THE GLOBAL TOTAL RETURN FUND, INC.
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Prospectus dated March 4, 1998
(Revised as of June 1, 1998)
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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.
There is no assurance that the Fund will achieve its investment objective. The
Fund seeks 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 U.S. dollars or in foreign currencies. The remainder is generally
invested in corporate debt securities or longer-term bank debt securities. The
Fund may also purchase and sell certain derivatives, including put and call
options on securities and foreign currencies and engage in transactions
involving futures contracts and options on such futures to hedge its portfolio
and to attempt to enhance return. See "How the Fund Invests--Investment
Objective and Policies." THE FUND IS NON-DIVERSIFIED AND MAY INVEST MORE THAN 5%
OF ITS TOTAL ASSETS IN THE SECURITIES OF ONE OR MORE ISSUERS. INVESTMENT IN A
NON-DIVERSIFIED PORTFOLIO INVOLVES GREATER RISK THAN INVESTMENT IN A DIVERSIFIED
PORTFOLIO. IN ADDITION, THE FUND MAY INVEST UP TO 10% OF ITS TOTAL ASSETS IN
NON-INVESTMENT GRADE SECURITIES, WHICH MAY ENTAIL ADDITIONAL RISKS. There can be
no assurance that the Fund's investment objective will be achieved. Investing in
Foreign Government securities, options contracts and futures contracts and
options thereon involves considerations and possible risks which are different
from those ordinarily associated with investing in U.S. Government securities.
See "How the Fund Invests--Risk Factors." The Fund's address is Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, and its telephone
number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information about
the Fund has been filed with the Securities and Exchange Commission (the
Commission) in a Statement of Additional Information, dated March 4, 1998, which
information is incorporated herein by reference (is legally considered a part of
this Prospectus) and is available without charge upon request to the Fund at the
address or telephone number noted above. The Commission maintains a Web site
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference and other information regarding the Fund.
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INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
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AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OF ANY BANK AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
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FUND HIGHLIGHTS
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The following summary is intended to highlight certain information
contained in this Prospectus and is qualified in its entirety by the more
detailed information appearing elsewhere herein.
WHAT IS THE GLOBAL TOTAL RETURN FUND, INC.?
The Global Total Return Fund, Inc. is a mutual fund. A mutual fund pools
the resources of investors by selling its shares to the public and investing the
proceeds of such sale in a portfolio of securities designed to achieve its
investment objective. Technically, the Fund is an open-end, non-diversified,
management investment company.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is to seek total return, the components of
which are current income and capital appreciation. It seeks to achieve this
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 U.S.
dollars or in foreign currencies. The remainder is generally invested in
corporate debt securities or longer-term bank debt securities. There can be no
assurance that the Fund's objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies" at page 10.
WHAT ARE THE FUND'S RISK FACTORS AND SPECIAL CHARACTERISTICS?
Investing in securities issued by foreign governments involves
considerations and risks not typically associated with investing in obligations
issued by the U.S. Government and domestic corporations. See "How the Fund
Invests--Risk Factors--Foreign Investments" at page 18. The Fund may also engage
in various hedging and return enhancement strategies, including using
derivatives, which may be considered speculative and may result in higher risks
and costs to the Fund. See "How the Fund Invests--Risk Factors--Risks of Hedging
and Return Enhancement Strategies" at page 20. In addition, the Fund may invest
up to 10% of its total assets in securities rated below investment grade, but
with a minimum rating of B, as determined by Moody's Investors Service, Inc.
(Moody's), Standard & Poor's Ratings Group (S&P) or comparably rated by another
nationally recognized statistical ratings organization (NRSRO), or if unrated,
deemed to be of equivalent quality by the investment adviser. Lower-rated
securities are subject to a greater risk of loss of principal and interest. See
"How the Fund Invests--Risk Factors--Medium and Lower-Rated Securities" at page
19.
The amount of income available for distribution to shareholders will be
affected by any foreign currency gains or losses generated by the Fund upon the
disposition of debt securities denominated in a foreign currency and by certain
hedging activities of the Fund. 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. See "Taxes, Dividends and Distributions" at page 25. As with an
investment in any mutual fund, an investment in this Fund can decrease in value
and you can lose money.
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of .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. As of January 31, 1998, PIFM served as manager or
administrator to 64 investment companies, including 42 mutual funds, with
aggregate assets of approximately $63 billion. PIFM has entered into a
Subadvisory Agreement with The Prudential Investment Corporation, doing business
as Prudential Investments (PI); PI, through PRICOA Asset Management Ltd. (PRICOA
and collectively with PI, the investment adviser), furnishes investment advisory
services in connection with the management of the Fund. See "How the Fund is
Managed--Manager" at page 21.
2
<PAGE>
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Investment Management Services LLC (The Distributor) acts as the
Distributor of the Fund's Class A, Class B, Class C and Class Z shares. The
Distributor is paid an annual distribution and service fee with respect to Class
A shares which is currently being charged at the annual rate of .15 of 1% of the
average daily net assets of the Class A shares and is paid a distribution and
service fee with respect to Class B and Class C shares which is currently being
charged at the annual rate of .75 of 1% of the average daily net assets of each
of the Class B and Class C shares. The Distributor incurs the expense of
distributing the Fund's Class Z shares under a Distribution Agreement with the
Fund, none of which is reimbursed by or paid for by the Fund. See "How the Fund
is Managed--Distributor" at page 22.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares. The minimum subsequent investment is $100 for Class
A, Class B and Class C shares. Class Z shares are not subject to any minimum
investment requirements. There is no minimum investment requirement for certain
retirement and employee savings plans or custodial accounts for the benefit of
minors. For purchases made through the Automatic Savings Accumulation Plan, the
minimum initial and subsequent investment is $50. See "Shareholder Guide--How to
Buy Shares of the Fund" at page 28 and "Shareholder Guide--Shareholder Services"
at page 37.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through the Distributor or brokers or
dealers that have entered into agreements to act as participating or introducing
brokers for the Distributor (Dealers) or directly from the Fund through its
transfer agent, Prudential Mutual Fund Services LLC (PMFS or the Transfer
Agent). In each case, sales are made at the net asset value per share (NAV) next
determined after receipt of your purchase order by the Transfer Agent, a Dealer
or the Distributor, plus a sales charge which may be imposed either (i) at the
time of purchase (Class A shares) or (ii) on a deferred basis (Class B or Class
C shares). Class Z shares are offered to a limited group of investors at NAV
without any sales charge. Dealers may charge their customers a separate fee for
handling purchase transactions. See "How the Fund Values Its Shares" at page 24
and "Shareholder Guide--How to Buy Shares of the Fund" at page 28.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers four classes of shares:
o Class A Shares: Sold with an initial sales charge of up to 4% of the
offering price.
o Class B Shares: Sold without an initial sales charge but are subject to a
contingent deferred sales charge or CDSC (declining from
5% to zero of the lower of the amount invested or the
redemption proceeds) which will be imposed on certain
redemptions made within six years of purchase. Although
Class B shares are subject to higher ongoing
distribution-related expenses than Class A shares, Class
B shares will automatically convert to Class A shares
(which are subject to lower ongoing distribution-related
expenses) approximately seven years after purchase.
o Class C Shares: Sold without an initial sales charge and, for one year
after purchase, are subject to a 1% CDSC on redemptions.
Like Class B shares, Class C shares are subject to higher
ongoing distribution-related expenses than Class A shares
but do not convert to another class.
o Class Z Shares: Sold without either an initial sales charge or CDSC to a
limited group of investors. Class Z shares are not
subject to any ongoing service or distribution expenses.
See "Shareholder Guide--Alternative Purchase Plan" at page 29.
3
<PAGE>
HOW DO I SELL MY SHARES?
You may redeem shares of the Fund at any time at the NAV next determined
after your Dealer, the Distributor or the Transfer Agent receives your sell
order. However, the proceeds of redemptions of Class B and Class C shares may be
subject to a CDSC. Dealers may charge their customers a separate fee for
handling sale transactions. See "Shareholder Guide--How to Sell Your Shares" at
page 32.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to declare dividends of net investment income at least
quarterly and make distributions of any net capital gains at least annually.
Dividends will be made without regard to capital or currency losses. Dividends
and distributions will be automatically reinvested in additional shares of the
Fund at NAV without a sales charge unless you request that they be paid to you
in cash. The amount of income available for distribution to shareholders as
ordinary income will be affected by any foreign currency gains or losses
generated by the Fund upon the disposition of debt securities denominated in a
foreign currency and by certain hedging activities of the Fund. See "Taxes,
Dividends and Distributions" at page 25.
4
<PAGE>
<TABLE>
<CAPTION>
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FUND EXPENSES
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<S> <C> <C> <C> <C>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- --------------
SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) .................... 4% None None None
Maximum Deferred Sales Load (as a percentage
of original purchase price or redemption proceeds,
whichever is lower) .................................... None 5% during the first 1% on None
year, decreasing by 1% redemp-
annually to 1% in the tions made
fifth year and sixth within one
year and 0% in the year of
seventh year* purchase
Maximum Sales Load Imposed on Reinvested
Dividends .............................................. None None None None
Redemption Fees ......................................... None None None None
Exchange Fee ............................................ None None None None
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES**
ANNUAL FUND OPERATING EXPENSES -------------- -------------- -------------- ----------------
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees ......................................... .75% .75% .75% .75%
12b-1 Fees (After Reduction) ............................ .15%++ .75%++ .75%++ None
Other Expenses .......................................... .49% .49% .49% .49%
---- ---- ---- ----
Total Fund Operating Expenses (After Reduction) ......... 1.39% 1.99% 1.99% 1.24%
==== ==== ==== ====
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of each time
period:
Class A .............................................................. $54 $82 $113 $200
Class B .............................................................. $70 $92 $117 $209
Class C .............................................................. $30 $62 $107 $232
Class Z** ............................................................ $13 $39 -- --
You would pay the following expenses on the same investment, assuming no
redemption:
Class A .............................................................. $54 $82 $113 $200
Class B .............................................................. $20 $62 $107 $209
Class C .............................................................. $20 $62 $107 $232
Class Z** ............................................................ $13 $39 -- --
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The above example is based on data for the Fund's fiscal year ended December 31, 1997. THE EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the various costs and expenses that an investor in the Fund will
bear, whether directly or indirectly. For more complete descriptions of the various costs and expenses, see "How the Fund is
Managed." "Other Expenses" include operating expenses of the Fund, such as Directors' and professional fees, registration fees,
reports to shareholders and transfer agency and custodian (domestic and foreign) fees, but exclude foreign withholding taxes.
<FN>
* Class B shares will automatically convert to Class A shares approximately seven years after purchase. See "Shareholder Guide
--Conversion Feature--Class B Shares."
** Estimated based on expenses expected to have been incurred if Class Z shares had been in existence throughout the fiscal year
ended December 31, 1997.
+ Dealers may independently charge additional fees for shareholder transactions or advisory services. Pursuant to rules of the
National Association of Securities Dealers, Inc., the aggregate initial sales charges, deferred sales charges and asset-based
sales charges on shares of the Fund may not exceed 6.25% of total gross sales, subject to certain exclusions. This 6.25%
limitation is imposed on each class of the Fund rather than on a per shareholder basis. Therefore, long-term shareholders of
the Fund may pay more in total sales charges than the economic equivalent of 6.25% of such shareholders' investment in such
shares. See "How the Fund is Managed--Distributor."
++ Although the Class A, Class B and Class C Distribution and Service Plans provide that the Fund may pay up to .30 of 1%, 1% and
1% per annum of average daily net assets of the Class A, Class B and Class C shares, respectively, the Distributor has agreed
to limit its distribution fee with respect to Class A, Class B and Class C shares of the Fund to .15 of 1%, .75 of 1% and .75
of 1% per annum of the average daily net assets of the Class A, Class B and Class C shares, respectively, for the fiscal year
ending December 31, 1998. Total Fund Operating Expenses without such limitation would be 1.54% for Class A shares, 2.24% for
Class B shares and 2.24% for Class C shares. See "How the Fund is Managed--Distributor."
</FN>
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
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FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS A SHARES)
====================================================================================================================================
The following financial highlights have been audited for the year ended December 31, 1997 by Price Waterhouse LLP, independent
accountants, and for the five years ended December 31, 1996 by Deloitte & Touche LLP, independent auditors, whose reports thereon
were unqualified. This information should be read in conjunction with the financial statements and notes thereto, which appear in
the Statement of Additional Information. The financial highlights contain selected data for a Class A share of common stock
outstanding, total return, ratios to average net assets and other supplemental data for the periods indicated. The Fund operated as
a closed-end investment company prior to January 15, 1996. Further performance information is contained in the annual report, which
may be obtained without charge. See "Shareholder Guide--Shareholder Services--Reports to Shareholders."
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1997(d) 1996 1995(a) 1994(a) 1993(a) 1992(a) 1991(a)
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <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 $ 8.99 $ 8.96
-------- -------- -------- -------- -------- -------- --------
Net investment income ............. .55 .62 .54 .52 .64 .81 .84
Net realized and unrealized
gain (loss) on investments
and foreign currencies ........... (.18) .32 1.25 (1.22) .74 (.90) (.19)
-------- -------- -------- -------- -------- -------- --------
Total from investment
operations ...................... .37 .94 1.79 (.70) 1.38 (.09) .65
-------- -------- -------- -------- -------- -------- --------
Dividends from net
investment income ................ (.68) (.62) (.54) (.17) (.30) (.75) (.62)
Distributions from net
realized capital gains ........... -- -- -- (.13) (.23) (.05) --
Distributions in excess of net
investment income(b) ............. (.19) (.50) (.27) -- -- -- --
Distributions in excess of
net capital gains(b) ............. -- -- -- -- (.19) -- --
Tax return of capital
distributions(b) ................. -- -- -- (.30) -- -- --
-------- -------- -------- -------- -------- -------- --------
Total distributions .............. (.87) (1.12) (.81) (.60) (.72) (.80) (.62)
-------- -------- -------- -------- -------- -------- --------
Redemption fee retained by Fund ... -- .12 -- -- -- -- --
Capital charge resulting
from the issuance of
Fund shares ...................... -- -- -- -- -- -- --
Net asset value, end of year ...... $ 7.88 $ 8.38 $ 8.44 $ 7.46 $ 8.76 $ 8.10 $ 8.99
======== ======== ======== ======== ======== ======== ========
Market price per share, end of year $ N/A $ N/A $ 8.25 $ 6.13 $ 8.00 $ 7.50 $ 8.13
======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN
based on(c):
Market price .................... N/A N/A 49.23% (16.12)% 16.50% 1.75% 9.42%
Net asset value ................. 4.55% 13.15% 25.45% (8.10)% 18.12% (.68)% 8.10%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) ..... $183,054 $229,770 $559,071 $493,645 $579,942 $535,647 $593,376
Average net assets (000) .......... $204,795 $299,026 $549,407 $536,230 $567,128 $570,812 $571,767
Ratios to average net assets:
Expenses including
distribution fees ............... 1.39% 1.33% 1.02% 1.04% 1.02% 1.01% .99%
Expenses, excluding distribution
fees ............................ 1.24% 1.18% 1.02% 1.04% 1.02% 1.01% .99%
Net investment income ............ 6.73% 7.01% 6.50% 6.45% 7.67% 9.39% 9.69%
Portfolio turnover rate ........... 43% 32% 256% 583% 370% 192% 141%
<CAPTION>
--------------------------------------
1990(a) 1989(a) 1988(a)
-------- -------- --------
<S> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of year ................ $ 8.57 $ 9.41 $ 9.95
-------- -------- --------
Net investment income ............. .89 .94 .99
Net realized and unrealized
gain (loss) on investments
and foreign currencies ........... .36 (.70) .08
-------- -------- --------
Total from investment
operations ...................... 1.25 .24 1.07
-------- -------- --------
Dividends from net
investment income ................ (.88) (.94) (.99)
Distributions from net
realized capital gains ........... -- -- (.59)
Distributions in excess of net
investment income(b) ............. -- -- --
Distributions in excess of
net capital gains(b) ............. -- -- --
Tax return of capital
distributions(b) ................. -- (.14) --
-------- -------- --------
Total distributions .............. (.88) (1.08) (1.58)
-------- -------- --------
Redemption fee retained by Fund ... -- -- --
Capital charge resulting
from the issuance of
Fund shares ...................... .02 -- (.03)
Net asset value, end of year ...... $ 8.96 $ 8.57 $ 9.41
======== ======== ========
Market price per share, end of year $ 8.00 $ 7.88 $ 9.38
======== ======== ========
TOTAL INVESTMENT RETURN
based on(c):
Market price .................... 12.89% (5.06)% 13.15%
Net asset value ................. 16.18% 2.92% 11.12%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) ..... $591,339 $595,824 $638,200
Average net assets (000) .......... $596,824 $613,520 $669,379
Ratios to average net assets:
Expenses including
distribution fees ............... 1.03% 1.07% 1.01%
Expenses, excluding distribution
fees ............................ 1.03% 1.07% 1.01%
Net investment income ............ 10.03% 10.63% 10.00%
Portfolio turnover rate ........... 221% 734% 371%
</TABLE>
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(a) During these periods, the Fund operated as a closed-end investment company.
Effective January 15, 1996, the Fund commenced operations as an open-end
investment company. Accordingly, historical expenses and ratios of expenses
to average net assets are not necessarily indicative of future expenses and
related ratios.
(b) These captions are provided in accordance with the American Institute of
Certified Public Accountants' Statement of Position (SOP) 93-2,
"Determination, Disclosure and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies"
(SOP 93-2) which was applied effective January 1, 1993. Since then, the
Fund has been accounting and reporting for all distributions to
shareholders in conformity with SOP 93-2. In accordance with SOP 93-2,
distributions for years prior to 1993 have not been restated.
(c) Total investment return based on net asset value is calculated assuming a
purchase of common stock at the current net asset value on the first day
and a sale at the current net asset value on the last day of each period
reported. Total investment 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 based on market value was
calculated 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.
(d) Calculated based upon weighted average shares outstanding during the year.
6
<PAGE>
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FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIOD)
(CLASS B SHARES)
================================================================================
The following financial highlights have been audited for the year ended
December 31, 1997 by Price Waterhouse LLP, independent accountants, and for the
period from January 15, 1996 through December 31, 1996 by Deloitte & Touche LLP,
independent auditors, whose reports thereon were unqualified. This information
should be read in conjunction with the financial statements and notes thereto,
which appear in the Statement of Additional Information. The financial
highlights contain selected data for a Class B share of common stock
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. Further performance information is contained in
the annual report which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
JANUARY 15, 1996(a)
YEAR ENDED THROUGH
DECEMBER 31, 1997(d) DECEMBER 31, 1996
-------------------- -------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ................. $ 8.39 $ 8.51
------ ------
Net investment income ................................ .49 .57
Net realized and unrealized gain (loss) on investments
and foreign currency transactions ................... (.16) .26
------ ------
Total from investment operations .................... .33 .83
------ ------
Dividends from net investment income ................. (.64) (.57)
Distributions in excess of net investment income ..... (.19) (.50)
------ ------
Total distributions ................................. (.83) (1.07)
------ ------
Redemption fee retained by Fund ...................... -- .12
------ ------
Net asset value, end of period ....................... $ 7.89 $ 8.39
====== ======
TOTAL RETURN(c): ..................................... 3.98% 11.99%
RATIOS/SUPPLEMENTAL DATA:
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%(b)
Expenses, excluding distribution fees ............... 1.24% 1.18%(b)
Net investment income ............................... 6.13% 6.41%(b)
Portfolio turnover rate .............................. 43% 32%
</TABLE>
- ----------
(a) Commencement of operations.
(b) Annualized.
(c) Total return does not consider the effect of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(d) Calculated based upon weighted average shares outstanding during the year.
7
<PAGE>
================================================================================
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIOD)
(CLASS C SHARES)
================================================================================
The following financial highlights have been audited for the year ended
December 31, 1997 by Price Waterhouse LLP, independent accountants, and for the
period from January 15, 1996 through December 31, 1996 by Deloitte & Touche LLP,
independent auditors, whose reports thereon were unqualified. This information
should be read in conjunction with the financial statements and notes thereto,
which appear in the Statement of Additional Information. The financial
highlights contain selected data for a Class C share of common stock
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. Further performance information is contained in
the annual report which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
JANUARY 15, 1996(a)
YEAR ENDED THROUGH
DECEMBER 31, 1997(e) DECEMBER 31, 1996
-------------------- -------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ........................................... $ 8.39 $8.51
------ -----
Net investment income .......................................................... .49 .57
Net realized and unrealized gain (loss) on investments
and foreign currency transactions ............................................. (.16) .26
------ -----
Total from investment operations .............................................. .33 .83
------ -----
Dividends from net investment income ........................................... (.64) (.57)
Distributions in excess of net investment income ............................... (.19) (.50)
------ -----
Total distributions ........................................................... (.83) (1.07)
Redemption fee retained by Fund ................................................ -- .12
------ -----
Net asset value, end of period ................................................. $ 7.89 $8.39
====== =====
TOTAL RETURN(c): ............................................................... 3.98% 11.99%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ................................................ $ 190 $210(d)
Average net assets (000) ....................................................... $ 397 $204(d)
Ratios to average net assets:
Expenses, including distribution fees ......................................... 1.99% 1.93%(b)
Expenses, excluding distribution fees ......................................... 1.24% 1.18%(b)
Net investment income ......................................................... 6.05% 6.41%(b)
Portfolio turnover rate ........................................................ 43% 32%
</TABLE>
- ----------
(a) Commencement of operations.
(b) Annualized.
(c) Total return does not consider the effect of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(d) Figure is actual and not rounded to nearest thousand.
(e) Calculated based upon weighted average shares outstanding during the year.
8
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FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIOD)
(CLASS Z SHARES)
================================================================================
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class Z share of common stock
outstanding, total return, ratios to average net assets and other supplemental
data for the period indicated. Further performance information is contained in
the annual report which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
CLASS Z
--------------------
MARCH 17, 1997(a)
THROUGH
DECEMBER 31, 1997(d)
--------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ......................... $ 8.32
------
Net investment income ........................................ .39
Net realized and unrealized gain (loss) on investment
and foreign currency transactions ........................... .05
------
Total from investment operations ............................ .44
------
Dividends from net investment income ......................... (.69)
Distributions in excess of net investment income ............. (.19)
------
Total distributions ......................................... (.88)
------
Net asset value, end of period ............................... $ 7.88
======
TOTAL RETURN(c): ............................................. 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%(b)
Expenses, excluding distribution fees ....................... 1.24%(b)
Net investment income ....................................... 5.41%(b)
Portfolio turnover ........................................... 43%
- ----------
(a) Commencement of operations.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of the period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(d) Calculated based upon weighted average shares outstanding during the
period.
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================================================================================
HOW THE FUND INVESTS
================================================================================
INVESTMENT OBJECTIVE AND POLICIES
THE FUND'S INVESTMENT OBJECTIVE IS TO SEEK TOTAL RETURN, THE COMPONENTS OF
WHICH ARE CURRENT INCOME AND CAPITAL APPRECIATION. THERE IS NO ASSURANCE THAT
THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. AS WITH AN INVESTMENT IN ANY
MUTUAL FUND, AN INVESTMENT IN THIS FUND CAN DECREASE IN VALUE AND YOU CAN LOSE
MONEY.
THE FUND'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY OF THE FUND.
FUNDAMENTAL POLICIES MAY NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A
MAJORITY OF THE FUND'S OUTSTANDING VOTING SECURITIES AS DEFINED IN THE
INVESTMENT COMPANY ACT OF 1940, AS AMENDED (THE INVESTMENT COMPANY ACT). FUND
POLICIES THAT ARE NOT FUNDAMENTAL MAY BE MODIFIED BY THE BOARD OF DIRECTORS.
THE FUND 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 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. SEE
"INVESTMENT OBJECTIVE AND POLICIES" IN THE STATEMENT OF ADDITIONAL INFORMATION.
THE FUND WILL INVEST PRIMARILY IN INVESTMENT GRADE DEBT SECURITIES (I.E.,
THOSE RATED IN ONE OF THE FOUR HIGHEST RATING CATEGORIES BY MOODY'S, S&P OR
ANOTHER NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION (NRSRO), 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 COMPARABLY RATED BY ANOTHER NRSRO, OR, IF UNRATED, DEEMED TO
BE OF EQUIVALENT QUALITY BY THE INVESTMENT ADVISER. See "Risk Factors--Medium
and Lower-Rated Securities" below. Under normal circumstances, the Fund intends
to maintain investments in at least three countries (including the United
States). The Fund will not normally invest in securities denominated in a
particular currency, including U.S. dollars, if immediately thereafter
securities denominated in such currency would exceed 40% of the Fund's total
assets. For temporary defensive and cash management purposes, the Fund may
invest without limit in U.S. Treasury or other dollar denominated debt
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, its instrumentalities
or agencies.
The Fund may invest up to 35% of its total assets in corporate debt
securities and other non-government debt securities and (subject to the Fund's
maturity limitations) in intermediate-term and long-term bank debt securities in
the United States and in foreign countries denominated in U.S. dollars or in
foreign currencies. See "Corporate and Other Non-Government Debt Securities"
below. The Fund may also engage in various strategies using derivatives,
including the use of options on securities and currencies and futures contracts
and options thereon. See "Hedging and Return Enhancement Strategies" below.
The Fund will maintain, under normal circumstances, an average maturity of
not more than ten years and, in general, will not invest in securities with
remaining maturities greater than ten years. The average maturity of the Fund's
portfolio will be actively managed in light of market conditions and trends.
Generally, when the investment adviser expects interest rates to rise, the
average maturity of the Fund's portfolio will be shortened. Conversely, when the
investment adviser expects interest rates to fall, the average maturity of the
Fund's portfolio will be lengthened.
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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.
U.S. GOVERNMENT SECURITIES
THE U.S. GOVERNMENT SECURITIES IN WHICH THE FUND MAY INVEST INCLUDE U.S.
TREASURY SECURITIES, SECURITIES ISSUED OR GUARANTEED BY THE U.S. GOVERNMENT, ITS
AGENCIES OR INSTRUMENTALITIES, AND MORTGAGE-RELATED SECURITIES ISSUED BY U.S.
GOVERNMENT AGENCIES OR INSTRUMENTALITIES.
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 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. See "Investment Objective
and Policies--Corporate and Other Non-Government Debt Securities" in the
Statement of Additional Information.
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
11
<PAGE>
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. See "Investment Objective and
Policies--U.S. Government Securities" in the Statement of Additional
Information. These certificates are in most cases "pass-through" instruments,
through which the holder receives a share of all interest and principal payments
from the mortgages underlying the certificate, net of certain fees.
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. See "Investment Objective and Policies" in the Statement of
Additional Information. 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).
FOREIGN GOVERNMENT SECURITIES
FOREIGN GOVERNMENT SECURITIES INCLUDE DEBT SECURITIES ISSUED OR GUARANTEED,
AS TO PAYMENT OF PRINCIPAL AND INTEREST, BY GOVERNMENTS, SEMI-GOVERNMENTAL
ENTITIES, GOVERNMENTAL AGENCIES, SUPRANATIONAL ENTITIES AND OTHER GOVERNMENTAL
ENTITIES (COLLECTIVELY, GOVERNMENT ENTITIES). The Fund may invest in the Foreign
Government securities of developed countries and developing or emerging market
countries that the investment adviser believes to be stable. Foreign Government
securities may be denominated in U.S. dollars or in foreign currencies.
A "supranational entity" is an entity constituted by the national
governments of several countries to promote economic development. Examples of
such supranational entities include, among others, the World Bank (International
Bank for Reconstruction and Development), the European Investment Bank and the
Asian Development Bank. Debt securities of "semi-governmental entities" are
issued by 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-government
issuers include, among others, the Province of Ontario and the City of
Stockholm.
Foreign Government securities also include debt securities of Government
Entities denominated in European Currency Units. A European Currency Unit
represents specified amounts of the currencies of certain of the fifteen member
states of the European Union. Foreign Government securities also include
mortgage-backed securities issued or guaranteed by foreign Government Entities
including semi-governmental entities and Brady Bonds, which are long-term bonds
issued by Government Entities in developing countries as part of a restructuring
of their commercial loans. See "Investment Objective and Policies--Foreign
Securities" in the Statement of Additional Information.
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<PAGE>
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 a 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 WITHOUT LIMITATION IN COMMERCIAL PAPER AND OTHER
INSTRUMENTS WHICH ARE INDEXED TO CERTAIN SPECIFIC FOREIGN CURRENCY EXCHANGE
RATES. The terms of such instruments provide that its principal amount is
adjusted upwards or downwards (but not below zero) at maturity to reflect
changes in the exchange rate between two currencies while the obligation is
outstanding. The Fund will purchase such instruments with the currency in which
it is denominated and, at maturity, will receive interest and principal payments
thereon in that currency, but the amount of principal payable by the issuer at
maturity will change in proportion to the change (if any) in the exchange rate
between the two specified currencies between the date the instrument is issued
and the date the instrument matures. While such instruments entail the risk of
loss of principal, the potential for realizing gains as a result of changes in
foreign currency exchange rates enables the Fund to hedge (or cross-hedge)
against a decline in the U.S. dollar value of investments denominated in foreign
currencies while providing an attractive money market rate of return.
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 (i) obligations from
which the interest coupons have been stripped (principal only); (ii) the
interest coupons that are stripped (interest only); (iii) book-entries at a bank
representing ownership of obligation components; or (iv) 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.
CORPORATE AND OTHER NON-GOVERNMENT DEBT SECURITIES
THE FUND MAY INVEST IN CORPORATE AND OTHER NON-GOVERNMENT DEBT OBLIGATIONS
OF DOMESTIC AND FOREIGN ISSUERS INCLUDING CONVERTIBLE SECURITIES AND (SUBJECT TO
THE FUND'S MATURITY LIMITATIONS) IN INTERMEDIATE-TERM AND LONG-TERM BANK DEBT
SECURITIES IN THE UNITED STATES AND IN FOREIGN COUNTRIES DENOMINATED IN U.S.
DOLLARS OR IN FOREIGN CURRENCIES. ISSUERS ARE NOT LIMITED TO THE CORPORATE FORM
OF ORGANIZATION. Bonds and other debt securities are used by issuers to borrow
money from investors. The issuer pays the investor a fixed or variable rate of
interest and must repay
13
<PAGE>
the amount borrowed at maturity. Some debt securities, such as zero coupon
bonds, do not pay current interest but are purchased at a discount from their
face values. The discount approximates the total amount of interest the security
will accrue and compound over the period until maturity or the particular
interest payment date at a rate of interest reflecting the market rate of the
security at the time of issuance.
Zero coupon securities do not require the periodic payment of interest.
These investments benefit the issuer by mitigating its need for cash to meet
debt service, but also require a higher rate of return to attract investors who
are willing to defer receipt of cash. These investments may experience greater
volatility in market value than securities that make regular payments of
interest. The Fund accrues income on these investments for tax and accounting
purposes, which is distributable to shareholders and which, because no cash is
received at the time of accrual, may require the liquidation of other portfolio
securities to satisfy the Fund's distribution obligations, in which case the
Fund will forego the purchase of additional income producing assets with these
funds. Zero coupon securities include both corporate and U.S. and foreign
government securities. Pay-in-kind securities have their interest payable upon
maturity by delivery of additional 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 payable at
regular intervals. Certain debt securities are subject to call provisions. 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 comparable rated securities paying cash interest at regular
interest payment periods. See "Investment Objective and Policies--Corporate and
Other Non-Government Debt Securities" in the Statement of Additional
Information.
THE FUND IS PERMITTED TO INVEST IN ADJUSTABLE RATE OR FLOATING RATE DEBT
SECURITIES, INCLUDING CORPORATE SECURITIES AND SECURITIES ISSUED BY U.S.
GOVERNMENT AGENCIES, WHOSE INTEREST RATE IS CALCULATED BY REFERENCE TO A
SPECIFIED INDEX SUCH AS THE CONSTANT MATURITY TREASURY RATE, THE T-BILL RATE OR
LIBOR (LONDON INTERBANK OFFERED RATE) AND IS RESET PERIODICALLY. Adjustable rate
securities allow the Fund to participate in increases in interest rates through
these periodic adjustments. The value of adjustable or floating rate securities
will, like other debt securities, generally vary inversely with changes in
prevailing interest rates. The value of adjustable or floating rate securities
is unlikely to rise in periods of declining interest rates to the same extent as
fixed rate instruments of similar maturities. In periods of rising interest
rates, changes in the coupon will lag behind changes in the market rate
resulting in a lower net asset value until the coupon resets to market rates.
MONEY MARKET INSTRUMENTS
The Fund may invest in high quality money market instruments, including,
among others, commercial paper of a U.S. or non-U.S. company, foreign government
securities, certificates of deposit, bankers' acceptances and time deposits of
domestic and foreign banks, and obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities. These obligations will be U.S.
dollar denominated or denominated in a foreign currency. Money market
instruments typically have a maturity of one year or less as measured from the
date of purchase. The Fund may invest in money market instruments without limit
for temporary defensive and cash management purposes. To the extent the Fund
otherwise invests in money market instruments, it is subject to the limitations
described above.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Fund will enter into repurchase agreements whereby the seller of the
security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The repurchase date is usually within a day or two
of the original purchase, although it may extend over a number of months. The
Fund does not currently intend to invest in repurchase agreements whose
maturities exceed one year. The Fund's repurchase agreements will at all times
be fully collateralized in an amount at least equal to the resale price. In the
event of a default or bankruptcy by a seller, the Fund will promptly
14
<PAGE>
seek to liquidate the collateral. To the extent that the proceeds from any sale
of such collateral upon a default in the obligation to repurchase are less than
the repurchase price, the Fund will suffer a loss. The Fund participates in a
joint repurchase account with other investment companies managed by PIFM
pursuant to an order of the Commission. See "Additional Investment
Policies--Repurchase Agreements" in the Statement of Additional Information.
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. Restricted securities eligible
for resale pursuant to Rule 144A under the Securities Act of 1933, as amended
(the Securities Act), and privately placed commercial paper that have a readily
available market are not considered illiquid for purposes of this limitation.
The investment adviser will monitor the liquidity of such restricted securities
under the supervision of the Board of Directors. The Fund's investment in Rule
144A securities could have the effect of increasing illiquidity to the extent
that qualified institutional buyers become, for a time, uninterested in
purchasing Rule 144A securities. Repurchase agreements subject to demand are
deemed to have a maturity equal to the applicable notice period.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase or sell securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place in the future in order to secure what is considered to be an advantageous
price and yield to the Fund at the time of entering into the transaction. The
Fund's Custodian will maintain, in a segregated account of the Fund, 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.
Subject to this segregation requirement, the Fund may purchase securities on
such basis without limit.
BORROWING
The Fund may borrow up to 20% of the value of its total assets (calculated
at the time of the borrowing) from banks for temporary, extraordinary or
emergency purposes, for the clearance of transactions or for investment
purposes. The Fund may pledge up to 20% of its total assets to secure these
borrowings. If the Fund's asset coverage for borrowing falls below 300%, the
Fund will take prompt action 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.
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."
PORTFOLIO TURNOVER
As a result of the Fund's investment policies, its portfolio turnover rate
may exceed 100%, although the rate is not expected to exceed 250%. High
portfolio turnover (over 100%) may involve correspondingly greater brokerage
15
<PAGE>
commissions (or mark-ups) and other transaction rates, which will be borne
directly by the Fund. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information. In addition, high portfolio turnover may
result in increased short-term capital gains, which, when distributed to
shareholders, are treated as ordinary income. See "Taxes, Dividends and
Distributions."
HEDGING AND RETURN ENHANCEMENT STRATEGIES
THE FUND MAY ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING USING
DERIVATIVES, TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO
ENHANCE RETURN, BUT NOT FOR SPECULATION. THE FUND, AND THUS ITS INVESTORS, MAY
LOSE MONEY THROUGH ANY UNSUCCESSFUL USE OF THESE STRATEGIES. These strategies
currently include the use of options, foreign currency contracts and futures
contracts and options thereon (including interest rate futures contracts and
currency futures contracts and options thereon). The Fund's ability to use these
strategies may be limited by market conditions, regulatory limits and tax
considerations and there can be no assurance that any of these strategies will
succeed. See "Additional Investment Policies" and "Taxes, Dividends and
Distributions" in the Statement of Additional Information. New financial
products and risk management techniques continue to be developed and the Fund
may use these new investments and techniques to the extent consistent with its
investment objective and policies.
OPTIONS TRANSACTIONS
THE FUND MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON
SECURITIES AND CURRENCIES THAT ARE TRADED ON U.S. AND FOREIGN SECURITIES
EXCHANGES OR IN THE OVER-THE-COUNTER MARKET TO ATTEMPT TO ENHANCE RETURN OR TO
HEDGE ITS PORTFOLIO INVESTMENTS. THESE OPTIONS WILL BE ON DEBT SECURITIES,
AGGREGATES OF DEBT SECURITIES, FINANCIAL INDICES, U.S. GOVERNMENT SECURITIES
(LISTED ON AN EXCHANGE AND OVER-THE-COUNTER, I.E., PURCHASED OR SOLD THROUGH
U.S. GOVERNMENT SECURITIES DEALERS), FOREIGN GOVERNMENT SECURITIES AND FOREIGN
CURRENCIES. The Fund may write covered put and call options to attempt to
generate additional income through the receipt of premiums, purchase put options
in an effort to protect the value of a security that it owns against a decline
in market value and purchase call options in an effort to protect against an
increase in price of securities (or currencies) it intends to purchase. The Fund
may also purchase put and call options to offset previously written put and call
options of the same type. See "Additional Investment Policies--Options on
Securities" in the Statement of Additional Information.
A CALL OPTION GIVES THE PURCHASER, IN EXCHANGE FOR A PREMIUM PAID, THE
RIGHT FOR A SPECIFIED PERIOD OF TIME TO PURCHASE THE SECURITIES OR CURRENCY
SUBJECT TO THE OPTION AT A SPECIFIED PRICE (THE EXERCISE PRICE OR STRIKE PRICE).
The writer of a call option, in return for the premium, has the obligation, upon
exercise of the option, to deliver, depending upon the terms of the option
contract, the underlying securities or a specified amount of cash to the
purchaser upon receipt of the exercise price. When the Fund writes a call
option, it gives up the potential for gain on the underlying securities or
currency in excess of the exercise price of the option during the period that
the option is open. There is no limitation on the amount of call options the
Fund may write.
A PUT OPTION GIVES THE PURCHASER, IN RETURN FOR A PREMIUM, THE RIGHT, FOR A
SPECIFIED PERIOD OF TIME, TO SELL THE SECURITIES OR CURRENCY 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 or currency underlying the option at the
exercise price. The Fund might, therefore, be obligated to purchase the
underlying securities or currency for more than their current market price.
THE FUND WILL WRITE ONLY "COVERED" OPTIONS. A written 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) maintains in a segregated account
cash or other liquid assets in 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. See
"Additional Investment Policies--Options on Securities--Additional Risks of
Options, Futures Contracts and Options on Futures Contracts" in the Statement of
Additional Information.
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FOREIGN CURRENCY EXCHANGE CONTRACTS
THE FUND MAY ENTER INTO FOREIGN CURRENCY EXCHANGE CONTRACTS TO PROTECT THE
VALUE OF ITS PORTFOLIO AGAINST FUTURE CHANGES IN THE LEVEL OF CURRENCY EXCHANGE
RATES. The Fund may enter into such contracts on a spot, i.e., cash, basis at
the rate then prevailing in the currency exchange market or on a forward basis,
by entering into a forward contract to purchase or sell currency. A forward
contract on foreign currency is an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days agreed upon by
the parties from the date of the contract at a price set on the date of the
contract.
THE FUND'S DEALINGS IN FORWARD CONTRACTS WILL BE LIMITED TO HEDGING
INVOLVING EITHER SPECIFIC TRANSACTIONS OR PORTFOLIO POSITIONS. Transaction
hedging is the purchase or sale of a forward contract 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 or
dividends receivable and Fund expenses. Position hedging is the sale of a
foreign currency with respect to portfolio security positions denominated or
quoted in or convertible into that currency or in a different currency (cross
hedge). The Fund may also cross hedge its currency exposure under circumstances
where the investment adviser believes that the currency in which a security is
denominated may deteriorate against the dollar and that the possible loss in
value can be hedged, return can be enhanced and risks can be managed by entering
into forward contracts to sell the deteriorating currency and buy a currency
that is expected to appreciate in relation to the dollar. Although there are no
limits on the number of forward contracts which the Fund may enter into, 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. See "Additional Investment Policies--Foreign Currency
Exchange Contracts" in the Statement of Additional Information.
The Fund will not enter into forward contracts to purchase or sell currency
if, as a result thereof, the net liquidation value of all such contracts exceeds
5% of the Fund's net assets.
FUTURES CONTRACTS AND OPTIONS THEREON
THE FUND MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS AND OPTIONS
THEREON WHICH ARE TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE FOR CERTAIN
HEDGING AND RISK MANAGEMENT PURPOSES AND TO ATTEMPT TO ENHANCE RETURN IN
ACCORDANCE WITH REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION (CFTC).
THE FUND, AND THUS ITS INVESTORS, MAY LOSE MONEY THROUGH ANY UNSUCCESSFUL USE OF
THESE STRATEGIES. These futures contracts and related options will be on debt
securities, aggregates of debt securities, financial indices, U.S. Government
securities, Foreign Government securities, foreign currencies and composite
foreign currencies. A financial futures contract is an agreement to purchase or
sell an agreed amount of securities or currencies at a set price for delivery
in the future.
The Fund may not purchase or sell futures contracts and related options to
attempt to enhance return or for risk management purposes, if immediately
thereafter the sum of the amount of initial margin deposits on the Fund's
existing futures and options on futures and premiums paid for such related
options would exceed 5% of the market value of the Fund's total assets. The Fund
may purchase and sell futures contracts and related options without limitation,
for bona fide hedging purposes in accordance with regulations of the CFTC (i.e.,
to reduce certain risks of its investments). The total contract value of all
futures contracts sold will not exceed the total market value of the Fund's
investments.
Futures contracts and related options are generally subject to segregation
requirements of the Commission and the coverage requirements of the CFTC. If the
Fund does not hold the security or currency underlying the futures contract, the
Fund will be required to segregate on an ongoing basis with its Custodian cash
or other liquid assets in an amount at least equal to the Fund's obligations
with respect to such futures contracts. The Fund may place and maintain cash,
securities and similar investments with a futures commission merchant in amounts
necessary to effect the Fund's transactions in exchange-traded futures contracts
and options thereon, provided certain conditions are satisfied.
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THE FUND'S SUCCESSFUL USE OF FUTURES CONTRACTS AND RELATED OPTIONS DEPENDS
UPON THE INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET AND
IS SUBJECT TO VARIOUS ADDITIONAL RISKS. The correlation between movements in the
price of a futures contract and the price of the securities being hedged is
imperfect and there is a risk that the value of the securities being hedged may
increase or decrease at a greater rate than a specified futures contract,
resulting in losses to the Fund. Certain futures exchanges or boards of trade
have established daily limits on the amount that the price of a futures contract
or related options 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 related options on any particular day.
THE FUND'S ABILITY TO ENTER INTO OR CLOSE OUT FUTURES CONTRACTS AND OPTIONS
THEREON IS LIMITED BY THE REQUIREMENTS OF THE INTERNAL REVENUE CODE FOR
QUALIFICATION AS A REGULATED INVESTMENT COMPANY. See "Additional Investment
Policies--Futures Contracts and --Options on Futures Contracts" and "Taxes,
Dividends and Distributions" in the Statement of Additional Information.
RISK FACTORS
FOREIGN INVESTMENTS
INVESTING IN SECURITIES ISSUED BY FOREIGN GOVERNMENTS INVOLVES
CONSIDERATIONS AND POSSIBLE RISKS NOT TYPICALLY ASSOCIATED WITH INVESTING IN
OBLIGATIONS ISSUED BY THE U.S. GOVERNMENT AND DOMESTIC CORPORATIONS. The values
of foreign investments are affected by changes in currency rates or exchange
control regulations, application of foreign tax laws, including withholding
taxes, changes in governmental administration or economic or monetary policy (in
this country or abroad) or changed circumstances in dealings between nations.
Costs are incurred in connection with conversions between various currencies. In
addition, foreign brokerage commissions are generally higher than in the United
States, and foreign securities markets may be less liquid, more volatile and
less subject to governmental supervision than in the United States. Investments
in foreign countries could be affected by other factors not present in the
United States, including expropriation, confiscatory taxation, lack of uniform
accounting and auditing standards and potential difficulties in enforcing
contractual obligations and could be subject to extended settlement periods.
THE FUND WILL INVEST IN FOREIGN GOVERNMENT SECURITIES DENOMINATED IN
FOREIGN CURRENCIES. A CHANGE IN THE VALUE OF ANY SUCH CURRENCY AGAINST THE U.S.
DOLLAR WILL RESULT IN A CORRESPONDING CHANGE IN THE U.S. DOLLAR VALUE OF THE
FUND'S 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
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<PAGE>
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 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" in the Statement of
Additional Information.
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.
MEDIUM AND LOWER-RATED SECURITIES
The Fund may invest in medium grade securities (i.e., rated Baa by Moody's,
BBB by S&P's or comparably rated by another NRSRO) and up to 10% of its total
assets in lower-rated securities (i.e., rated lower than Baa by Moody's, lower
than BBB by S&P's or comparably rated by another NRSRO) or, in either case if
unrated, deemed to be of equivalent quality by the investment adviser. However,
the Fund will not purchase a security rated lower than B by Moody's or S&P's.
Securities rated Baa by Moody's, although considered investment grade, possess
speculative characteristics, and changes in economic or other conditions are
more likely to impair the ability of issuers of these securities to make
interest and principal payments than is the case with respect to issuers of
higher-grade bonds. See "Appendix A--Description of Security Ratings."
Generally, lower-rated securities and unrated securities of comparable
quality, commonly referred to as junk bonds (i.e., securities rated lower than
Baa by Moody's or BBB by S&P's or comparably rated by another NRSRO), offer a
higher current yield than is offered by higher-rated securities, but also (i)
will likely have some quality and protective characteristics that, in the
judgment of the rating organizations, are outweighed by large uncertainties or
major risk exposures to adverse conditions and (ii) are predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. The market values of
certain of these securities also tend to be more sensitive to individual issuer
developments and changes in economic conditions than higher-quality bonds. In
addition, medium and lower-rated securities and comparable unrated securities
generally present a higher degree of credit risk. The risk of loss due to
default by these issuers is significantly greater because medium and lower-rated
securities and unrated securities of comparable quality generally are unsecured
and frequently are subordinated to the prior payment of senior indebtedness. The
investment adviser, under the supervision of the Manager and the Directors, in
evaluating the creditworthiness of an issuer whether rated or unrated, takes
various factors into consideration, which may include, as applicable, the
issuer's financial resources, its sensitivity to economic conditions and trends
and regulatory matters.
In addition, the market value of securities in lower-rated categories is
more volatile than that of higher-quality securities, and the markets in which
medium and lower-rated or unrated securities are traded are more limited than
those in which higher-rated securities are traded. The existence of limited
markets may make it more difficult for the Fund to obtain accurate market
quotations for purposes of valuing its portfolio and calculating its net asset
value. Moreover, the lack of a liquid trading market may restrict the
availability of securities for the Fund to purchase and may also have the effect
of limiting the ability of the Fund to sell securities at their fair value
either to meet redemption requests or to respond to changes in the economy or
the financial markets.
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
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<PAGE>
investors. Also, as the principal value of bonds moves inversely with movements
in interest rates, in the event of rising interest rates the value of the
securities held by the Fund may decline proportionately more than a portfolio
consisting of higher-rated securities. If the Fund experiences unexpected net
redemptions, it may be forced to sell its higher-rated bonds, resulting in a
decline in the overall credit quality of the securities held by the Fund and
increasing the exposure of the Fund to the risks of lower-rated securities.
Investments in zero coupon bonds may be more speculative and subject to greater
fluctuations in value due to changes in interest rates than bonds that pay
interest currently.
Subsequent to its purchase by a 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 investment adviser will consider this event in its determination of whether
the Fund should continue to hold the securities.
During the year ended December 31, 1997, 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 = 67.90%
AA/Aa = 6.62
A/A = 4.42
BBB/Baa = 12.38
BB/Ba = 5.74
B/B = 1.32
CCC/Caa = --
CC/Ca = --
Unrated = 1.62
RISKS OF HEDGING 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 ITS
INVESTORS, MAY LOSE MONEY THROUGH ANY UNSUCCESSFUL USE OF THESE STRATEGIES. If
the investment adviser's prediction 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 and foreign
currencies include (1) dependence on the investment adviser's ability to predict
correctly movements in the direction of interest rates, securities prices and
currency markets; (2) imperfect correlation between the price of options and
futures contracts and options thereon and movements in the prices of the
securities or currencies being hedged; (3) the fact that skills needed to use
these strategies are different from those needed to select portfolio securities;
(4) the possible absence of a liquid secondary market for any particular
instrument at any time; (5) the possible need to defer closing out certain
hedged positions to avoid adverse tax consequences; 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 security at a disadvantageous time, due to the need for the Fund to
maintain "cover" or to segregate securities in connection with hedging
techniques. See "Taxes, Dividends and Distributions" in the Statement of
Additional Information.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
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================================================================================
HOW THE FUND IS MANAGED
================================================================================
THE FUND HAS A BOARD OF DIRECTORS WHICH, IN ADDITION TO OVERSEEING THE
ACTIONS OF THE FUND'S MANAGER, INVESTMENT ADVISER AND DISTRIBUTOR, AS SET FORTH
BELOW, DECIDE UPON MATTERS OF GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND
SUPERVISES THE DAILY BUSINESS OPERATIONS OF THE FUND. THE FUND'S INVESTMENT
ADVISER FURNISHES DAILY INVESTMENT ADVISORY SERVICES.
For the period ended December 31, 1997, the Fund's total expenses as a
percentage of average net assets for Class A, Class B, Class C and Class Z
shares were 1.39%, 1.99%, 1.99% and 1.24% (annualized), respectively. See
"Financial Highlights."
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS THE MANAGER
OF THE FUND AND IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF .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. PIFM is organized in New York as a limited liability
company. For the fiscal year ended December 31, 1997, the Fund paid management
fees to PIFM of .75% of the Fund's average net assets. See "Manager" in the
Statement of Additional Information.
As of January 31, 1998, PIFM served as the manager of 42 open-end
investment companies, constituting all of the Prudential Mutual Funds, and as
manager or administrator to 22 closed-end investment companies with aggregate
assets of approximately $63 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM MANAGES THE INVESTMENT
OPERATIONS OF THE FUND AND ALSO ADMINISTERS THE FUND'S CORPORATE AFFAIRS. See
"Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PIFM AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI), PI THROUGH A
SUBADVISORY AGREEMENT WITH PRICOA ASSET MANAGEMENT LTD. (PRICOA, AND
COLLECTIVELY WITH PI, THE INVESTMENT ADVISER) FURNISHES INVESTMENT ADVISORY
SERVICES IN CONNECTION WITH THE MANAGEMENT OF THE FUND. PI REIMBURSES PRICOA,
AND PIFM REIMBURSES PI, FOR ITS REASONABLE COSTS AND EXPENSES INCURRED IN
PROVIDING SUCH SERVICES. PIFM continues to have responsibility for all
investment advisory services pursuant to the Management Agreement and supervises
the investment adviser's performance of such services.
The Fund is managed by J. Gabriel Irwin and Simon Wells, who head a Global
Fixed Income Group of PI. As a team, they have responsibility for the day-to-day
management of the Fund's portfolio. Messrs. Irwin and Wells have been officers
of PRICOA since August 1997 and have been employed by PI and Prudential-Bache
Securities (U.K.) Inc. since April 1995. Messrs. Irwin and Wells were previously
employed by Smith Barney Global Capital Management Inc., where they worked
together as Directors and senior members of the Investment Policy Committee and
managed approximately $1.5 billion in institutional and mutual fund assets.
Messrs. Irwin and Wells also serve as the portfolio managers of Prudential
Global Limited Maturity Fund, Inc. (Limited Maturity Portfolio), Prudential
Intermediate Global Income Fund, Inc. and Prudential International Bond Fund,
Inc.
PIFM and PIC are wholly-owned subsidiaries of Prudential, a major
diversified insurance and financial services company. PIC's address is
Prudential Plaza, Newark, New Jersey 07102-3777. PRICOA, a subsidiary of
Prudential, is a private limited company organized under the laws of England and
regulated by IMRO in the conduct of its investment business. Its address is 115
Houndsditch, London EC3A 7BU.
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DISTRIBUTOR
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC (THE DISTRIBUTOR), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS A LIMITED
LIABILITY COMPANY CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE
AND SERVES AS THE DISTRIBUTOR OF THE CLASS A, CLASS B, CLASS C AND CLASS Z
SHARES OF THE FUND. IT IS A WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL. Prudential
Securities Incorporated, One Seaport Plaza, New York, New York 10292, previously
served as the exclusive distributor of Fund shares and will serve as a
co-distributor of the Fund for shares sold through its financial advisors until
approximately July 1, 1998. Thereafter, Prudential Investment Management
Services LLC will serve as the exclusive distributor of Fund shares. Prudential
Securities Incorporated is an indirect, wholly-owned subsidiary of Prudential.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS
B PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), THE DISTRIBUTOR INCURS THE EXPENSES OF DISTRIBUTING THE
FUND'S CLASS A, CLASS B AND CLASS C SHARES. The Distributor also incurs the
expenses of distributing the Fund's Class Z shares under the Distribution
Agreement, none of which is reimbursed by or paid for by the Fund. These
expenses include commissions and account servicing fees paid to, or on account
of, Dealers 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 the Fund's shares, including lease,
utility, communications and sales promotion expenses.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
The distribution and/or service fees may also be used by the Distributor to
compensate on a continuing basis Dealers that have entered into agreements with
the Distributor in consideration for the distribution, marketing, administrative
and other services and activities provided by Dealers with respect to the
promotion of the sale of the Fund's shares and the maintenance of related
shareholder accounts.
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 ASSET VALUE OF THE CLASS A SHARES.
The Class A Plan provides that (i) up to .25 of 1% of the average daily net
assets of the Class A shares may be used to pay for personal service and/or the
maintenance of shareholder accounts (service fee) and (ii) total distribution
fees (including the service fee of up to .25 of 1%) may not exceed .30 of 1% of
the average daily net assets of the Class A shares. The Distributor has agreed
to limit its distribution related fees payable under the Class A Plan to .15 of
1% of the average daily net assets of the Class A shares for the fiscal year
ending December 31, 1998.
UNDER THE CLASS B AND CLASS C PLANS, THE FUND MAY PAY THE DISTRIBUTOR FOR
ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C SHARES
AT AN ANNUAL RATE OF UP TO 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS B AND
CLASS C SHARES, RESPECTIVELY. The Class B and Class C Plans provide for the
payment to the Distributor of (i) an asset-based sales charge of up to .75 of 1%
of the average daily net assets of the Class B and Class C shares, and (ii) a
service fee of up to .25 of 1% of the average daily net assets of the Class B
and Class C shares; provided that the total distribution-related fee does not
exceed .75 of 1%. The service fee is used to pay for personal service and/or the
maintenance of shareholder accounts. The Distributor has agreed to limit its
distribution-related fees payable under the Class B and Class C Plans to .75 of
1% of the average daily net assets of the Class C shares for the fiscal year
ending December 31, 1998. The Distributor also receives contingent deferred
sales charges from certain redeeming shareholders. See "Shareholder Guide--How
to Sell Your Shares--Contingent Deferred Sales Charges."
For the fiscal year ended December 31, 1997, the Fund paid distribution
expenses of .15%, .75% and .75% of the average daily net assets of the Class A,
Class B and Class C shares, respectively. The Fund records all payments made
22
<PAGE>
under the Plans as expenses in the calculation of net investment income. See
"Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of Class A, Class B and
Class C shares of the Fund will be allocated to each such class based upon the
ratio of sales of each such class to the sales of Class A, Class B or Class C
shares of the Fund other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize the
sale of another class.
Each Plan provides that it shall continue in effect from year to year
provided that a majority of the Board of Directors of the Fund, including a
majority of the Directors who are not "interested persons" of the Fund (as
defined in the Investment Company Act) and who have no direct or indirect
financial interest in the operation of the Plan or any agreement related to the
Plan (the Rule 12b-1 Directors), vote annually to continue the Plan. Each Plan
may be terminated at any time by vote of a majority of the Rule 12b-1 Directors
or of a majority of the outstanding shares of the applicable class of the Fund.
The Fund will not be obligated to pay expenses incurred under any Plan if it is
terminated or not continued.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to Dealers 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.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. governing maximum sales charges. See "Distributor" in
the Statement of Additional Information.
FEE WAIVERS
The Distributor has agreed to limit its distribution fees for the Class A,
Class B and Class C shares as described under "Distributor." Fee waivers will
increase the Fund's yield and total return. See "Performance Information" in the
Statement of Additional Information and "Fund Expenses."
PORTFOLIO TRANSACTIONS
Affiliates of the Distributor may act as brokers and/or futures commission
merchants for the Fund, provided that the commissions, fees or other
remuneration they receive are fair and reasonable. See "Portfolio Transactions
and Brokerage" in the Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and, in that capacity, maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. Its mailing address is P.O. Box
1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS) Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and in
those capacities maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PIFM. Its mailing address is P.O. Box 15035, New
Brunswick, New Jersey 08906-5005.
YEAR 2000
The services provided to the Fund and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of their outside service
providers. Many computer software systems in use today cannot distinguish the
year 2000 from the year 1900 because of the way dates are encoded and
calculated. Such event could have a negative impact on handling securities
trades, payments of interest and dividends, pricing and account services.
Although, at this time, there can be no assurance that there will be no adverse
impact on the Fund, the Manager, the Distributor, the Transfer Agent and the
Custodian have advised the Fund that they have been actively working on
necessary changes to their computer systems to prepare for the year 2000 and
expect that their systems, and those of their outside service providers, will be
adapted in time for that event.
23
<PAGE>
================================================================================
HOW THE FUND VALUES ITS SHARES
================================================================================
THE FUND'S NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING
ITS LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
BOARD OF DIRECTORS HAS FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE
FUND'S NAV TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not
readily available, at fair value as determined in good faith under procedures
established by the Fund's Board of Directors. For valuation purposes, quotations
of foreign securities in a foreign currency are converted to U.S. dollar
equivalents. See "Net Asset Value" in the Statement of Additional Information.
The Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Fund or days on which changes in the
value of the Fund's portfolio securities do not materially affect the NAV.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger
distribution-related fee to which Class B and Class C shares are subject. The
NAV of Class Z shares will generally be higher than the NAV of the other three
classes because Class Z shares are not subject to any distribution and/or
service fees. It is expected, however, that the NAV of the four classes will
tend to converge immediately after the recording of dividends, if any, which
will differ by approximately the amount of the distribution and/or service fee
expense accrual differential among the classes.
================================================================================
HOW THE FUND CALCULATES PERFORMANCE
================================================================================
FROM TIME TO TIME THE FUND MAY ADVERTISE ITS YIELD, AVERAGE ANNUAL TOTAL
RETURN AND AGGREGATE TOTAL RETURN IN ADVERTISEMENTS OR SALES LITERATURE. YIELD
AND TOTAL RETURN ARE CALCULATED SEPARATELY FOR CLASS A, CLASS B, CLASS C AND
CLASS Z SHARES. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT
INTENDED TO INDICATE FUTURE PERFORMANCE. The yield refers to the income
generated by an investment in the Fund over a one-month or 30-day period. This
income is then "annualized;" that is, the amount of income generated by the
investment during that 30-day period is assumed to be generated each 30-day
period for twelve periods and is shown as a percentage of the investment. The
income earned on the investment is also assumed to be reinvested at the end of
the sixth 30-day period. The total return shows how much an investment in the
Fund would have increased (decreased) over a specified period of time (i.e.,
one, five or ten years or since inception of the Fund) assuming that all
distributions and dividends by the Fund were reinvested on the reinvestment
dates during the period and less all recurring fees. The aggregate total return
reflects actual performance over a stated period of time. Average annual total
return is a hypothetical rate of return that, if achieved annually, would have
produced the same aggregate total return if performance had been constant over
the entire period. Average annual total return smooths out variations in
performance and takes into account any applicable initial or contingent deferred
sales charges. Neither average annual total return nor aggregate total return
takes into account any federal or state income taxes which may be payable upon
redemption. The Fund also may include comparative performance information in
advertising or marketing the Fund's shares. Such performance information may
include data from Lipper Analytical Services, Inc., Morningstar Publications,
Inc., other industry publications, business periodicals and market indices. See
"Performance Information" in the Statement of Additional Information. Further
performance information is contained in the Fund's annual and semi-annual
reports to shareholders, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
24
<PAGE>
================================================================================
TAXES, DIVIDENDS AND DISTRIBUTIONS
================================================================================
TAXATION OF THE FUND
THE FUND HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
FUND WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND NET CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS.
Gains or losses on disposition of debt securities denominated in a foreign
currency attributable to fluctuations in the value of 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 or losses increase or decrease the
amount of the Fund's investment company taxable income available to be
distributed to shareholders as ordinary income, rather than increasing or
decreasing the amount of the Fund's net capital gain. If currency losses exceed
other investment company taxable income during a taxable year, distributions
made by the Fund during the year would be a return of capital to you, reducing
your basis in your Fund shares. See "Dividends and Distributions" below.
The Fund may incur foreign income taxes in connection with some of its
foreign investments. Certain of these taxes may be credited to shareholders. The
Fund may be permitted to "pass through" to shareholders the right to take
credits against federal income taxes or deductions in respect of foreign taxes
paid by the Fund. See "Taxes, Dividends and Distributions" in the Statement of
Additional Information.
Under the Internal Revenue Code, special rules apply to the treatment of
certain options and futures contracts (Section 1256 contracts). At the end of
each fiscal year and at October 31 of such fiscal year, such investments held by
the Fund will be required to be "marked-to-market" for federal income tax
purposes; that is, treated as having been sold at market value. Sixty percent of
any gain or loss recognized on these "deemed sales" and on actual dispositions
may be treated as long-term capital gain or loss, and the remainder will be
treated as short-term capital gain or loss. See "Taxes, Dividends and
Distributions" in the Statement of Additional Information.
TAXATION OF SHAREHOLDERS
Any dividends out of net taxable investment income, together with
distributions of net short-term gains (i.e., the excess of net short-term
capital gains over net long-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not reinvested.
CERTAIN GAINS OR LOSSES FROM FLUCTUATIONS IN EXCHANGE RATES (SECTION 988 GAINS
OR LOSSES) WILL AFFECT THE AMOUNT OF ORDINARY INCOME THE FUND WILL BE ABLE TO
PAY AS DIVIDENDS. SEE "TAXES, DIVIDENDS AND DISTRIBUTIONS" IN THE STATEMENT OF
ADDITIONAL INFORMATION. Any net capital gains (i.e., the excess of net long-term
capital gains over net short-term capital losses) distributed to shareholders
will be taxable as long-term capital gains to the shareholders, whether or not
reinvested and regardless of the length of time a shareholder has owned his or
her shares. The maximum long-term capital gains rate for individual shareholders
for securities held between 12 and 18 months currently is 28% and for securities
held more than 18 months is 20%. The maximum tax rate for ordinary income is
39.6%. The maximum long-term capital gains rate for corporate shareholders
currently is 35%.
Both regular and capital gains dividends are taxable to shareholders in the
year in which received, whether they are received in cash or in additional
shares. In addition, certain dividends declared by the Fund will be treated as
received by shareholders on December 31 of the year the dividends are declared.
This rule applies to dividends declared by the Fund in October, November or
December of a calendar year, payable to shareholders of record on a date in any
such month, if such dividends are paid during January of the following calendar
year.
Dividends received by corporate shareholders are eligible for a
dividends-received deduction of 70% to the extent the Fund's income is derived
from qualified dividends received by the Fund from domestic corporations.
Dividends
25
<PAGE>
attributable to interest income, capital and currency gain, gain or loss from
Section 1256 contracts, dividend income from foreign corporations and income
from some other sources are not eligible for the corporate dividends-received
deduction. See "Taxes, Dividends and Distributions" in the Statement of
Additional Information. Corporate shareholders should consult their tax advisers
regarding other requirements applicable to the dividends-received deduction.
Any gain or loss realized upon a sale or redemption of shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held more than one year and
otherwise as short-term capital gain or loss. Any such loss with respect to
shares that are held six months or less, however, will be treated as a long-term
capital loss to the extent of any capital gain distributions received by the
shareholder. With respect to non-corporate shareholders, gain or loss on shares
held more than 18 months will be considered in determining a holder's adjusted
net capital gain subject to a maximum statutory tax rate of 20%.
The Fund has obtained opinions of counsel to the effect that neither (i)
the conversion of Class B shares into Class A shares nor (ii) the exchange of
any class of the Fund's shares for any other class of its shares constitutes a
taxable event for federal income tax purposes. However, such opinions are not
binding on the Internal Revenue Service.
WITHHOLDING TAXES. Under the Internal Revenue Code, the Fund is required to
withhold and remit to the U.S. Treasury 31% of taxable dividends, capital gain
income and redemption proceeds on the accounts of certain shareholders who fail
to furnish their correct tax identification numbers on IRS Form W-9 (or IRS Form
W-8 in the case of certain foreign shareholders) with the required
certifications regarding the shareholder's status under the federal income tax
law. Withholding at this rate is also required from dividends and capital gains
distributions (but not redemption proceeds) payable to shareholders who are
otherwise subject to backup withholding. Any dividends out of net investment
income and short-term capital gains paid to a foreign shareholder will generally
be subject to U.S. withholding tax at the rate of 30% (or lower treaty rate if
applicable).
Shareholders are advised to consult their own tax advisers regarding
specific questions as to federal, state or local taxes. See "Taxes, Dividends
and Distributions" in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
The Fund expects to declare dividends of net investment income at least
quarterly and make distributions at least annually of any net capital gains.
Dividends will be made without regard to capital losses. Any net realized
currency losses may result in a tax basis return of capital. Any net capital
losses will be carried forward to offset net capital gains in future years.
The per share dividends on Class B and Class C shares will be lower than
the per share dividends on Class A shares as a result of the higher distribution
fee applicable with respect to Class B and Class C shares in relation to Class A
and Class Z shares and lower dividends for Class A shares in relation to Class Z
shares. Distributions of net capital gains, if any, will be in the same amount
per share for each class of shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES, BASED
ON THE NAV OF EACH CLASS ON THE RECORD DATE, OR SUCH OTHER DATE AS THE BOARD OF
DIRECTORS MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT LESS THAN
FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS AND
DISTRIBUTIONS IN CASH. Such election should be submitted to Prudential Mutual
Fund Services LLC, Attention: Account Maintenance, P.O. Box 15035, New
Brunswick, New Jersey 08906-5015. The Fund will notify each shareholder after
the close of the Fund's taxable year of both the dollar amount and the taxable
status of that year's dividends and distributions on a per share basis. To the
extent that, in a given year, distributions to shareholders exceed recognized
net investment income and recognized short-term and long-term capital gains,
shareholders will receive a return of capital in respect of such year and, in an
annual statement, will be notified of the amount of any return of capital for
such year.
26
<PAGE>
As of December 31, 1997, the Fund had a capital loss carryforward for
federal income tax purposes of approximately $2,165,900 which expires in 2002.
Accordingly, no capital gains distribution is expected to be paid to
shareholders until net gains have been realized in excess of such carryforward
amount.
IF YOU BUY SHARES ON OR IMMEDIATELY BEFORE THE RECORD DATE (THE DATE THAT
DETERMINES WHO RECEIVES THE DIVIDEND), YOU WILL RECEIVE A PORTION OF THE MONEY
YOU INVESTED AS A TAXABLE DIVIDEND. THEREFORE, YOU SHOULD CONSIDER THE TIMING OF
DIVIDENDS WHEN BUYING SHARES OF THE FUND.
================================================================================
GENERAL INFORMATION
================================================================================
DESCRIPTION OF COMMON STOCK
THE FUND WAS INCORPORATED IN MARYLAND ON MAY 6, 1986 UNDER THE NAME "THE
GLOBAL YIELD FUND, INC." AS A CLOSED-END, NON-DIVERSIFIED, MANAGEMENT INVESTMENT
COMPANY. THE FUND OPERATED AS A CLOSED-END FUND PRIOR TO JANUARY 15, 1996. ON
DECEMBER 6, 1995, SHAREHOLDERS APPROVED OPEN-ENDING THE FUND AND THE FUND HAS
OPERATED AS AN OPEN-END FUND SINCE JANUARY 15, 1996. THE FUND IS AUTHORIZED TO
ISSUE 2 BILLION SHARES OF COMMON STOCK, $.01 PAR VALUE PER SHARE, DIVIDED INTO
FOUR CLASSES, DESIGNATED CLASS A, CLASS B, CLASS C AND CLASS Z COMMON STOCK,
CONSISTING OF 500 MILLION CLASS A SHARES, 500 MILLION CLASS B SHARES, 500
MILLION CLASS C SHARES AND 500 MILLION CLASS Z SHARES. Each class of common
stock represents an interest in the same assets of the Fund and is identical in
all respects except that (i) each class is subject to different sales charges
and distribution and/or service fees (except for Class Z shares, which are not
subject to any sales charges and distribution and/or service fees) which may
affect performance, (ii) each class has exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and has
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class, (iii) each
class has a different exchange privilege, (iv) only Class B shares have a
conversion feature, and (v) Class Z shares are offered exclusively for sale to a
limited group of investors. See "How the Fund is Managed--Distributor." In
accordance with the Fund's Articles of Incorporation, the Board of Directors may
authorize the creation of additional series of common stock and classes within
such series, with such preferences, privileges, limitations and voting and
dividend rights as the Board of Directors may determine.
The Board of Directors may increase or decrease the number of authorized
shares without the approval of shareholders. Shares of the Fund, when issued,
are fully paid, nonassessable, fully transferable and redeemable at the option
of the holder. Shares are also redeemable at the option of the Fund under
certain circumstances as described under "Shareholder Guide--How to Sell Your
Shares." Each share of each class of common stock is equal as to earnings,
assets and voting privileges, except as noted above, and each class (with the
exception of Class Z shares, which are not subject to any distribution and/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's
shares do not have cumulative voting rights for the election of Directors.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS FOR EXAMPLE THE ELECTION OF DIRECTORS IS REQUIRED TO BE
ACTED ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE DIRECTORS OF THE FUND OR TO TRANSACT ANY OTHER BUSINESS.
27
<PAGE>
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which
has been incorporated by reference herein, does not contain all the information
set forth in the Registration Statement filed by the Fund with the Commission
under the Securities Act of 1933. Copies of the Registration Statement may be
obtained at a reasonable charge from the Commission or may be examined, without
charge, at the office of the Commission in Washington, D.C.
================================================================================
SHAREHOLDER GUIDE
================================================================================
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH THE DISTRIBUTOR, THROUGH
DEALERS, OR DIRECTLY FROM THE FUND THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL
FUND SERVICES LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15035, NEW BRUNSWICK, NEW JERSEY 08906-5020. The purchase price is the
NAV next determined following receipt of an order in proper form by the
Distributor, your Dealer or the Transfer Agent, plus a sales charge which, at
your option, may be imposed either (i) at the time of purchase (Class A shares)
or (ii) on a deferred basis (Class B or Class C shares). Class Z shares are
offered to a limited group of investors at net asset value without any sales
charge. Dealers may charge their customers a separate fee for handling purchase
transactions. Payment may be made by cash, wire, check or through your brokerage
account. See "Alternative Purchase Plan" and "How the Fund Values its Shares."
In order to receive that day's NAV, your order must be received before the
Fund's NAV is computed (currently 4:15 P.M., New York time). If you purchase
shares through your Dealer, the Dealer must receive your order before the Fund's
NAV is computed that day and must transmit the order to the Distributor that
same day for you to receive that day's NAV.
The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares, except that the minimum initial investment for Class
C shares may be waived from time to time. There is no minimum initial investment
requirement for Class Z shares. The minimum subsequent investment is $100 for
all classes except for Class Z shares, for which there is no such minimum. All
minimum investment requirements are waived for certain retirement and employee
savings plans or custodial accounts for the benefit of minors. For purchases
made through the Automatic Savings Accumulation Plan, the minimum initial and
subsequent investment is $50. See "Shareholder Services" below. See "Shareholder
Services" below.
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
If a stock certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares in street name with their Dealer will not receive stock
certificates.
Your Dealer is responsible for forwarding payment promptly to the Fund.
The Distributor reserves the right to cancel any purchase order for which
payment has not been received by the third business day following the placement
of the order.
Transactions in Fund shares may be subject to postage and handling charges
imposed by your Dealer. Any such charge is retained by the Dealer and is not
remitted to the Fund.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire,
you must first telephone PMFS at (800) 225-1852 (toll-free) to receive an
account number. The following information will be requested: your name, address,
tax identification number, dividend distribution election, amount being wired
and wiring bank. Instructions should then be given by you to your bank to
transfer funds by wire to State Street Bank and Trust Company (State Street),
Boston,
28
<PAGE>
Massachusetts, Custody and Shareholder Services Division, Attention: The Global
Total Return Fund, Inc., specifying on the wire the account number assigned by
PMFS and your name and identifying the class in which you are eligible to invest
(Class A, Class B, Class C or Class Z shares).
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time) on a business day, you may
purchase shares of the Fund as of that day. See "Net Asset Value" in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
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 your name and
individual account number. It is not necessary to call PMFS to make subsequent
purchase orders utilizing Federal Funds. The minimum amount which may be
invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS FOUR CLASSES OF SHARES (CLASS A, CLASS B, CLASS C AND CLASS
Z SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE
FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH
OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES
(ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
------------ ------------------------- -----------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 4% .30 of 1% (currently Initial sales charge waived or reduced
of the public offering price being charged at a rate for certain purchases
of .15 of 1%)
CLASS B Maximum CDSC of 5% of the 1% (currently being Shares convert to Class A shares
lesser of the amount invested or charged at a rate of approximately seven years after
the redemption proceeds; declines .75 of 1%) purchase
to zero after six years
CLASS C Maximum CDSC of 1% of the lesser 1% (currently being Shares do not convert to another class
of the amount invested or the charged at a rate of
redemption proceeds on .75 of 1%)
redemptions made within one
year of purchase
CLASS Z None None Sold to a limited group of investors
</TABLE>
The four classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that (i) each class
(with the exception of Class Z shares, which are not subject to any distribution
or service fees) bears the separate expenses of its Rule 12b-1 distribution and
service plan, (ii) each class has exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and has
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class, (iii) each
class has a different exchange privilege, (iv) only Class B shares have a
conversion feature and (v) Class Z shares are offered exclusively for sale to a
limited group of investors. See "How to Exchange Your Shares" below. The income
attributable to each class and the dividends payable on the shares of each class
will be reduced by the amount of the distribution fee (if any) of each class.
Class B and Class C shares bear the expenses of a higher distribution fee which
will generally cause them to have higher expense ratios and to pay lower
dividends than the Class A and Class Z shares.
Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B, Class C and Class Z
shares and will generally receive more compensation initially for selling Class
A and Class B shares than for selling Class C or Class Z shares.
29
<PAGE>
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER
THINGS, (1) the length of time you expect to hold your investment, (2) the
amount of any applicable sales charge (whether imposed at the time of purchase
or redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) the fact that Class B shares automatically
convert to Class A shares approximately seven years after purchase (see
"Conversion Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:
If you intend to hold your investment in the Fund for less than 7 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 4% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for more than 6 years, you should
consider purchasing Class A shares over either Class B or Class C shares
regardless of whether or not you qualify for a reduced sales charge on Class A
shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and Class C shares for the
higher cumulative annual distribution-related fee on those shares to exceed the
initial sales charge plus cumulative annual distribution-related 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 the period of time or redemptions during which the CDSC is applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT
OR UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES
UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. See "Reduction and
Waiver of Initial Sales Charges" and "Class Z Shares" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial
sales charge alternative is the next determined NAV following receipt of an
order by the Transfer Agent, the Distributor or your Broker plus a sales charge
(expressed as a percentage of the offering price and of the amount invested) as
shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION AS
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ------------------ --------------- --------------- -----------------
<S> <C> <C> <C>
Less than $50,000 4.00% 4.17% 3.75%
$50,000 to $99,999 3.50% 3.63% 3.25%
$100,000 to $249,999 2.75% 2.83% 2.50%
$250,000 to $499,999 2.00% 2.04% 1.90%
$500,000 to $999,999 1.50% 1.52% 1.40%
$1,000,000 and above None None None
</TABLE>
The Distributor may reallow the entire sales charge to Dealers. Dealers
may be deemed to be underwriters, as that term is defined under the federal
securities laws. The Distributor reserves the right, without prior notice to any
Dealer, to suspend or eliminate Dealer concessions or commissions.
30
<PAGE>
In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay dealers, financial advisers and other persons which distribute shares
a finders' fee from its own resources based on a percentage of the NAV of shares
sold by such persons.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
BENEFIT PLANS. Class A shares may be purchased at NAV, without payment of
an initial sales charge, by pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal
Revenue Code (collectively, Benefit Plans), provided that the Benefit Plan has
existing assets of at least $1 million invested in shares of Prudential Mutual
Funds (excluding money market funds other than those acquired pursuant to the
exchange privilege) or 250 eligible employees or participants. In the case of
Benefit Plans whose accounts are held directly with the Transfer Agent and for
which the Transfer Agent does individual account record keeping (Direct Account
Benefit Plans) Class A shares may be purchased at NAV by participants who are
repaying loans made from such plans to the participant.
SPECIAL RULES APPLICABLE TO RETIREMENT PLANS. After a Benefit 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 Transfer Agent, by the following persons: (a) officers of the Prudential
Mutual Funds (including the Fund), (b) employees of the Distributor and PIFM and
their subsidiaries and members of the families of such persons who maintain an
"employee related" account at the Transfer Agent, (c) employees of subadvisers
of the Prudential Mutual Funds provided that purchases at NAV are permitted by
such person's employer, (d) Prudential, employees and special agents of
Prudential and its subsidiaries and all persons who have retired directly from
active service with Prudential or one of its subsidiaries, (e) registered
representatives and employees of Dealers provided that purchases at NAV are
permitted by such person's employer, and (f) investors in Individual Retirement
Accounts, provided the purchase is made with the proceeds of a tax-free rollover
of assets from a Benefit Plan for which Prudential Investments serves as the
recordkeeper or administrator, (g) investors previously eligible to purchase
Class A shares at NAV because of their participation in programs sponsored by an
affiliate of the Distributor for certain retirement plan or deferred
compensation plan participants, (h) orders placed by broker-dealers, investment
advisers or financial planners who have entered into an agreement with the
Distributor, who place trades for their own accounts 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 (i) orders placed
by clients of broker-dealers, investment advisers or financial planners who
place trades for their own accounts if the accounts are linked to the master
account of such broker-dealer, investment adviser or financial planner on the
books and records of the broker-dealer, investment adviser or financial planner
(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 Dealer
facilitating the transaction that the sale qualifies for the reduced or waived
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions. See "Purchase and
Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class
A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one
of the deferred sales alternatives is the NAV next determined following receipt
of an order by the Transfer Agent, a Dealer or the Distributor. Although there
is no
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sales charge imposed at the time of purchase, redemptions of Class B and Class C
shares may be subject to a CDSC. See "How to Sell Your Shares--Contingent
Deferred Sales Charges."
The Distributor will pay, from its own resources, sales commissions of up
to 4% of the purchase price of Class B shares to Dealers, financial advisers and
other persons who sell Class B shares at the time of sale. This facilitates the
ability of the Fund to sell the Class B shares without an initial sales charge
being deducted at the time of purchase. The Distributor anticipates that it will
recoup its advancement of sales commissions from the combination of the CDSC and
the distribution fee. See "How the Fund is Managed--Distributor." In connection
with the sale of Class C shares, the Distributor will pay, from its own
resources, Dealers, financial advisers and other persons which distribute Class
C shares a sales commission of up to 1% of the purchase price at the time of the
sale.
CLASS Z SHARES
Class Z shares are currently available for purchase by: (i) 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; (ii) participants in any fee-based program or trust
program sponsored by any affiliate of the Distributor which includes mutual
funds as investment options and for which the Fund is an available option; (iii)
certain participants in the MEDLEY Program (group variable annuity contracts)
sponsored by an affiliate of the Distributor Prudential, for whom Class Z shares
of the Prudential Mutual Funds are an available investment option, (iv) Benefit
Plans for which an affiliate of the Distributor serves as recordkeeper and as of
September 20, 1996, (a) were Class Z shareholders of the Prudential Mutual Funds
or (b) executed a letter of intent to purchase Class Z shares of the Prudential
Mutual Funds, (v) current and former Directors/Trustees of the Prudential Mutual
Funds (including the Fund); and (vi) employees of an affiliate of the
Distributor who participate in an employer-sponsored employee savings plan.
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 Dealers, financial advisers and other persons
which distribute shares a finders' fee, from its own resources, based on a
percentage of the net asset value of shares sold by such persons.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES AT ANY TIME FOR CASH AT THE NAV PER SHARE NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT, THE DISTRIBUTOR OR YOUR DEALER. See "How the Fund Values its
Shares." In certain cases, however, redemption proceeds will be reduced by the
amount of any applicable CDSC, as described below. See "Contingent Deferred
Sales Charges" below. If your are redeeming your shares through a Dealer, your
Dealer must receive your sell order before the Fund computes its NAV for that
day (i.e., 4:15 P.M., New York time) in order to receive that day's NAV. Your
Dealer will be responsible for furnishing all necessary documentation to the
Distributor and may charge you for its services in connection with redeeming
shares of the Fund
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR
REDEMPTION SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF
YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE
OF THE CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT, THE DISTRIBUTOR OR
YOUR DEALER 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 15035, New
Brunswick, New Jersey 08906-5010, the Distributor or to your Dealer.
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If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves this right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT THE DISTRIBUTOR OR YOUR DEALER OF
THE CERTIFICATE AND/OR WRITTEN REQUEST, EXCEPT AS INDICATED BELOW. Such payment
may be postponed or the right of redemption suspended at times (a) when the New
York Stock Exchange is closed for other than customary weekends and holidays,
(b) when trading on such Exchange is restricted, (c) when an emergency exists as
a result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or (d) during any other period when
the Commission, by order, so permits; provided that applicable rules and
regulations of the Commission shall govern as to whether the conditions
prescribed in (b), (c) or (d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL
THE FUND OR THE 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 FUND OR THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY
PURCHASING SHARES BY WIRE OR BY CERTIFIED OR CASHIER'S CHECK.
REDEMPTION IN KIND. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in kind of securities from the investment
portfolio of the Fund, in lieu of cash, in conformity with applicable rules of
the Commission. Securities will be readily marketable (i.e., U.S. Government
securities or securities listed on a national exchange) and will be valued in
the same manner as in a regular redemption. See "How the Fund Values its
Shares." If your shares are redeemed in kind, you would incur transaction costs
in converting the assets into cash. The Fund, however, has elected to be
governed by Rule 18f-1 under the Investment Company Act, under which the Fund is
obligated to redeem shares solely in cash up to the lesser of $250,000 or 1% of
the NAV of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Board
of Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose account
has a NAV of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No CDSC will be imposed on any such
involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the NAV next
determined after the order is received, which must be within 90 days after the
date of the redemption. Any CDSC paid in connection with such redemption will be
credited (in shares) to your account. (If less than a full repurchase is made,
the credit will be on a pro rata basis.) You must notify the Transfer Agent,
either directly or through your Dealer or the Distributor the Distributor, 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. For more
information on the rule which disallows a loss on the sale or exchange of shares
of the Fund which are replaced, see "Taxes, Dividends and Distributions" in the
Statement of Additional Information.
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CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred
sales charge or CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within one year of purchase will be subject to a 1% CDSC. The
CDSC will be deducted from the redemption proceeds and reduce the amount paid to
you. The CDSC will be imposed on any redemption by you which reduces the current
value of your shares to an amount which is lower than the amount of all payments
by you for shares during the preceding six years, in the case of Class B shares,
and one year, in the case of Class C shares. A CDSC will be applied on the
lesser of the original purchase price or the current value of the shares being
redeemed. Increases in the value of your shares or shares acquired through
reinvestment of dividends or distributions are not subject to a CDSC. The amount
of any CDSC will be paid to and retained by the Distributor. See "How the Fund
is Managed--Distributor" and "Waiver of Contingent Deferred Sales Charges--Class
B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares." The following table sets forth the rates of the CDSC
applicable to redemptions of Class B shares:
CDSC AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED
PAYMENT MADE OR REDEMPTION PROCEEDS
------------------ ----------------------
First ..................................... 5.0%
Second .................................... 4.0%
Third ..................................... 3.0%
Fourth .................................... 2.0%
Fifth ..................................... 1.0%
Sixth ..................................... 1.0%
Seventh ................................... None
In determining whether a CDSC is applicable to a redemption, the
calculation will be made in a manner that results in the lowest possible rate.
It will be assumed that the redemption is made first of amounts representing
shares acquired pursuant to the reinvestment of dividends and distributions;
then of amounts representing the increase in NAV above the total amount of
payments for the purchase of Fund shares made during the preceding six years;
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 net
asset value 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 or, in the case of a trust account, following the death or
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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), or a trust, at the time of death or initial
determination of disability, provided that the shares were purchased prior to
death or disability.
The CDSC will also be waived in the case of a total or partial redemption
in connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i) in the case of a
tax-deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59 1/2; and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service (i.e.,
following voluntary or involuntary termination of employment or following
retirement). Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan, unless such
redemptions otherwise qualify for a waiver as described above. In the case of
Direct Account and 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.
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% amount is reached.
In addition, the CDSC will be waived on redemptions of shares held by
Directors of the Fund.
You must notify the Transfer Agent either directly or through your Dealer
at the time of redemption, that you are entitled to waiver of the CDSC and
provide the Transfer Agent with such supporting documentation as it may deem
appropriate. The waiver will be granted subject to confirmation of your
entitlement. See "Purchase and Redemption of Fund Shares--Waiver of the
Contingent Deferred Sales Charge--Class B Shares" in the Statement of Additional
Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately
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seven years before such conversion date. For example, if 100 shares were
initially purchased at $10 per share (for a total of $1,000) and a second
purchase of 100 shares was subsequently made at $11 per share (for a total of
$1,100), 95.24 shares would convert approximately seven years from the initial
purchase (i.e., $1,000 divided by $2,100 (47.62%) multiplied by 200 shares
equals 95.24 shares). The Manager reserves the right to modify the formula for
determining the number of Eligible Shares in the future as it deems appropriate
on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share 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 same, you may receive fewer Class A shares than Class B
shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been made
on the last day of the month, or for Class B shares acquired through exchange,
or a series of exchanges, on the last day of the month in which the original
payment for purchases of such Class B shares was made. For Class B shares
previously exchanged for shares of a money market fund, the time period during
which such shares were held in the money market fund will be excluded. For
example, Class B shares held in a money market fund for one year will not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase of
such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B, Class C and Class Z
shares will not constitute "preferential dividends" under the Internal Revenue
Code and (ii) that the conversion of shares does not constitute a taxable event.
The conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares will continue to be subject, possibly indefinitely, to their higher
annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND YOU HAVE AN EXCHANGE PRIVILEGE WITH CERTAIN
OTHER PRUDENTIAL MUTUAL FUNDS, INCLUDING ONE OR MORE SPECIFIED MONEY MARKET
FUNDS, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A,
CLASS B, CLASS C AND CLASS Z SHARES MAY BE EXCHANGED FOR CLASS A, CLASS B, CLASS
C AND CLASS Z SHARES, RESPECTIVELY, OF ANOTHER FUND ON THE BASIS OF THE RELATIVE
NAV. No sales charge will be imposed at the time of the exchange. Any applicable
CDSC payable upon the redemption of shares exchanged will be that imposed by the
Fund in which shares were initially purchased and will be calculated from the
first day of the month after the initial purchase, excluding the time shares
were held in a money market fund. Class B and Class C shares may not be
exchanged into money market funds other than Prudential Special Money Market
Fund, Inc. For purposes of calculating the holding period applicable to the
Class B conversion feature, the time period during which Class B shares were
held in a money market fund will be excluded. See "Conversion Feature--Class B
Shares" above. An exchange will be treated as a redemption and purchase for tax
purposes. See "Shareholder Investment Account--Exchange Privilege" in the
Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE THE TELEPHONE
EXCHANGE PRIVILEGE ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE
TRANSFER AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call
the Fund at (800) 225-1852 to execute a telephone exchange of shares, on
weekdays, except holidays, between the hours of 8:00 A.M. and 6:00 P.M., New
York time. For your protection and to prevent fraudulent exchanges, your
telephone call will be recorded and you will be asked to provide your personal
identification number. A written confirmation of the exchange transaction will
be sent to you. NEITHER THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS,
LIABILITY OR COST WHICH RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY
BELIEVED TO BE GENUINE UNDER THE FOREGOING
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PROCEDURES. All exchanges will be made on the basis of the relative NAV of the
two funds next determined after the request is received in good order.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON
THE FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15035, New Brunswick, New
Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE
OF SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC, AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGE. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV (see "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges"
above) and for shareholders who qualify to purchase Class Z shares (see
"Alternative Purchase Plan--Class Z Shares" above). Under this exchange
privilege, amounts representing any Class B and Class C shares (which are not
subject to a CDSC) held in such a shareholder's account will be automatically
exchanged for Class A shares for shareholders who qualify to purchase Class A
shares at NAV on a quarterly basis, unless the shareholder elects otherwise.
Similarly, shareholders who qualify to purchase Class Z shares will have their
Class B and Class C shares which are not subject to a CDSC and their Class A
shares exchanged for Class Z shares on a quarterly basis. Eligibility for this
exchange privilege will be calculated on the business day prior to the date of
the exchange. Amounts representing Class B or Class C shares which are not
subject to a CDSC include the following: (1) amounts representing Class B or
Class C shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the net asset value
above the total amount of payments for the purchase of Class B or Class C shares
and (3) amounts representing Class B or Class C shares held beyond the
applicable CDSC period. Class B and Class C shareholders must notify the
Transfer Agent either directly or through their Dealer that they are eligible
for this special exchange privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at NAV.
The exchange privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.
FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, the Fund reserves the right to refuse purchase orders and exchanges
by any person, group or commonly controlled accounts, if, in the Manager's sole
judgment, such person, group or accounts were following a market timing strategy
or were otherwise engaging in excessive trading (Market Timers).
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading. The
Fund may notify the Market Timer of rejection of an exchange or purchase order
subsequent to the day on which the order was placed.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in the Fund, you
can take advantage of the following additional services and privileges.
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o AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Fund at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested.
o AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make
regular purchases of the Fund's shares in amounts as little as $50 via an
automatic debit to a bank account. For additional information about this
service, you may contact the Transfer Agent directly.
o TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the Distributor. These plans are for use by both
self-employed individuals and corporate employers. These plans permit either
self-direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from the Transfer Agent. If you
are considering adopting such a plan, you should consult with your own legal or
tax adviser with respect to the establishment and maintenance of such a plan.
o SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges."
o REPORTS TO SHAREHOLDERS. The Fund will send to you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. In addition, monthly
unaudited financial data are available upon request from the Fund.
o SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, or by
telephone, at (800) 225-1852 (toll-free) or, from outside the U.S.A., at
(732) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
38
<PAGE>
APPENDIX A
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the company ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
SHORT-TERM DEBT RATINGS
Moody's short-term Ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted.
PRIME-1: Issuers rated "Prime-1" (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
PRIME-2: Issuers rated "Prime-2" (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations.
A-1
<PAGE>
STANDARD & POOR'S RATINGS GROUP
DEBT RATINGS
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher-rated categories.
BB, B, CCC, CC: Debt rated BB, B, CCC and CC is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and
CC the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major exposures to adverse conditions.
COMMERCIAL PAPER RATINGS
S&P's commercial paper ratings are current assessments of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-1: This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-2
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
================================================================================
TABLE OF CONTENTS
PAGE
----
FUND HIGHLIGHTS ........................................................... 2
What are the Fund's Risk Factors and Special Characteristics? ............ 2
FUND EXPENSES ............................................................. 5
FINANCIAL HIGHLIGHTS ...................................................... 6
HOW THE FUND INVESTS ...................................................... 10
Investment Objective and Policies ........................................ 10
Other Investments and Policies ........................................... 14
Hedging and Return Enhancement Strategies ................................ 16
Risk Factors ............................................................. 18
Investment Restrictions .................................................. 20
HOW THE FUND IS MANAGED ................................................... 21
Manager .................................................................. 21
Distributor .............................................................. 22
Fee Waivers .............................................................. 23
Portfolio Transactions ................................................... 23
Custodian and Transfer and Dividend Disbursing Agent ..................... 23
Year 2000 ................................................................ 23
HOW THE FUND VALUES ITS SHARES ............................................ 24
HOW THE FUND CALCULATES PERFORMANCE ....................................... 24
TAXES, DIVIDENDS AND DISTRIBUTIONS ........................................ 25
GENERAL INFORMATION ....................................................... 27
Description of Common Stock .............................................. 27
Additional Information ................................................... 28
SHAREHOLDER GUIDE ......................................................... 28
How to Buy Shares of the Fund ............................................ 28
Alternative Purchase Plan ................................................ 29
How to Sell Your Shares .................................................. 32
Conversion Feature--Class B Shares ....................................... 36
How to Exchange Your Shares .............................................. 37
Shareholder Services ..................................................... 37
DESCRIPTION OF SECURITY RATINGS............................................ A-1
================================================================================
MF169P
CUSIP Nos.: Class A: 37936L-30-2
Class B: 37936L-40-1
Class C: 37936L-50-0
Class D: 37936L-20-3
The Global
Total Return Fund, Inc.
PROSPECTUS
[GRAPHIC]
MARCH 4, 1998
[REVISED JUNE 1, 1998]
[LOGO] PRUDENTIAL
INVESTMENTS
