictions are set out
in the Fund's Prospectus dated December 30, 1997and the Fund's Statement of
Additional Information dated December 30, 1997; both supplemented as of March
17, 1998.
PRICOA WORLDWIDE INVESTORS PORTFOLIO, GLOBAL BOND FUND
The Fund's investment objective is to seek total return, the components of which
are current income and capital appreciation. The Fund seeks to achieve its
investment objective by investing primarily in investment grade bonds issued by
governments and corporations with varying maturities. It may also have limited
exposure to non-investment grade issues from emerging markets.
The Fund's detailed investment policies and investment restrictions are set out
in the Fund's Prospectus dated October 28, 1996.
PRICOA WORLDWIDE INVESTORS PORTFOLIO, EUROPEAN GROWTH FUND
The Fund's investment objective is long-term growth of capital through
investment in a portfolio of transferable equity and debt securities of
companies domiciled in Europe.
The Fund's detailed investment policies and investment restrictions are set out
in the Fund's Prospectus dated October 28, 1996.
PRICOA MONEY MARKET PORTFOLIO
The Fund's investment objective is to provide the highest level of current
income in each designated currency consistent with safety of principal. Each
Series seeks to achieve this objective by investing in a portfolio of high
quality money market instruments and short-term debt obligations having a
maturity of one year or less denominated (1) in the designated currency of the
Series or (2) in US dollars (or other currencies) in combination with forward
currency exchange contracts to purchase matching amounts of the designated
currency.
The Fund's detailed investment policies and investment restrictions are set out
in the Fund's Prospectus dated June 12, 1991.
PRUDENTIAL GLOBAL GENESIS FUND, INC.
The Fund's investment objective is long-term growth of capital. The Fund seeks
to achieve its investment objective by investing primarily in common stocks,
common stock equivalents (such as
<PAGE>
warrants and convertible debt securities) and other equity securities (including
preferred stocks) of smaller foreign and domestic companies. Under normal
circumstances, the Fund will invest 65% of its total assets in such securities.
The Fund's detailed investment policies and investment restrictions are set out
in the Fund's Prospectus dated July 30, 1997 and the Fund's Statement of
Additional Information dated July 30,1997.
PRUDENTIAL EUROPE GROWTH FUND, INC.
The Fund's investment objective is to seek long-term growth of capital. The Fund
attempts to achieve this objective by investing primarily in equity securities
(common stock, securities convertible into common stock and preferred stock) of
companies domiciled in Europe.
The Fund's detailed investment policies and investment restrictions are set out
in the Fund's Prospectus dated July 1, 1997, and the Fund's Statement of
Additional Information dated July 1, 1997.
The investment guidelines for the remaining funds are as follows:
PRUDENTIAL GENERAL ACCOUNT
EUROPEAN PORTION OF THE SMALL CAP ACCOUNT
1. Investments will be composed primarily of securities publicly traded in
Europe.
2. Investments will be targeted in securities of small capitalization
companies. (Stocks which primarily make up the lowest 20 percent of the
total market capitalization of $30 million to $1.5 billion. The majority of
investments to be in the stocks with market capitalization less than $750
million.)
3. No more than 10% of the portfolio will be invested in stocks larger than
$1.5 billion and not represented in the Salomon Brothers Extended Market
Index ("EMI").
4. No more than 10% of the portfolio will be invested in any one company at
the time of purchase.
5. The portfolio will not purchase more than 10% of the issued capital of any
one company.
6. Investments in cash and related instruments will not exceed 25% of the
portfolio, except during initial portfolio building.
7. Currency hedging of underlying stock positions only (requires approval of
Global Equities CIO). Foreign currency futures and options contracts can
only be employed to hedge underlying currency exposure (i.e., up to but not
more than 100% of underlying exposure to a foreign currency as measured by
the value of cash plus securities held in that foreign currency).
EUROPEAN SMALL CAP ACCOUNT
1. Investments will be composed primarily of securities publicly traded in
Europe.
2. Investments will be targeted in securities of small capitalization
companies. (Stocks which primarily make up the lowest 20 percent of the
total market capitalization of $30 million to $1.5 billion. The majority of
investments to be in the stocks with market capitalization less than $750
million.)
<PAGE>
3. No more than 10% of the portfolio will be invested in stocks larger than
$1.5 billion and not represented in the Salomon Brothers Extended Market
Index ("EMI").
4. No more than 10% of the portfolio will be invested in any one company at
the time of purchase.
5. The portfolio will not purchase more than 10% of the issued capital of any
one company.
6. Investments in cash and related instruments will not exceed 25% of the
portfolio, except during portfolio building.
7. Currency hedging of underlying stock positions only (requires approval of
Global Equities CIO). Foreign currency futures and options contracts can
only be employed to hedge underlying currency exposure (i.e., up to but not
more than 100% of underlying exposure to a foreign currency as measured by
the value of cash plus securities held in that foreign currency).
EUROPEAN LARGE CAP ACCOUNT
1. Investments will be composed primarily of publicly traded securities of
companies headquartered in European countries, the majority of which would
also be included in the MSCI European Index.
2. The portfolio will consist of no fewer than 25 securities, and no single
security will represent more than 10% of the portfolio at the time of
purchase.
3. The portfolio will not purchase more than 10% of the issued capital of any
one company.
4. Investments in cash and related instruments, except during the initial
portfolio building period, will not exceed 15% of the portfolio.
5. The portfolio may use futures contracts, forward contracts, options and
derivatives related to the underlying stock or foreign exchange markets of
the countries in which they are invested, provided such instruments are
used in bona fide hedging transactions.
6. Additional policies and guidelines will be established by the Portfolio
Management Group.
EUROPEAN PORTION OF THE GLOBAL SMALL CAP ACCOUNT
1. Investments will be composed primarily of securities publicly traded in
Europe.
2. Investments will be targeted in securities of small capitalization
companies. (Stocks which primarily make up the lowest 20 percent of the
total market capitalization of $30 million to $1.5 billion. The majority of
investments to be in the stocks with market capitalization less than $750
million.)
3. No more than 10% of the portfolio will be invested in stocks larger than
$1.5 billion and not represented in the Salomon Brothers Extended Market
Index ("EMI").
4. No more than 10% of the portfolio will be invested in any one company at
the time of purchase.
5. The portfolio will not purchase more than 10% of the issued capital of any
one company.
6. Investments in cash and related instruments will not exceed 25% of the
portfolio, except during initial portfolio building.
<PAGE>
7. Currency hedging of underlying stock positions only (requires approval of
Global Equities CIO). Foreign currency futures and options contracts can
only be employed to hedge underlying currency exposure (i.e., up to but not
more than 100% of underlying exposure to a foreign currency as measured by
the value of cash plus securities held in that foreign currency).
PRUDENTIAL GROUP TRUST ACCOUNT (PRU PLAN)
EUROPEAN PORTION OF THE INTERNATIONAL LARGE CAP ACCOUNT
1. The investment objective will be long term capital appreciation through
investment in a broadly diversified portfolio from outside the United
States. The portfolio will be measured against the Morgan Stanley
International "EAFE" Index.
2. Investments will be composed primarily of securities publicly traded in
Europe.
3. Portfolio will be invested primarily (75%) in securities of large
capitalization companies (greater than $1.5 billion).
4. No more than 10% of the portfolio will be invested in any one company at
the time of purchase.
5. The portfolio will not purchase more than 10% of the issued capital of any
one company.
6. Investments in cash and related instruments will not exceed 15% of the
portfolio, except during initial portfolio building.
7. Currency hedging of underlying stock positions only (requires approval of
Global Equities CIO).
EUROPEAN PORTION OF THE INTERNATIONAL SMALL CAP ACCOUNT
1. Investments will be composed primarily of securities publicly traded in
Europe.
2. Portfolio will be primarily (70%) in securities of small capitalization
companies.(Stocks which primarily make up the lowest 20 percent of the
total market capitalization of $30 million to$1.5 billion. The majority of
investments to be in the stocks with market capitalization less than $750
million.)
3. No more than 10% of the portfolio will be invested in stocks larger than
$1.5 billion and not represented in the Salomon Brothers Extended Market
Index ("EMI").
4. No more than 10% of the portfolio will be invested in any one company at
the time of purchase.
5. The portfolio will not purchase more than 10% of the issued capital of any
one company.
6. Investments in cash and related instruments will not exceed 15% of the
portfolio, except during initial portfolio building.
7. Currency hedging of underlying stock positions only (requires approval of
Global Equities CIO).
TOLI GLOBAL- ROCHE RETIREE WELFARE INVESTMENT TRUST
(EUROPEAN PORTION OF THE GLOBAL ACCOUNT)
1. Investment will be composed primarily of securities publicly traded
represented in the EMI as well as the stock exchanges of Mexico, Thailand,
Indonesia, Philippines, Taiwan, and South
<PAGE>
Korea, as well as options and futures contracts related to those securities
and convertible bonds of small capitalization companies. No options,
futures, or other derivatives will add any leverage to the portfolio.
Investment may also be made in cash or in the equivalents of cash or in any
commingled money market account maintained by Prudential.
2. Investments will be targeted primarily (i.e. a minimum of 70% of the
invested portion of the portfolio) in securities of companies which meet
Global Equities definition of small capitalization companies. Throughout
the world, Global Equities uses the largest market cap of the stocks in
lowest 20% of the market capitalization, within the U. S. markets as its
upper capitalization limit (currently $1.5 billion), except in Japan where
Global Equities applies the 20% test separately due to currency
fluctuations. (In Japan, the upper limit is currently $1.5 billion). The
majority of investments to be in the stocks with market capitalization less
than $750 million. Stocks which are included in the portfolio not meeting
the cap size definition should normally be ones which are constituents of
the EMI, except for Southeast Asia where larger traded stocks may be used.
3. No more than 7% of any regional sub-portfolio will be invested in any one
company at the time of purchase; no more than 3% of the total global
portfolio will be so invested.
4. The portfolio will not purchase more than 10% of the issued capital of any
one company. The regional portfolios are generally kept diversified in 30
to 60 names. Industry weights are determined on a bottom up basis but
monitored at the portfolio level and may cut back to limit potential sector
risk.
5. Investments in cash and related instruments will not exceed 17% of the
portfolio, except during initial building.
6. Currency hedging will be allowed, although it is not anticipated that
Global Equities will employ an active currency overlay program. Any
currency hedging must be covered by an underlying cash/stock position.
7. Within the global portfolio, none of the four regions (Japan, Southeast
Asia, Europe, or North America) will be weighted at time of purchase (or
allocation shift) by more than 12% of the benchmark weight or less than 12%
of the benchmark weight. This 12% guideline will also apply to country
weights within each regional sub-portfolio.
GENERAL
Subject to the investment guidelines for the Client Accounts described herein or
as subsequently notified to Sub-Investment Manager in writing:
1. The Client Accounts may contain securities which are or were the subject of
a relevant offer or issue, whether at the time Sub-Investment Manager
acquires them on behalf of Investment Manager, within a period of 12 months
preceding that or otherwise. For the purpose of this paragraph, a "relevant
offer or issue" is an offer or issue of any securities (whether or not
those securities are to be listed on the London Stock Exchange or any other
recognized or designated investment exchange) which is or was sponsored,
underwritten, managed or arranged, or in connection with which other
services were provided, by Sub-Investment Manager or a connected person.
2. Sub-Investment Manager may not commit Investment Manager to any obligation
to underwrite any issue or offer for sale of securities.
3. Sub-Investment Manager may, on behalf of Investment Manager, acquire or
dispose of units in a
<PAGE>
regulated collective investment scheme, whether or
not operated, managed or advised by Sub-Investment Manager or a connected
person.
4. Sub-Investment Manager may enter into repo or reverse repo transactions but
may not otherwise lend or borrow securities for any purpose.
5. Sub-Investment Manager is authorized by Investment Manager to deal in
warrants, options (including traded options) futures or contracts for
differences on behalf of Investment Manager (provided they are investments
as defined herein). The limits on margins will vary as between the Client
Accounts as set out in Schedule B above and the Prospectuses and Statements
of Additional Information mentioned therein.
6. Where the requisite currency of settlement is not the Client Accounts
Currency Sub-Investment Manager shall be entitled to use spot or forward
foreign exchange contracts (and accordingly enter into them on Investment
Manager's behalf) to fund the acquisition of spot or forward investments or
dispose of sale proceeds in a foreign currency. Notwithstanding
Sub-Investment Manager's right to do this, Investment Manager accepts that
if a liability in one currency is matched by an asset in a different
currency, or if any investment acquired or sold hereunder is denominated or
paid for in a currency other than the Client Accounts Currency, a movement
of exchange rates may be unfavorable rather than favorable, on the gain or
loss otherwise experienced on the investment.
THE GLOBAL TOTAL RETURN FUND, INC.
Distribution Agreement
----------------------
Agreement made as of June 1, 1998, between The Global Total Return
Fund, Inc. (the Fund), and Prudential Investment Management Services LLC, a
Delaware limited liability company (the Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the Investment Company Act), as a non-diversified, open-end,
management investment company and it is in the interest of the Fund to offer its
shares for sale continuously;
WHEREAS, the shares of the Fund may be divided into classes and/or
series (all such shares being referred to herein as Shares) and the Fund
currently is authorized to offer Class A, Class B, Class C and Class Z Shares;
WHEREAS, the Distributor is a broker-dealer registered under the
Securities Exchange Act of 1934, as amended, and is engaged in the business of
selling shares of registered investment companies either directly or through
other broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into an
agreement with each other, with respect to the continuous offering of the Fund's
Shares from and after the date hereof in order to promote the growth of the Fund
and facilitate the distribution of its Shares; and
WHEREAS, the Fund has adopted a plan (or plans) of distribution
pursuant to Rule 12b-1 under the Investment Company Act with respect to certain
of its classes and/or series of Shares (the Plans) authorizing payments by the
Fund to the Distributor with respect to the distribution of such classes and/or
series of Shares and the maintenance of related shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor
The Fund hereby appoints the Distributor as the principal
underwriter and distributor of the Shares of the Fund to sell Shares to the
public on behalf of the Fund and the Distributor hereby accepts such appointment
and agrees to act hereunder. The Fund hereby agrees during the term of this
Agreement to sell Shares of the Fund through the Distributor on the terms and
conditions set forth below.
1
<PAGE>
Section 2. Exclusive Nature of Duties
The Distributor shall be the exclusive representative of the Fund to
act as principal underwriter and distributor of the Fund's Shares, except that:
2.1 The exclusive rights granted to the Distributor to sell Shares
of the Fund shall not apply to Shares of the Fund issued in connection with the
merger or consolidation of any other investment company or personal holding
company with the Fund or the acquisition by purchase or otherwise of all (or
substantially all) the assets or the outstanding shares of any such company by
the Fund.
2.2 Such exclusive rights shall not apply to Shares issued by the
Fund pursuant to reinvestment of dividends or capital gains distributions or
through the exercise of any conversion feature or exchange privilege.
2.3 Such exclusive rights shall not apply to Shares issued by the
Fund pursuant to the reinstatement privilege afforded redeeming shareholders.
2.4 Such exclusive rights shall not apply to purchases made through
the Fund's transfer and dividend disbursing agent in the manner set forth in the
currently effective Prospectus of the Fund. The term "Prospectus" shall mean the
Prospectus and Statement of Additional Information included as part of the
Fund's Registration Statement, as such Prospectus and Statement of Additional
Information may be amended or supplemented from time to time, and the term
"Registration Statement" shall mean the Registration Statement filed by the Fund
with the Securities and Exchange Commission and effective under the Securities
Act of 1933, as amended (Securities Act), and the Investment Company Act, as
such Registration Statement is amended from time to time.
Section 3. Purchase of Shares from the Fund
3.1 The Distributor shall have the right to buy from the Fund on
behalf of investors the Shares needed, but not more than the Shares needed
(except for clerical errors in transmission) to fill unconditional orders for
Shares placed with the Distributor by investors or registered and qualified
securities dealers and other financial institutions (selected dealers).
3.2 The Shares shall be sold by the Distributor on behalf of the
Fund and delivered by the Distributor or selected dealers, as described in
Section 6.4 hereof, to investors at the offering price as set forth in the
Prospectus.
3.3 The Fund shall have the right to suspend the sale of any or all
classes and/or series of its Shares at times when redemption is suspended
pursuant to
2
<PAGE>
the conditions in Section 4.3 hereof or at such other times as may be determined
by the Board. The Fund shall also have the right to suspend the sale of any or
all classes and/or series of its Shares if a banking moratorium shall have been
declared by federal or New Jersey authorities.
3.4 The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Shares received by
the Distributor. Any order may be rejected by the Fund; provided, however, that
the Fund will not arbitrarily or without reasonable cause refuse to accept or
confirm orders for the purchase of Shares. The Fund (or its agent) will confirm
orders upon their receipt, will make appropriate book entries and upon receipt
by the Fund (or its agent) of payment therefor, will deliver deposit receipts
for such Shares pursuant to the instructions of the Distributor. Payment shall
be made to the Fund in New York Clearing House funds or federal funds. The
Distributor agrees to cause such payment and such instructions to be delivered
promptly to the Fund (or its agent).
Section 4. Repurchase or Redemption of Shares by the Fund
4.1 Any of the outstanding Shares may be tendered for redemption at
any time, and the Fund agrees to repurchase or redeem the Shares so tendered in
accordance with its Declaration of Trust as amended from time to time, and in
accordance with the applicable provisions of the Prospectus. The price to be
paid to redeem or repurchase the Shares shall be equal to the net asset value
determined as set forth in the Prospectus. All payments by the Fund hereunder
shall be made in the manner set forth in Section 4.2 below.
4.2 The Fund shall pay the total amount of the redemption price as
defined in the above paragraph pursuant to the instructions of the Distributor
on or before the seventh day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of Shares shall be
paid by the Fund as follows: (i) in the case of Shares subject to a contingent
deferred sales charge, any applicable contingent deferred sales charge shall be
paid to the Distributor, and the balance shall be paid to or for the account of
the redeeming shareholder, in each case in accordance with applicable provisions
of the Prospectus; and (ii) in the case of all other Shares, proceeds shall be
paid to or for the account of the redeeming shareholder, in each case in
accordance with applicable provisions of the Prospectus.
4.3 Redemption of any class and/or series of Shares or payment may
be suspended at times when the New York Stock Exchange is closed for other than
customary weekends and holidays, when trading on said Exchange is restricted,
when an emergency exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, or during any
other period when the Securities and Exchange Commission, by order, so permits.
3
<PAGE>
Section 5. Duties of the Fund
5.1 Subject to the possible suspension of the sale of Shares as
provided herein, the Fund agrees to sell its Shares so long as it has Shares of
the respective class and/or series available.
5.2 The Fund shall furnish the Distributor copies of all
information, financial statements and other papers which the Distributor may
reasonably request for use in connection with the distribution of Shares, and
this shall include one certified copy, upon request by the Distributor, of all
financial statements prepared for the Fund by independent public accountants.
The Fund shall make available to the Distributor such number of copies of its
Prospectus and annual and interim reports as the Distributor shall reasonably
request.
5.3 The Fund shall take, from time to time, but subject to the
necessary approval of the Board and the shareholders, all necessary action to
fix the number of authorized Shares and such steps as may be necessary to
register the same under the Securities Act, to the end that there will be
available for sale such number of Shares as the Distributor reasonably may
expect to sell. The Fund agrees to file from time to time such amendments,
reports and other documents as may be necessary in order that there will be no
untrue statement of a material fact in the Registration Statement, or necessary
in order that there will be no omission to state a material fact in the
Registration Statement which omission would make the statements therein
misleading.
5.4 The Fund shall use its best efforts to notify such states as the
Distributor and the Fund may approve of its intention to sell any appropriate
number of its Shares; provided that the Fund shall not be required to amend its
Articles of Incorporation or By-Laws to comply with the laws of any state, to
maintain an office in any state, to change the terms of the offering of its
Shares in any state from the terms set forth in its Registration Statement, to
qualify as a foreign corporation in any state or to consent to service of
process in any state other than with respect to claims arising out of the
offering of its Shares. Any such notification may be withheld, terminated or
withdrawn by the Fund at any time in its discretion. As provided in Section 9
hereof, the expense of notification and maintenance of notification shall be
borne by the Fund. The Distributor shall furnish such information and other
material relating to its affairs and activities as may be required by the Fund
in connection with such notifications.
4
<PAGE>
Section 6. Duties of the Distributor
6.1 The Distributor shall devote reasonable time and effort to
effect sales of Shares, but shall not be obligated to sell any specific number
of Shares. Sales of the Shares shall be on the terms described in the
Prospectus. The Distributor may enter into like arrangements with other
investment companies. The Distributor shall compensate the selected dealers as
set forth in the Prospectus.
6.2 In selling the Shares, the Distributor shall use its best
efforts in all respects duly to conform with the requirements of all federal and
state laws relating to the sale of such securities. Neither the Distributor nor
any selected dealer nor any other person is authorized by the Fund to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the
confirmation of sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales and the
cancellation of unsettled transactions, as may be necessary to comply with the
requirements of Securities Exchange Act Rule 10b-10 and the rules of the
National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into selected
dealer agreements with registered and qualified securities dealers and other
financial institutions of its choice for the sale of Shares, provided that the
Fund shall approve the forms of such agreements. Within the United States, the
Distributor shall offer and sell Shares only to such selected dealers as are
members in good standing of the NASD or are institutions exempt from
registration under applicable federal securities laws. Shares sold to selected
dealers shall be for resale by such dealers only at the offering price
determined as set forth in the Prospectus.
Section 7. Payments to the Distributor
7.1 With respect to classes and/or series of Shares which impose a
front-end sales charge, the Distributor shall receive and may retain any portion
of any front-end sales charge which is imposed on such sales and not reallocated
to selected dealers as set forth in the Prospectus, subject to the limitations
of Rule 2830 of the Conduct Rules of the NASD. Payment of these amounts to the
Distributor is not contingent upon the adoption or continuation of any
applicable Plans.
7.2 With respect to classes and/or series of Shares which impose a
contingent deferred sales charge, the Distributor shall receive and may retain
any contingent deferred sales charge which is imposed on such sales as set forth
in the Prospectus, subject to the limitations of Rule 2830 of the Conduct Rules
of the NASD.
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Payment of these amounts to the Distributor is not contingent upon the adoption
or continuation of any Plan.
Section 8. Payment of the Distributor under the Plan
8.1 The Fund shall pay to the Distributor as compensation for
services under any Plans adopted by the Fund and this Agreement a distribution
and service fee with respect to the Fund's classes and/or series of Shares as
described in each of the Fund's respective Plans and this Agreement.
8.2 So long as a Plan or any amendment thereto is in effect, the
Distributor shall inform the Board of the commissions and account servicing fees
with respect to the relevant class and/or series of Shares to be paid by the
Distributor to account executives of the Distributor and to broker-dealers,
financial institutions and investment advisers which have dealer agreements with
the Distributor. So long as a Plan (or any amendment thereto) is in effect, at
the request of the Board or any agent or representative of the Fund, the
Distributor shall provide such additional information as may reasonably be
requested concerning the activities of the Distributor hereunder and the costs
incurred in performing such activities with respect to the relevant class and/or
series of Shares.
Section 9. Allocation of Expenses
The Fund shall bear all costs and expenses of the continuous
offering of its Shares (except for those costs and expenses borne by the
Distributor pursuant to a Plan and subject to the requirements of Rule 12b-1
under the Investment Company Act), including fees and disbursements of its
counsel and auditors, in connection with the preparation and filing of any
required Registration Statements and/or Prospectuses under the Investment
Company Act or the Securities Act, and all amendments and supplements thereto,
and preparing and mailing annual and periodic reports and proxy materials to
shareholders (including but not limited to the expense of setting in type any
such Registration Statements, Prospectuses, annual or periodic reports or proxy
materials). The Fund shall also bear the cost of expenses of making notice
filings for the Shares for sale, and, if necessary or advisable in connection
therewith, of qualifying the Fund as a broker or dealer, in such states of the
United States or other jurisdictions as shall be selected by the Fund and the
Distributor pursuant to Section 5.4 hereof and the cost and expense payable to
each such state for continuing notification therein until the Fund decides to
discontinue such notification pursuant to Section 5.4 hereof. As set forth in
Section 8 above, the Fund shall also bear the expenses it assumes pursuant to
any Plan, so long as such Plan is in effect.
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Section 10. Indemnification
10.1 The Fund agrees to indemnify, defend and hold the Distributor,
its officers and directors and any person who controls the Distributor within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
reasonable counsel fees incurred in connection therewith) which the Distributor,
its officers, members or any such controlling person may incur under the
Securities Act, or under common law or otherwise, arising out of or based upon
any untrue statement of a material fact contained in the Registration Statement
or Prospectus or arising out of or based upon any alleged omission to state a
material fact required to be stated in either thereof or necessary to make the
statements in either thereof not misleading, except insofar as such claims,
demands, liabilities or expenses arise out of or are based upon any such untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with information furnished by the Distributor to the Fund
for use in the Registration Statement or Prospectus; provided, however, that
this indemnity agreement shall not inure to the benefit of any such officer,
member or controlling person unless a court of competent jurisdiction shall
determine in a final decision on the merits, that the person to be indemnified
was not liable by reason of willful misfeasance, bad faith or gross negligence
in the performance of its duties, or by reason of its reckless disregard of its
obligations under this Agreement (disabling conduct), or, in the absence of such
a decision, a reasonable determination, based upon a review of the facts, that
the indemnified person was not liable by reason of disabling conduct, by (a)
vote of a majority of a quorum of Directors or Directors who are neither
"interested persons" of the Fund as defined in Section 2(a)(19) of the
Investment Company Act nor parties to the proceeding, or (b) an independent
legal counsel in a written opinion. The Fund's agreement to indemnify the
Distributor, its officers and members and any such controlling person as
aforesaid is expressly conditioned upon the Fund's being promptly notified of
any action brought against the Distributor, its officers or members, or any such
controlling person, such notification to be given by letter or telegram
addressed to the Fund at its principal business office. The Fund agrees promptly
to notify the Distributor of the commencement of any litigation or proceedings
against it or any of its officers or directors in connection with the issue and
sale of any Shares.
10.2 The Distributor agrees to indemnify, defend and hold the Fund,
its officers and Directors and any person who controls the Fund, if any, within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending against such claims, demands or liabilities
and any reasonable counsel fees incurred in connection therewith) which the
Fund, its officers and Directors or any such controlling person may incur under
the Securities Act or under common law or otherwise, but only to the extent that
such liability or expense incurred by the Fund, its
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Directors or officers or such controlling person resulting from such claims or
demands shall arise out of or be based upon any alleged untrue statement of a
material fact contained in information furnished by the Distributor to the Fund
for use in the Registration Statement or Prospectus or shall arise out of or be
based upon any alleged omission to state a material fact in connection with such
information required to be stated in the Registration Statement or Prospectus or
necessary to make such information not misleading. The Distributor's agreement
to indemnify the Fund, its officers and Directors and any such controlling
person as aforesaid, is expressly conditioned upon the Distributor's being
promptly notified of any action brought against the Fund, its officers and
directors or any such controlling person, such notification being given to the
Distributor at its principal business office.
Section 11. Duration and Termination of this Agreement
11.1 This Agreement shall become effective as of the date first
above written and shall remain in force for two years from the date hereof and
thereafter, but only so long as such continuance is specifically approved at
least annually by (a) the Board of the Fund, or by the vote of a majority of the
outstanding voting securities of the applicable class and/or series of the Fund,
and (b) by the vote of a majority of those Directors who are not parties to this
Agreement or interested persons of any such parties and who have no direct or
indirect financial interest in this Agreement or in the operation of any of the
Fund's Plans or in any agreement related thereto (Independent Directors), cast
in person at a meeting called for the purpose of voting upon such approval.
11.2 This Agreement may be terminated at any time, without the
payment of any penalty, by a majority of the independent Directors or by vote of
a majority of the outstanding voting securities of the applicable class and/or
series of the Fund, or by the Distributor, on sixty (60) days' written notice to
the other party. This Agreement shall automatically terminate in the event of
its assignment.
11.3 The terms "affiliated person," "assignment," "interested
person" and "vote of a majority of the outstanding voting securities", when used
in this Agreement, shall have the respective meanings specified in the
Investment Company Act.
Section 12. Amendments to this Agreement
This Agreement may be amended by the parties only if such amendment
is specifically approved by (a) the Board of the Fund, or by the vote of a
majority of the outstanding voting securities of the applicable class and/or
series of the Fund, and (b) by the vote of a majority of the independent
Directors cast in person at a meeting called for the purpose of voting on such
amendment.
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Section 13. Separate Agreement as to Classes and/or Series
The amendment or termination of this Agreement with respect to any
class and/or series shall not result in the amendment or termination of this
Agreement with respect to any other class and/or series unless explicitly so
provided.
Section 14. Governing Law
The provisions of this Agreement shall be construed and interpreted
in accordance with the laws of the State of New Jersey as at the time in effect
and the applicable provisions of the Investment Company Act. To the extent that
the applicable law of the State of New Jersey, or any of the provisions herein,
conflict with the applicable provisions of the Investment Company Act, the
latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the day and year above written.
Prudential Investment Management Services LLC
By:/s/ BRIAN M. STORMS
-------------------
Brian M. Storms
Executive Vice President
The Global Total Return Fund, Inc.
By: /s/ ROBERT F. GUNIA
--------------------
Robert F. Gunia
Vice President
9
DEALER AGREEMENT
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
Prudential Investment Management Services LLC ("Distributor") and
_________________ ("Dealer") have agreed that Dealer will participate in the
distribution of shares ("Shares") of all the funds and series thereof (as they
may exist from time to time) comprising the Prudential Mutual Fund Family (each
a "Fund" and collectively the "Funds") and any classes thereof for which
Distributor now or in the future serves as principal underwriter and
distributor, subject to the terms of this Dealer Agreement ("Agreement"). Any
such additional Funds will be included in this Agreement upon Distributor's
written notification to Dealer.
1. LICENSING
a. Dealer represents and warrants that it is: (i) a
broker-dealer registered with the Securities and Exchange Commission ("SEC");
(ii) a member in good standing of the National Association of Securities
Dealers, Inc. ("NASD"); and (iii) licensed by the appropriate regulatory agency
of each state or other jurisdiction in which Dealer will offer and sell Shares
of the Funds, to the extent necessary to perform the duties and activities
contemplated by this Agreement.
b. Dealer represents and warrants that each of its partners,
directors, officers, employees, and agents who will be utilized by Dealer with
respect to its duties and activities under this Agreement is either
appropriately licensed or exempt from such licensing requirements by the
appropriate regulatory agency of each state or other jurisdiction in which
Dealer will offer and sell Shares of the Funds.
c. Dealer agrees that: (i) termination or suspension of its
registration with the SEC; (ii) termination or suspension of its membership with
the NASD; or (iii) termination or suspension of its license to do business by
any state or other jurisdiction or federal regulatory agency shall immediately
cause the termination of this Agreement. Dealer further agrees to immediately
notify Distributor in writing of any such action or event.
d. Dealer agrees that this Agreement is in all respects
subject to the Conduct Rules of the NASD and such Conduct Rules shall control
any provision to the contrary in this Agreement.
e. Dealer agrees to be bound by and to comply with all
applicable state and federal laws and all rules and regulations promulgated
thereunder generally affecting the sale or distribution of mutual fund shares.
2. ORDERS
a. Dealer agrees to offer and sell Shares of the Funds
(including those of each of its classes) only at the regular public offering
price applicable to such Shares and in effect at the time of each transaction.
The procedures relating to all orders and the handling of each order (including
the manner of computing the net asset value of Shares and the effective time of
orders received from Dealer) are subject to: (i) the terms of the then current
prospectus and statement of
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additional information (including any supplements, stickers or amendments
thereto) relating to each Fund, as filed with the SEC ("Prospectus"); (ii) the
new account application for each Fund, as supplemented or amended from time to
time; and (iii) Distributor's written instructions and multiple class pricing
procedures and guidelines, as provided to Dealer from time to time. To the
extent that the Prospectus contains provisions that are inconsistent with this
Agreement or any other document, the terms of the Prospectus shall be
controlling.
b. Distributor reserves the right at any time, and without
notice to Dealer, to suspend the sale of Shares or to withdraw or limit the
offering of Shares. Distributor reserves the unqualified right not to accept any
specific order for the purchase or sale of Shares.
c. In all offers and sales of the Shares to the public, Dealer
is not authorized to act as broker or agent for, or employee of, Distributor,
any Fund or any other dealer, and Dealer shall not in any manner represent to
any third party that Dealer has such authority or is acting in such capacity.
Rather, Dealer agrees that it is acting as principal for Dealer's own account or
as agent on behalf of Dealer's customers in all transactions in Shares, except
as provided in Section 3.i. hereof. Dealer acknowledges that it is solely
responsible for all suitability determinations with respect to sales of Shares
of the Funds to Dealer's customers and that Distributor has no responsibility
for the manner of Dealer's performance of, or for Dealer's acts or omissions in
connection with, the duties and activities Dealer provides under this Agreement.
d. All orders are subject to acceptance by Distributor in its
sole discretion and become effective only upon confirmation by Distributor.
e. Distributor agrees that it will accept from Dealer orders
placed through a remote terminal or otherwise electronically transmitted via the
National Securities Clearing Corporation ("NSCC") Fund/Serv Networking program,
provided, however, that appropriate documentation thereof and agreements
relating thereto are executed by both parties to this Agreement, including in
particular the standard NSCC Networking Agreement and any other related
agreements between Distributor and Dealer deemed appropriate by Distributor, and
that all accounts opened or maintained pursuant to that program will be governed
by applicable NSCC rules and procedures. Both parties further agree that, if the
NSCC Fund/Serv Networking program is used to place orders, the standard NSCC
Networking Agreement will control insofar as there is any conflict between any
provision of the Dealer Agreement and the standard NSCC Networking Agreement.
3. DUTIES OF DEALER
a. Dealer agrees to purchase Shares only from Distributor or
from Dealer's customers.
b. Dealer agrees to enter orders for the purchase of Shares
only from Distributor and only for the purpose of covering purchase orders
Dealer has already received from its customers or for Dealer's own bona fide
investment.
c. Dealer agrees to date and time stamp all orders received by
Dealer and promptly, upon receipt of any and all orders, to transmit to
Distributor all orders received prior to
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the time described in the Prospectus for the calculation of each Fund's net
asset value so as to permit Distributor to process all orders at the price next
determined after receipt by Dealer, in accordance with the Prospectus. Dealer
agrees not to withhold placing orders for Shares with Distributor so as to
profit itself as a result of such inaction.
d. Dealer agrees to maintain records of all purchases and
sales of Shares made through Dealer and to furnish Distributor or regulatory
authorities with copies of such records upon request. In that regard, Dealer
agrees that, unless Dealer holds Shares as nominee for its customers or
participates in the NSCC Fund/Serv Networking program, at certain matrix levels,
it will provide Distributor with all necessary information to comply properly
with all federal, state and local reporting requirements and backup and
nonresident alien withholding requirements for its customer accounts including,
without limitation, those requirements that apply by treating Shares issued by
the Funds as readily tradable instruments. Dealer represents and agrees that all
Taxpayer Identification Numbers ("TINs") provided are certified, and that no
account that requires a certified TIN will be established without such certified
TIN. With respect to all other accounts, including Shares held by Dealer in
omnibus accounts and Shares purchased or sold through the NSCC Fund/Serv
Networking program, at certain matrix levels, Dealer agrees to perform all
federal, state and local tax reporting with respect to such accounts, including
without limitation redemptions and exchanges.
e. Dealer agrees to distribute or cause to be delivered to its
customers Prospectuses, proxy solicitation materials and related information and
proxy cards, semi-annual and annual shareholder reports and any other materials
in compliance with applicable legal requirements, except to the extent that
Distributor expressly undertakes to do so in writing.
f. Dealer agrees that if any Share is repurchased by any Fund
or is tendered for redemption within seven (7) business days after confirmation
by Distributor of the original purchase order from Dealer, Dealer shall forfeit
its right to any concession or commission received by Dealer with respect to
such Share and shall forthwith refund to Distributor the full concession allowed
to Dealer or commission paid to Dealer on the original sale. Distributor agrees
to notify Dealer of such repurchase or redemption within a reasonable time after
settlement. Termination or cancellation of this Agreement shall not relieve
Dealer from its obligation under this provision.
g. Dealer agrees that payment for Shares ordered from
Distributor shall be in Fed Funds, New York clearinghouse or other immediately
available funds and that such funds shall be received by Distributor by the
earlier of: (i) the end of the third (3rd) business day following Dealer's
receipt of the customer's order to purchase such Shares; or (ii) the settlement
date established in accordance with Rule 15c6-1 under the Securities Exchange
Act of 1934, as amended. If such payment is not received by Distributor by such
date, Dealer shall forfeit its right to any concession or commission with
respect to such order, and Distributor reserves the right, without notice,
forthwith to cancel the sale, or, at its option, to sell the Shares ordered back
to the Fund, in which case Distributor may hold Dealer responsible for any loss,
including loss of profit, suffered by Distributor resulting from Dealer's
failure to make payment as aforesaid. If a purchase is made by check, the
purchase is deemed made upon conversion of the purchase instrument into Fed
Funds, New York clearinghouse or other immediately available funds.
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h. Dealer agrees that it: (i) shall assume responsibility for
any loss to the Fund caused by a correction to any order placed by Dealer that
is made subsequent to the trade date for the order, provided such order
correction was not based on any negligence on Distributor's part; and (ii) will
immediately pay such loss to the Fund upon notification.
i. Dealer agrees that in connection with orders for the
purchase of Shares on behalf of any IRAs, 401(k) plans or other retirement plan
accounts, by mail, telephone, or wire, Dealer shall act as agent for the
custodian or trustee of such plans (solely with respect to the time of receipt
of the application and payments), and Dealer shall not place such an order with
Distributor until it has received from its customer payment for such purchase
and, if such purchase represents the first contribution to such a retirement
plan account, the completed documents necessary to establish the retirement
plan. Dealer agrees to indemnify Distributor and its affiliates for any claim,
loss, or liability resulting from incorrect investment instructions received by
Distributor from Dealer.
j. Dealer agrees that it will not make any conditional orders
for the purchase or redemption of Shares and acknowledges that Distributor will
not accept conditional orders for Shares.
k. Dealer agrees that all out-of-pocket expenses incurred by
it in connection with its activities under this Agreement will be borne by
Dealer.
l. Dealer agrees that it will keep in force appropriate
broker's blanket bond insurance policies covering any and all acts of Dealer's
partners, directors, officers, employees, and agents adequate to reasonably
protect and indemnify the Distributor and the Funds against any loss which any
party may suffer or incur, directly or indirectly, as a result of any action by
Dealer or Dealer's partners, directors, officers, employees, and agents.
m. Dealer agrees that it will maintain the required net
capital as specified by the rules and regulations of the SEC, NASD and other
regulatory authorities.
4. DEALER COMPENSATION
a. On each purchase of Shares by Dealer from Distributor, the
total sales charges and dealer concessions or commissions, if any, payable to
Dealer shall be as stated on Schedule A to this Agreement, which may be amended
by Distributor from time to time. Distributor reserves the right, without prior
notice, to suspend or eliminate such dealer concession or commissions by
amendment, sticker or supplement to the then current Prospectus for each Fund.
Such sales charges and dealer concessions or commissions, are subject to
reduction under a variety of circumstances as described in each Fund's then
current Prospectus. For an investor to obtain any reduction, Distributor must be
notified at the time of the sale that the sale qualifies for the reduced sales
charge. If Dealer fails to notify Distributor of the applicability of a
reduction in the sales charge at the time the trade is placed, neither
Distributor nor any Fund will be liable for amounts necessary to reimburse any
investor for the reduction that should have been effected. Dealer acknowledges
that no sales charge or concession or commission will be paid to Dealer on the
reinvestment of dividends or capital gains reinvestment or on Shares acquired in
exchange for Shares of another Fund, or class thereof, having the same sales
charge structure as the Fund, or class thereof, from which the exchange was
made, in accordance with the Prospectus.
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b. In accordance with the Funds' Prospectuses, Distributor or
any affiliate may, but is not obligated to, make payments to dealers from
Distributor's own resources as compensation for certain sales that are made at
net asset value ("Qualifying Sales"). If Dealer notifies Distributor of a
Qualifying Sale, Distributor may make a contingent advance payment up to the
maximum amount available for payment on the sale. If any of the Shares purchased
in a Qualifying Sale are redeemed within twelve (12) months of the end of the
month of purchase, Distributor shall be entitled to recover any advance payment
attributable to the redeemed Shares by reducing any account payable or other
monetary obligation Distributor may owe to Dealer or by making demand upon
Dealer for repayment in cash. Distributor reserves the right to withhold
advances to Dealer, if for any reason Distributor believes that it may not be
able to recover unearned advances from Dealer.
c. With respect to any Fund that offers Shares for which
distribution plans have been adopted under Rule 12b-1 under the Investment
Company Act of 1940, as amended ("Rule 12b-1 Plans"), Distributor also is
authorized to pay the Dealer continuing distribution and/or service fees, as
specified in Schedule A and the relevant Fund Prospectus, with respect to Shares
of any such Fund, to the extent that Dealer provides distribution, marketing,
administrative and other services and activities regarding the promotion of such
Shares and the maintenance of related shareholder accounts.
d. In connection with the receipt of distribution fees and/or
service fees under Rule 12b-1 Plans applicable to Shares purchased by Dealer's
customers, Distributor directs Dealer to provide enhanced shareholder services
such as: processing purchase and redemption transactions; establishing
shareholder accounts; and providing certain information and assistance with
respect to the Funds. (Redemption levels of shareholder accounts assigned to
Dealer will be considered in evaluating Dealer's continued ability to receive
payments of distribution and/or service fees.) In addition, Dealer agrees to
support Distributor's marketing efforts by, among other things, granting
reasonable requests for visits to Dealer's office by Distributor's wholesalers
and marketing representatives, including all Funds covered by a Rule 12b-1 Plan
on Dealer's "approved," "preferred" or other similar product lists, if
applicable, and otherwise providing satisfactory product, marketing and sales
support. Further, Dealer agrees to provide Distributor with supporting
documentation concerning the shareholder services provided, as Distributor may
reasonably request from time to time.
e. All Rule 12b-1 Plan distribution and/or servicing fees
shall be based on the value of Shares attributable to Dealer's customers and
eligible for such payment, and shall be calculated on the basis of and at the
rates set forth in the compensation schedule then in effect. Without prior
approval by a majority of the outstanding shares of a Fund, the aggregate annual
fees paid to Dealer pursuant to any Rule 12b-1 Plan shall not exceed the amounts
stated as the "annual maximums" in each Fund's Prospectus, which amount shall be
a specified percent of the value of the Fund's net assets held in Dealer's
customers' accounts that are eligible for payment pursuant to the Rule 12b-1
Plans (determined in the same manner as each Fund uses to compute its net assets
as set forth in its then current Prospectus).
f. The provisions of any Rule 12b-1 Plan between the Funds and
the Distributor shall control over this Agreement in the event of any
inconsistency. Each Rule 12b-1 Plan in effect on the date of this Agreement is
described in the relevant Fund's Prospectus. Dealer
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hereby acknowledges that all payments under Rule 12b-1 Plans are subject to
limitations contained in such Rule 12b-1 Plans and may be varied or discontinued
at any time.
5. REDEMPTIONS, REPURCHASES AND EXCHANGES
a. The Prospectus for each Fund describes the provisions
whereby the Fund, under all ordinary circumstances, will redeem Shares held by
shareholders on demand. Dealer agrees that it will not make any representations
to shareholders relating to the redemption of their Shares other than the
statements contained in the Prospectus and the underlying organizational
documents of the Fund, to which it refers, and that Dealer will pay as
redemption proceeds to shareholders the net asset value, minus any applicable
deferred sales charge or redemption fee, determined after receipt of the order
as discussed in the Prospectus.
b. Dealer agrees not to repurchase any Shares from its
customers at a price below that next quoted by the Fund for redemption or
repurchase, i.e., at the net asset value of such Shares, less any applicable
deferred sales charge, or redemption fee, in accordance with the Fund's
Prospectus. Dealer shall, however, be permitted to sell Shares for the account
of the customer or record owner to the Funds at the repurchase price then
currently in effect for such Shares and may charge the customer or record owner
a fair service fee or commission for handling the transaction, provided Dealer
discloses the fee or commission to the customer or record owner. Nevertheless,
Dealer agrees that it shall not under any circumstances maintain a secondary
market in such repurchased Shares.
c. Dealer agrees that, with respect to a redemption order it
has made, if instructions in proper form, including any outstanding
certificates, are not received by Distributor within the time customary or the
time required by law, the redemption may be canceled forthwith without any
responsibility or liability on Distributor's part or on the part of any Fund, or
Distributor, at its option, may buy the shares redeemed on behalf of the Fund,
in which latter case Distributor may hold Dealer responsible for any loss,
including loss of profit, suffered by Distributor resulting from Distributor's
failure to settle the redemption.
d. Dealer agrees that it will comply with any restrictions and
limitations on exchanges described in each Fund's Prospectus, including any
restrictions or prohibitions relating to frequent purchases and redemptions
(i.e., market timing).
6. MULTIPLE CLASSES OF SHARES
Distributor may, from time to time, provide Dealer with
written guidelines or standards relating to the sale or distribution of Funds
offering multiple classes of Shares with different sales charges and
distribution-related operating expenses.
7. FUND INFORMATION
a. Dealer agrees that neither it nor any of its partners,
directors, officers, employees, and agents is authorized to give any information
or make any representations concerning Shares of any Fund except those contained
in the Fund's then current Prospectus or in materials provided by Distributor.
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b. Distributor will supply to Dealer Prospectuses, reasonable
quantities of sales literature, sales bulletins, and additional sales
information as provided by Distributor. Dealer agrees to use only advertising or
sales material relating to the Funds that: (i) is supplied by Distributor, or
(ii) conforms to the requirements of all applicable laws or regulations of any
government or authorized agency having jurisdiction over the offering or sale of
Shares of the Funds and is approved in writing by Distributor in advance of its
use. Such approval may be withdrawn by Distributor in whole or in part upon
written notice to Dealer, and Dealer shall, upon receipt of such notice,
immediately discontinue the use of such sales literature, sales bulletins and
advertising. Dealer is not authorized to modify or translate any such materials
without Distributor's prior written consent.
8. SHARES
a. Distributor acts solely as agent for the Fund and
Distributor shall have no obligation or responsibility with respect to Dealer's
right to purchase or sell Shares in any state or jurisdiction.
b. Distributor shall periodically furnish Dealer with
information identifying the states or jurisdictions in which it is believed that
all necessary notice, registration or exemptive filings for Shares have been
made under applicable securities laws such that offers and sales of Shares may
be made in such states or jurisdictions. Distributor shall have no obligation to
make such notice, registration or exemptive filings with respect to Shares in
any state or jurisdiction.
c. Dealer agrees not to transact orders for Shares in states
or jurisdictions in which it has been informed that Shares may not be sold or in
which it and its personnel are not authorized to sell Shares.
d. Distributor shall have no responsibility, under the laws
regulating the sale of securities in the United States or any foreign
jurisdiction, with respect to the qualification or status of Dealer or Dealer's
personnel selling Fund Shares. Distributor shall not, in any event, be liable or
responsible for the issue, form, validity, enforceability and value of such
Shares or for any matter in connection therewith.
e. Dealer agrees that it will make no offers or sales of
Shares in any foreign jurisdiction, except with the express written consent of
Distributor.
9. INDEMNIFICATION
a. Dealer agrees to indemnify, defend and hold harmless
Distributor and the Funds and their predecessors, successors, and affiliates,
each current or former partner, officer, director, employee, shareholder or
agent and each person who controls or is controlled by Distributor from any and
all losses, claims, liabilities, costs, and expenses, including attorney fees,
that may be assessed against or suffered or incurred by any of them howsoever
they arise, and as they are incurred, which relate in any way to: (i) any
alleged violation of any statute or regulation (including without limitation the
securities laws and regulations of the United States or any state or foreign
country) or any alleged tort or breach of contract, related to the offer or sale
by Dealer of Shares of the Funds pursuant to this Agreement (except to the
extent that Distributor's negligence or failure to follow correct instructions
received from Dealer is the cause of such loss,
A-7
<PAGE>
claim, liability, cost or expense); (ii) any redemption or exchange pursuant to
instructions received from Dealer or its partners, affiliates, officers,
directors, employees or agents; or (iii) the breach by Dealer of any of its
representations and warranties specified herein or the Dealer's failure to
comply with the terms and conditions of this Agreement, whether or not such
action, failure, error, omission, misconduct or breach is committed by Dealer or
its predecessor, successor, or affiliate, each current or former partner,
officer, director, employee or agent and each person who controls or is
controlled by Dealer.
b. Distributor agrees to indemnify, defend and hold harmless
Dealer and its predecessors, successors and affiliates, each current or former
partner, officer, director, employee or agent, and each person who controls or
is controlled by Dealer from any and all losses, claims, liabilities, costs and
expenses, including attorney fees, that may be assessed against or suffered or
incurred by any of them which arise, and which relate to any untrue statement of
or omission to state a material fact contained in the Prospectus or any written
sales literature or other marketing materials provided by the Distributor to the
Dealer, required to be stated therein or necessary to make the statements
therein not misleading.
c. Dealer agrees to notify Distributor, within a reasonable
time, of any claim or complaint or any enforcement action or other proceeding
with respect to Shares offered hereunder against Dealer or its partners,
affiliates, officers, directors, employees or agents, or any person who controls
Dealer, within the meaning of Section 15 of the Securities Act of 1933, as
amended.
d. Dealer further agrees promptly to send Distributor copies
of (i) any report filed pursuant to NASD Conduct Rule 3070, including, without
limitation quarterly reports filed pursuant to Rule 3070(c), (ii) reports filed
with any other self-regulatory organization in lieu of Rule 3070 reports
pursuant to Rule 3070(e) and (iii) amendments to Dealer's Form BD.
e. Each party's obligations under these indemnification
provisions shall survive any termination of this Agreement.
10. TERMINATION; AMENDMENT
a. In addition to the automatic termination of this Agreement
specified in Section 1.c. of this Agreement, each party to this Agreement may
unilaterally cancel its participation in this Agreement by giving thirty (30)
days prior written notice to the other party. In addition, each party to this
Agreement may terminate this Agreement immediately by giving written notice to
the other party of that other party's material breach of this Agreement. Such
notice shall be deemed to have been given and to be effective on the date on
which it was either delivered personally to the other party or any officer or
member thereof, or was mailed postpaid or delivered to a telegraph office for
transmission to the other party's designated person at the addresses shown
herein or in the most recent NASD Manual.
b. This Agreement shall terminate immediately upon the
appointment of a Trustee under the Securities Investor Protection Act or any
other act of insolvency by Dealer.
c. The termination of this Agreement by any of the foregoing
means shall have no effect upon transactions entered into prior to the effective
date of termination and shall
A-8
<PAGE>
not relieve Dealer of its obligations, duties and indemnities specified in this
Agreement. A trade placed by Dealer subsequent to its voluntary termination of
this Agreement will not serve to reinstate the Agreement. Reinstatement, except
in the case of a temporary suspension of Dealer, will only be effective upon
written notification by Distributor.
d. This Agreement is not assignable or transferable and will
terminate automatically in the event of its "assignment," as defined in the
Investment Company Act of 1940, as amended and the rules, regulations and
interpretations thereunder. The Distributor may, however, transfer any of its
duties under this Agreement to any entity that controls or is under common
control with Distributor.
e. This Agreement may be amended by Distributor at any time by
written notice to Dealer. Dealer's placing of an order or accepting payment of
any kind after the effective date and receipt of notice of such amendment shall
constitute Dealer's acceptance of such amendment.
11. DISTRIBUTOR'S REPRESENTATIONS AND WARRANTIES
Distributor represents and warrants that:
a. It is a limited liability company duly organized and
existing and in good standing under the laws of the state of Delaware and is
duly registered or exempt from registration as a broker-dealer in all states and
jurisdictions in which it provides services as principal underwriter and
distributor for the Funds.
b. It is a member in good standing of the NASD.
c. It is empowered under applicable laws and by Distributor's
charter and by-laws to enter into this Agreement and perform all activities and
services of the Distributor provided for herein and that there are no
impediments, prior or existing, regulatory, self-regulatory, administrative,
civil or criminal matters affecting Distributor's ability to perform under this
Agreement.
d. All requisite actions have been taken to authorize
Distributor to enter into and perform this Agreement.
12. ADDITIONAL DEALER REPRESENTATIONS AND WARRANTIES
In addition to the representations and warranties found
elsewhere in this Agreement, Dealer represents and warrants that:
a. It is duly organized and existing and in good standing
under the laws of the state, commonwealth or other jurisdiction in which Dealer
is organized and that Dealer will not offer Shares of any Fund for sale in any
state or jurisdiction where such Shares may not be legally sold or where Dealer
is not qualified to act as a broker-dealer.
A-9
<PAGE>
b. It is empowered under applicable laws and by Dealer's
organizational documents to enter into this Agreement and perform all activities
and services of the Dealer provided for herein and that there are no
impediments, prior or existing, regulatory, self-regulatory, administrative,
civil or criminal matters affecting Dealer's ability to perform under this
Agreement.
c. All requisite actions have been taken to authorize Dealer
to enter into and perform this Agreement.
d. It is not, at the time of the execution of this Agreement,
subject to any enforcement or other proceeding with respect to its activities
under state or federal securities laws, rules or regulations.
13. SETOFF; DISPUTE RESOLUTION; GOVERNING LAW
a. Should any of Dealer's concession accounts with Distributor
have a debit balance, Distributor shall be permitted to offset and recover the
amount owed from any other account Dealer has with Distributor, without notice
or demand to Dealer.
b. In the event of a dispute concerning any provision of this
Agreement, either party may require the dispute to be submitted to binding
arbitration under the commercial arbitration rules and procedures of the NASD.
The parties agree that, to the extent permitted under such arbitration rules and
procedures, the arbitrators selected shall be from the securities industry.
Judgment upon any arbitration award may be entered by any state or federal court
having jurisdiction.
c. This Agreement shall be governed and construed in
accordance with the laws of the state of New Jersey, not including any provision
which would require the general application of the law of another jurisdiction.
14. INVESTIGATIONS AND PROCEEDINGS
The parties to this Agreement agree to cooperate fully in any
securities regulatory investigation or proceeding or judicial proceeding with
respect to each's activities under this Agreement and promptly to notify the
other party of any such investigation or proceeding.
15. CAPTIONS
All captions used in this Agreement are for convenience only,
are not a party hereof, and are not to be used in construing or interpreting any
aspect hereof.
16. ENTIRE UNDERSTANDING
This Agreement contains the entire understanding of the
parties hereto with respect to the subject matter contained herein and
supersedes all previous agreements. This Agreement shall be binding upon the
parties hereto when signed by Dealer and accepted by Distributor.
A-10
<PAGE>
17. SEVERABILITY
Whenever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law.
If, however, any provision of this Agreement is held under applicable law to be
invalid, illegal, or unenforceable in any respect, such provision shall be
ineffective only to the extent of such invalidity, and the validity, legality
and enforceability of the remaining provisions of this Agreement shall not be
affected or impaired in any way.
18. ENTIRE AGREEMENT
This Agreement contains the entire understanding of the
parties hereto with respect to the subject matter contained herein and
supersedes all previous agreements and/or understandings of the parties. This
Agreement shall be binding upon the parties hereto when signed by Dealer and
accepted by Distributor.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year set forth below.
PRUDENTIAL INVESTMENT MANAGEMENT
SERVICES LLC
By: ----------------------------------
Name: ----------------------------------
Title: ----------------------------------
Date: ----------------------------------
DEALER:-----------------------------------
By: ----------------------------------
(Signature)
Name: ----------------------------------
Title: ----------------------------------
Address:----------------------------------
----------------------------------
----------------------------------
Telephone: -------------------------------
NASD CRD # -------------------------------
Prudential Dealer # ----------------------
(Internal Use Only)
Date: ----------------------------------
A-11
THE GLOBAL TOTAL RETURN FUND, INC.
Amended and Restated
Distribution and Service Plan
(Class A Shares)
----------------
Introduction
------------
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by The Global Total Return Fund, Inc. (the Fund) and by Prudential
Investment Management Services LLC, the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class A shares issued by the Fund
(Class A shares). Under the Plan, the Fund intends to pay to the Distributor, as
compensation for its services, a distribution and service fee with respect to
Class A shares.
A majority of the Board of Trustees of the Fund, including a majority of
those Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of this Plan or any agreements related to it (the Rule 12b-1
Trustees), have determined by votes cast in person at a meeting called for the
purpose of voting on this Plan that there is a reasonable likelihood that
adoption and continuation of this Plan will benefit the Fund and its
shareholders. Expenditures under this Plan by the Fund for Distribution
Activities (defined below) are primarily intended to result in the sale of Class
A shares
1
<PAGE>
of the Fund within the meaning of paragraph (a)(2)of Rule 12b-1 promulgated
under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
The Plan
--------
The material aspects of the Plan are as follows:
1. Distribution Activities
The Fund shall engage the Distributor to distribute Class A shares of the
Fund and to service shareholder accounts using all of the facilities of the
Distributor's distribution network, including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class A
shares of the Fund are referred to herein as "Distribution Activities."
2. Payment of Service Fee
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class A shares (service
fee). The Fund shall
2
<PAGE>
calculate and accrue daily amounts payable by the
Class A shares of the Fund hereunder and shall pay such amounts monthly or at
such other intervals as the Board of Trustees may determine.
3. Payment for Distribution Activities
The Fund shall pay to the Distributor as compensation for its services a
distribution fee, together with the service fee (described in Section 2 hereof),
of .30 of 1% per annum of the average daily net assets of the Class A shares of
the Fund for the performance of Distribution Activities. The Fund shall
calculate and accrue daily amounts payable by the Class A shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Trustees may determine.
Amounts payable under the Plan shall be subject to the limitations of Rule
2830 of the NASD Conduct Rules. Amounts paid to the Distributor by the Class A
shares of the Fund will not be used to pay the distribution expenses incurred
with respect to any other class of shares of the Fund except that distribution
expenses attributable to the Fund as a whole will be allocated to the Class A
shares according to the ratio of the sales of Class A shares to the total sales
of the Fund's shares over the Fund's fiscal year or such other allocation method
approved by the Board of Trustees. The allocation of distribution expenses among
classes will be subject to the review of the Board of Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) sales commissions and trailer commissions paid to, or
on account of, account executives of the Distributor;
3
<PAGE>
(b) indirect and overhead costs of the Distributor associated with
Distribution Activities, including central office and branch
expenses;
(c) amounts paid to Prudential Securities or Prusec for
performing services under a selected dealer agreement
between Prudential Securities or Prusec and the
Distributor for sale of Class A shares of the Fund,
including sales commissions, trailer commissions paid
to, or on account of, agents and indirect and
overhead costs associated with Distribution
Activities;
(d) advertising for the Fund in various forms through any
available medium, including the cost of printing and
mailing Fund prospectuses, statements of additional
information and periodic financial reports and sales
literature to persons other than current shareholders
of the Fund; and
(e) sales commissions (including trailer commissions)
paid to, or on account of, broker-dealers and
financial institutions (other than Prudential
Securities or Prusec) which have entered into
selected dealer agreements with the Distributor with
respect to Class A shares of the Fund.
4. Quarterly Reports; Additional Information
An appropriate officer of the Fund will provide to the Board of Trustees of
the Fund for review, at least quarterly, a written report specifying in
reasonable detail the amounts expended for Distribution Activities (including
payment of the service fee) and the purposes for which such expenditures were
made in compliance with the requirements of Rule 12b-1. The Distributor will
provide to the Board of Trustees of the Fund such additional information as the
Board shall from time to time reasonably request, including information about
Distribution Activities undertaken or to be undertaken by the Distributor.
The Distributor will inform the Board of Trustees of the Fund of the
commissions and account servicing fees to be paid by the Distributor to account
executives of the
4
<PAGE>
Distributor and to broker-dealers and financial institutions
which have selected dealer agreements with the Distributor.
5. Effectiveness; Continuation
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class A shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities of
the Class A shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Board of Trustees of the Fund and a majority of the Rule 12b-1
Trustees by votes cast in person at a meeting called for the purpose of voting
on the continuation of the Plan. .
6. Termination
This Plan may be terminated at any time, without the payment of any penalty,
by a majority of the Rule 12b-1 Trustees, or by vote of a majority of the
outstanding voting securities (as defined in the Investment Company Act) of the
Class A shares of the Fund, or by the Distributor, on sixty (60) days' written
notice to the other party. This Plan shall automatically terminate in the event
of its assignment.
7. Amendments
The Plan may not be amended to change the combined service and distribution
fees to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment
5
<PAGE>
Company Act) of the Class A shares of the Fund. All material amendments of the
Plan shall be approved by a majority of the Board of Trustees of the Fund and a
majority of the Rule 12b-1 Trustees by votes cast in person at a meeting called
for the purpose of voting on the Plan.
8. Rule 12b-1 Trustees
While the Plan is in effect, the selection and nomination of the Trustees
shall be committed to the discretion of the Rule 12b-1 Trustees.
9. Records
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
Dated: January 15, 1996 as amended
and restated on June 1, 1998
6
THE GLOBAL TOTAL RETURN FUND, INC.
Amended and Restated
Distribution and Service Plan
(Class B Shares)
--------------
Introduction
------------
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by The Global Total Return Fund, Inc. (the Fund) and by Prudential
Investment Management Services LLC, the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class B shares issued by the Fund
(Class B shares). Under the Plan, the Fund wishes to pay to the Distributor, as
compensation for its services, a distribution and service fee with respect to
Class B shares.
A majority of the Board of Trustees of the Fund, including a majority who
are not "interested persons" of the Fund (as defined in the Investment Company
Act) and who have no direct or indirect financial interest in the operation of
this Plan or any agreements related to it (the Rule 12b-1 Trustees), have
determined by votes cast in person at a meeting called for the purpose of voting
on this Plan that there is a reasonable likelihood that adoption and
continuation of this Plan will benefit the Fund and its shareholders.
Expenditures under this Plan by the Fund for Distribution Activities (defined
below) are primarily intended to result in the sale of Class B shares
1
<PAGE>
of the Fund within the meaning of paragraph (a)(2) of Rule 12b-1 promulgated
under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor
and/or other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
The Plan
--------
The material aspects of the Plan are as follows:
1. Distribution Activities
The Fund shall engage the Distributor to distribute Class B shares of
the Fund and to service shareholder accounts using all of the facilities of the
Distributor's distribution network including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class B
shares of the Fund are referred to herein as "Distribution Activities."
2. Payment of Service Fee
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class B shares (service
fee). The Fund shall
2
<PAGE>
calculate and accrue daily amounts payable by the Class B shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Trustees may determine.
3. Payment for Distribution Activities
The Fund shall pay to the Distributor as compensation for its services a
distribution fee of .75 of 1% per annum of the average daily net assets of the
Class B shares of the Fund for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class B shares of
the Fund hereunder and shall pay such amounts monthly or at such other intervals
as the Board of Trustees may determine. Amounts payable under the Plan shall be
subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Amounts paid to the Distributor by the Class B shares of the Fund will
not be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class B shares according to the
ratio of the sale of Class B shares to the total sales of the Fund's shares over
the Fund's fiscal year or such other allocation method approved by the Board of
Trustees. The allocation of distribution expenses among classes will be subject
to the review of the Board of Trustees. Payments hereunder will be applied to
distribution expenses in the order in which they are incurred, unless otherwise
determined by the Board of Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
3
<PAGE>
(a) sales commissions (including trailer commissions) paid to, or
on account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated
with performance of Distribution Activities including central
office and branch expenses;
(c) amounts paid to Prudential Securities or Prusec for
performing services under a selected dealer agreement between
Prudential Securities or Prusec and the Distributor for sale of
Class B shares of the Fund, including sales commissions and
trailer commissions paid to, or on account of, agents and
indirect and overhead costs associated with Distribution
Activities;
(d) advertising for the Fund in various forms through any
available medium, including the cost of printing and mailing Fund
prospectuses, statements of additional information and periodic
financial reports and sales literature to persons other than
current shareholders of the Fund; and
(e) sales commissions (including trailer commissions) paid to, or
on account of, broker-dealers and other financial institutions
(other than Prudential Securities or Prusec) which have entered
into selected dealer agreements with the Distributor with respect
to Class B shares of the Fund.
4. Quarterly Reports; Additional Information
An appropriate officer of the Fund will provide to the Board of Trustees of
the Fund for review, at least quarterly, a written report specifying in
reasonable detail the amounts expended for Distribution Activities (including
payment of the service fee) and the purposes for which such expenditures were
made in compliance with the requirements of Rule 12b-1. The Distributor will
provide to the Board of Trustees of the Fund such additional information as they
shall from time to time reasonably request, including information about
Distribution Activities undertaken or to be undertaken by the Distributor.
4
<PAGE>
The Distributor will inform the Board of Trustees of the Fund of the
commissions and account servicing fees to be paid by the Distributor to account
executives of the Distributor and to broker-dealers and other financial
institutions which have selected dealer agreements with the Distributor.
5. Effectiveness; Continuation
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class B shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities of
the Class B shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Board of Trustees of the Fund and a majority of the Rule 12b-1
Trustees by votes cast in person at a meeting called for the purpose of voting
on the continuation of the Plan.
6. Termination
This Plan may be terminated at any time, without the payment of any
penalty, by a majority of the Rule 12b-1 Trustees, or by vote of a majority of
the outstanding voting securities (as defined in the Investment Company Act) of
the Class B shares of the Fund, or by the Distributor, on sixty (60) days'
written notice to the other party. This Plan shall automatically terminate in
the event of its assignment.
7. Amendments
The Plan may not be amended to change the combined service and distribution
expenses to be paid as provided for in Sections 2 and 3 hereof so as to increase
5
<PAGE>
materially the amounts payable under this Plan unless such amendment shall be
approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class B shares of the Fund. All
material amendments of the Plan shall be approved by a majority of the Board of
Trustees of the Fund and a majority of the Rule 12b-1 Trustees by votes cast in
person at a meeting called for the purpose of voting on the Plan.
8. Rule 12b-1 Trustees
While the Plan is in effect, the selection and nomination of the Rule 12b-1
Trustees shall be committed to the discretion of the Rule 12b-1 Trustees.
9. Records
The Fund shall preserve copies of the Plan and any related agreements
and all reports made pursuant to Section 4 hereof, for a period of not less than
six years from the date of effectiveness of the Plan, such agreements or
reports, and for at least the first two years in an easily accessible place.
Dated: January 15, 1996 as amended
and restated on June 1, 1998
THE GLOBAL TOTAL RETURN FUND, INC.
Amended and Restated
Distribution and Service Plan
(Class C Shares)
--------------
Introduction
------------
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by The Global Total Return Fund, Inc. (the Fund) and by Prudential
Investment Management Services LLC, the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class C shares issued by the Fund
(Class C shares). Under the Plan, the Fund wishes to pay to the Distributor, as
compensation for its services, a distribution and service fee with respect to
Class C shares.
A majority of the Board of Trustees of the Fund, including a majority who
are not "interested persons" of the Fund (as defined in the Investment Company
Act) and who have no direct or indirect financial interest in the operation of
this Plan or any agreements related to it (the Rule 12b-1 Trustees), have
determined by votes cast in person at a meeting called for the purpose of voting
on this Plan that there is a reasonable likelihood that adoption and
continuation of this Plan will benefit the Fund and its shareholders.
Expenditures under this Plan by the Fund for Distribution Activities (defined
below) are primarily intended to result in the sale of Class C shares
1
<PAGE>
of the Fund within the meaning of paragraph (a)(2) of Rule 12b-1 promulgated
under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
The Plan
--------
The material aspects of the Plan are as follows:
1. Distribution Activities
The Fund shall engage the Distributor to distribute Class C shares of the
Fund and to service shareholder accounts using all of the facilities of the
Distributor's distribution network including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class C
shares of the Fund are referred to herein as "Distribution Activities."
2. Payment of Service Fee
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class C shares (service
fee). The Fund shall
2
<PAGE>
calculate and accrue daily amounts payable by the Class C shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Trustees may determine.
3. Payment for Distribution Activities
The Fund shall pay to the Distributor as compensation for its services
a distribution fee of .75 of 1% per annum of the average daily net assets of the
Class C shares of the Fund for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class C shares of
the Fund hereunder and shall pay such amounts monthly or at such other intervals
as the Board of Trustees may determine. Amounts payable under the Plan shall be
subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Amounts paid to the Distributor by the Class C shares of the Fund will
not be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class C shares according to the
ratio of the sale of Class C shares to the total sales of the Fund's shares over
the Fund's fiscal year or such other allocation method approved by the Board of
Trustees. The allocation of distribution expenses among classes will be subject
to the review of the Board of Trustees. Payments hereunder will be applied to
distribution expenses in the order in which they are incurred, unless otherwise
determined by the Board of Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) sales commissions (including trailer commissions) paid to, or on
3
<PAGE>
account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of Distribution Activities including central office and
branch expenses;
(c) amounts paid to Prudential Securities or Prusec for performing
services under a selected dealer agreement between Prudential
Securities or Prusec and the Distributor for sale of Class C shares of
the Fund, including sales commissions and trailer commissions paid to,
or on account of, agents and indirect and overhead costs associated
with Distribution Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund prospectuses,
statements of additional information and periodic financial reports
and sales literature to persons other than current shareholders of the
Fund; and
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and other financial institutions (other
than Prudential Securities or Prusec) which have entered into selected
dealer agreements with the Distributor with respect to Class C shares
of the Fund.
4. Quarterly Reports; Additional Information
An appropriate officer of the Fund will provide to the Board of Trustees of
the Fund for review, at least quarterly, a written report specifying in
reasonable detail the amounts expended for Distribution Activities (including
payment of the service fee) and the purposes for which such expenditures were
made in compliance with the requirements of Rule 12b-1. The Distributor will
provide to the Board of Trustees of the Fund such additional information as they
shall from time to time reasonably request, including information about
Distribution Activities undertaken or to be undertaken by the Distributor.
The Distributor will inform the Board of Trustees of the Fund of the
commissions
4
<PAGE>
and account servicing fees to be paid by the Distributor to account executives
of the Distributor and to broker-dealers and other financial institutions which
have selected dealer agreements with the Distributor.
5. Effectiveness;Continuation
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class C shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities of
the Class C shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Board of Trustees of the Fund and a majority of the Rule 12b-1
Trustees by votes cast in person at a meeting called for the purpose of voting
on the continuation of the Plan.
6. Termination
This Plan may be terminated at any time, without the payment of any
penalty, by a majority of the Rule 12b-1 Trustees, or by vote of a majority of
the outstanding voting securities (as defined in the Investment Company Act) of
the Class C shares of the Fund, or by the Distributor, on sixty (60) days'
written notice to the other party. This Plan shall automatically terminate in
the event of its assignment.
7. Amendments
The Plan may not be amended to change the combined service and distribution
expenses to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
5
<PAGE>
approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class C shares of the Fund. All
material amendments of the Plan shall be approved by a majority of the Board of
Trustees of the Fund and a majority of the Rule 12b-1 Trustees by votes cast in
person at a meeting called for the purpose of voting on the Plan.
8. Rule 12b-1 Trustees
While the Plan is in effect, the selection and nomination of the Rule 12b-1
Trustees shall be committed to the discretion of the Rule 12b-1 Trustees.
9. Records
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
Dated: January 15, 1996 as amended
and restated on June 1, 1998
THE GLOBAL TOTAL RETURN FUND, INC.
(the Fund)
AMENDED AND RESTATED PLAN PURSUANT TO RULE 18F-3
The Fund hereby adopts this plan pursuant to Rule 18f-3 under the
Investment Company Act of 1940 (the 1940 Act), setting forth the separate
arrangement and expense allocation of each class of shares in the Fund. Any
material amendment to this plan is subject to prior approval of the Board of
Directors, including a majority of the independent Directors.
CLASS CHARACTERISTICS
CLASS A SHARES: Class A shares are subject to a high initial sales charge and
a distribution and/or service fee pursuant to Rule 12b-1
under the 1940 Act (Rule 12b-1 fee) not to exceed .30 of
1% per annum of the average daily net assets of the
class. The initial sales charge is waived or reduced for
certain eligible investors.
CLASS B SHARES: Class B shares are not subject to an initial sales charge but
are subject to a high contingent deferred sales charge
(declining from 5% to zero over a six-year period) which
will be imposed on certain redemptions and a Rule 12b-1
fee not to exceed 1% per annum of the average daily net
assets of the class. The contingent deferred sales
charge is waived for certain eligible investors. Class B
shares automatically convert to Class A shares
approximately seven years after purchase.
CLASS C SHARES: Class C shares issued before October 28, 1998 are not subject
to an initial sales charge but are subject to a 1%
contingent deferred sales charge which will be imposed
on certain redemptions within the first 12 month after
purchase and a Rule 12b-1 fee not to exceed 1% per annum
of the average daily net assets of the class. Class C
shares issued on or after November 2, 1998 are subject
to a low initial sales charge and a 1% contingent
deferred sales charge which will be imposed on certain
redemptions within the first 18 months after purchase
and a Rule 12b-1 fee not to exceed 1% per annum of the
average daily net assets of the class.
<PAGE>
CLASS Z SHARES: Class Z shares are not subject to either an initial or
contingent deferred sales charge, nor are they subject
to any Rule 12b-1 fee.
INCOME AND EXPENSE ALLOCATIONS
Income, any realized and unrealized capital gains and losses, and
expenses not allocated to a particular class of the Fund will be
allocated to each class of the Fund on the basis of the net asset value
of that class in relation to the net asset value of the Fund.
DIVIDENDS AND DISTRIBUTIONS
Dividends and other distributions paid by the Fund to each class of
shares, to the extent paid, will be paid on the same day and at the
same time, and will be determined in the same manner and will be in the
same amount, except that the amount of the dividends and other
distributions declared and paid by a particular class of the Fund may
be different from that paid by another class of the Fund because of
Rule 12b-1 fees and other expenses borne exclusively by that class.
EXCHANGE PRIVILEGE
Holders of Class A Shares, Class B Shares, Class C Shares and Class Z
Shares shall have such exchange privileges as set forth in the Fund's
current prospectus. Exchange privileges may vary among classes and
among holders of a Class.
CONVERSION FEATURES
Class B shares will automatically convert to Class A shares on a
quarterly basis approximately seven years after purchase.
Conversions will be effected at relative net asset value without the
imposition of any additional sales charge.
GENERAL
A. Each class of shares shall have exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and
shall have separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the
interests of any other class.
B. On an ongoing basis, the Directors, pursuant to their fiduciary
responsibilities under the 1940 Act and otherwise, will monitor the
Fund for the existence of any material conflicts among the interests of
its several classes. The Directors,
2
<PAGE>
including a majority of the independent Directors, shall take such
action as is reasonably necessary to eliminate any such conflicts that
may develop. Prudential Investments Fund Management LLC, the Fund's
Manager, will be responsible for reporting any potential or existing
conflicts to the Directors.
C. For purposes of expressing an opinion on the financial statements of
the Fund, the methodology and procedures for calculating the net asset
value and dividends/distributions of the Fund's several classes and the
proper allocation of income and expenses among such classes will be
examined annually by the Fund's independent auditors who, in performing
such examination, shall consider the factors set forth in the relevant
auditing standards adopted, from time to time, by the American
Institute of Certified Public Accountants.
Date: May 9, 1996
Amended: June 1, 1998
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<AVG-DEBT-PER-SHARE> 0
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<INVESTMENTS-AT-VALUE> 175,354,608
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<ASSETS-OTHER> 4,595
<OTHER-ITEMS-ASSETS> 0
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<PAYABLE-FOR-SECURITIES> 1,659,338
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<OTHER-ITEMS-LIABILITIES> 919,065
<TOTAL-LIABILITIES> 2,578,403
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<PAID-IN-CAPITAL-COMMON> 178,426,173
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<SHARES-COMMON-PRIOR> 23,628,423
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<NET-CHANGE-FROM-OPS> 7,518,463
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<AVERAGE-NET-ASSETS> 2,642,000
<PER-SHARE-NAV-BEGIN> 7.89
<PER-SHARE-NII> 0.23
<PER-SHARE-GAIN-APPREC> 0.07
<PER-SHARE-DIVIDEND> (0.24)
<PER-SHARE-DISTRIBUTIONS> (0.01)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 7.94
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<AVG-DEBT-PER-SHARE> 0
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<PAID-IN-CAPITAL-COMMON> 178,426,173
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