THE GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
PROSPECTUS DATED MARCH 4, 1998
- --------------------------------------------------------------------------------
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 and is available at the Web
site of The Prudential Insurance Company of America (http://www.prudential.com).
Additional information about the Fund has been filed with the Securities and
Exchange Commission (the Commission) in a Statement of Additional Information,
dated March 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.
- --------------------------------------------------------------------------------
Investors are advised to read this Prospectus and retain it for future
reference.
- --------------------------------------------------------------------------------
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>
- --------------------------------------------------------------------------------
FUND HIGHLIGHTS
- --------------------------------------------------------------------------------
The following summary is intended to highlight certain information
contained in this Prospectus and is qualified in its entirety by the more
detailed information appearing elsewhere herein.
- --------------------------------------------------------------------------------
WHAT IS 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 Securities Incorporated (Prudential Securities or The
Distributor), a major securities underwriter and securities and commodities
broker, acts as the Distributor of the Fund's Class A, Class B, Class C and
Class Z shares. 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 38.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund, through its transfer
agent, Prudential Mutual Fund Services LLC (PMFS or the Transfer Agent) at the
net asset value per share (NAV) next determined after receipt of your purchase
order by the Transfer Agent or Prudential Securities plus a sales charge which
may be imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class B or Class C shares). Class Z shares are offered to a
limited group of investors at NAV without any sales charge. 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 Prudential Securities or the Transfer Agent receives your sell order.
However, the proceeds of redemptions of Class B and Class C shares may be
subject to a CDSC. See "Shareholder Guide--How to Sell Your Shares" at page 33.
Participants in programs sponsored by Prudential Retirement Services should
contact their client representative for more information about selling their
Class Z shares.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to declare 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>
- --------------------------------------------------------------------------------
FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES**
(AS A PERCENTAGE OF AVERAGE NET ASSETS) -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
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%
==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
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 -- --
</TABLE>
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.
- ----------
* 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.
+ 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."
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
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."
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1997(D) 1996 1995(A) 1994(A) 1993(A) 1992(A) 1991(A) 1990(A)
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <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 $ 8.57
-------- -------- -------- -------- -------- -------- -------- --------
Net investment income ............. .55 .62 .54 .52 .64 .81 .84 .89
Net realized and unrealized
gain (loss) on investments
and foreign currencies ........... (.18) .32 1.25 (1.22) .74 (.90) (.19) .36
-------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations ...................... .37 .94 1.79 (.70) 1.38 (.09) .65 1.25
-------- -------- -------- -------- -------- -------- -------- --------
Dividends from net
investment income ................ (.68) (.62) (.54) (.17) (.30) (.75) (.62) (.88)
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) (.88)
-------- -------- -------- -------- -------- -------- -------- --------
Redemption fee retained by Fund ... -- .12 -- -- -- -- -- --
Capital charge resulting
from the issuance of
Fund shares ...................... -- -- -- -- -- -- -- .02
-------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of year ...... $ 7.88 $ 8.38 $ 8.44 $ 7.46 $ 8.76 $ 8.10 $ 8.99 $ 8.96
======== ======== ======== ======== ======== ======== ======== ========
Market price per share, end of year $ N/A $ N/A $ 8.25 $ 6.13 $ 8.00 $ 7.50 $ 8.13 $ 8.00
======== ======== ======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN
based on(c):
Market price .................... N/A N/A 49.23% (16.12)% 16.50% 1.75% 9.42% 12.89%
Net asset value ................. 4.55% 13.15% 25.45% (8.10)% 18.12% (.68)% 8.10% 16.18%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) ..... $183,054 $229,770 $559,071 $493,645 $579,942 $535,647 $593,376 $591,339
Average net assets (000) .......... $204,795 $299,026 $549,407 $536,230 $567,128 $570,812 $571,767 $596,824
Ratios to average net assets:
Expenses including
distribution fees ............... 1.39% 1.33% 1.02% 1.04% 1.02% 1.01% .99% 1.03%
Expenses, excluding distribution
fees ............................ 1.24% 1.18% 1.02% 1.04% 1.02% 1.01% .99% 1.03%
Net investment income ............ 6.73% 7.01% 6.50% 6.45% 7.67% 9.39% 9.69% 10.03%
Portfolio turnover rate ........... 43% 32% 256% 583% 370% 192% 141% 221%
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1989(A) 1988(A)
-------- --------
<S> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of year ................ $ 9.41 $ 9.95
-------- --------
Net investment income ............. .94 .99
Net realized and unrealized
gain (loss) on investments
and foreign currencies ........... (.70) .08
-------- --------
Total from investment
operations ...................... .24 1.07
-------- --------
Dividends from net
investment income ................ (.94) (.99)
Distributions from net
realized capital gains ........... -- (.59)
Distributions excess of net
investment income(b) ............. -- --
Distributions in excess of
net capital gains(b) ............. -- --
Tax return of capital
distributions(b) ................. (.14) --
-------- --------
Total distributions .............. (1.08) (1.58)
-------- --------
Redemption fee retained by Fund ... -- --
Capital charge resulting
from the issuance of
Fund shares ...................... -- (.03)
-------- --------
Net asset value, end of year ...... $ 8.57 $ 9.41
======== ========
Market price per share, end of year $ 7.88 $ 9.38
======== ========
TOTAL INVESTMENT RETURN
based on(c):
Market Price .................... (5.06)% 13.15%
Net asset value ................. 2.92% 11.12%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) ..... $595,824 $638,200
Average net assets (000) .......... $613,520 $669,379
Ratios to average net assets:
Expenses including
distribution fees ............... 1.07% 1.01%
Expenses, excluding distribution
fees ............................ 1.07% 1.01%
Net investment income ............ 10.63% 10.00%
Portfolio turnover rate ........... 734% 371%
</TABLE>
- ----------
(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>
- --------------------------------------------------------------------------------
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
<PAGE>
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
9
<PAGE>
- --------------------------------------------------------------------------------
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.
10
<PAGE>
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.
12
<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.
16
<PAGE>
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.
17
<PAGE>
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
18
<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
19
<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.
20
<PAGE>
- --------------------------------------------------------------------------------
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.
21
<PAGE>
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR THE
DISTRIBUTOR), ONE SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION
ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR
OF THE CLASS A, CLASS B, CLASS C AND CLASS Z SHARES OF THE FUND. IT IS AN
INDIRECT, WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS
B PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), THE DISTRIBUTOR INCURS THE EXPENSES OF DISTRIBUTING THE
FUND'S CLASS A, CLASS B AND CLASS C SHARES. The Distributor also incurs the
expenses of distributing the Fund's Class Z shares under the Distribution
Agreement, none of which is reimbursed by or paid for by the Fund. These
expenses include commissions and account servicing fees paid to, or on account
of, financial advisers of Prudential Securities and representatives of Pruco
Securities Corporation (Prusec), an affiliated broker-dealer, commissions and
account servicing fees paid to, or on account of, other broker-dealers or
financial institutions which have entered into agreements with the Distributor,
advertising expenses, the cost of printing and mailing prospectuses to potential
investors and indirect and overhead costs of Prudential Securities and Prusec
associated with the sale of Fund shares, including lease, utility,
communications and sales promotion expenses.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE FUND MAY PAY 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
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.
22
<PAGE>
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 (including Prudential
Securities) and other persons which distribute shares of the Fund (including
Class Z shares). Such payments may be calculated by reference to the net asset
value of shares sold by such persons or otherwise.
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
Prudential Securities may act as a broker and/or futures commission
merchant for the Fund, provided that the commissions, fees or other remuneration
it receives are fair and reasonable. See "Portfolio Transactions and Brokerage"
in the Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and, in that capacity, maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. Its mailing address is P.O. Box
1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS) Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and in
those capacities maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PIFM. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
YEAR 2000
The services provided to the Fund and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of their outside service
providers. Many computer software systems in use today cannot distinguish the
year 2000 from the year 1900 because of the way dates are encoded and
calculated. Such event could have a negative impact on handling securities
trades, payments of interest and dividends, pricing and account services.
Although, at this time, there can be no assurance that there will be no adverse
impact on the Fund, the Manager, the Distributor, the Transfer Agent and the
Custodian have advised the Fund 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 is
currently the same as the maximum tax rate for ordinary income.
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. 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 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 15015, New
Brunswick, New Jersey 08906-5015. If you hold shares through Prudential
Securities, you should contact your financial adviser to elect to receive
dividends and distributions in cash. The Fund will notify each shareholder after
the close of the Fund's taxable year of both the dollar amount and the taxable
status of that year's dividends and distributions on a per share basis. To the
extent that, in a given year, distributions to shareholders exceed recognized
net investment income and recognized short-term and long-term capital gains,
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, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES, P.O.
BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. Participants in programs
sponsored by Prudential Retirement Services should contact their client
representative for more information about Class Z shares. The purchase price is
the NAV next determined following receipt of an order in proper form by the
Transfer Agent or the Distributor plus a sales charge which, at your option, may
be imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class B or Class C shares). Class Z shares are offered to a
limited group of investors at net asset value without any sales charge. Payment
may be made by cash, wire, check or through your brokerage account. See
"Alternative Purchase Plan" and "How the Fund Values its Shares."
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.
Application forms can be obtained from PMFS, Prudential Securities or
Prusec. If a stock certificate is desired, it must be requested in writing for
each transaction. Certificates are issued only for full shares. Shareholders who
hold their shares through Prudential Securities will not receive stock
certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
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
investment.
Transactions in Fund shares may be subject to postage and handling charges
imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire,
you must first telephone PMFS at (800) 225-1852 (toll-free) to receive an
account number. The following information will be requested: your name, address,
tax identification number, 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, 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.
28
<PAGE>
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.
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).
29
<PAGE>
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 or Prudential Securities plus a sales charge
(expressed as a percentage of the offering price and of the amount invested) as
shown in the following table:
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION AS
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ------------------ --------------- --------------- --------------------
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
The Distributor may reallow the entire initial sales charge to dealers.
Selling dealers may be deemed to be underwriters, as that term is defined under
the federal securities laws.
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
30
<PAGE>
market funds other than those acquired pursuant to the exchange privilege) may
be aggregated to determine the applicable reduction. See "Purchase and
Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class
A Shares" in the Statement of Additional Information.
Benefit Plans. Class A shares may be purchased at NAV, without payment of
an initial sales charge, by pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal
Revenue Code (collectively, Benefit Plans), provided that the Benefit Plan has
existing assets of at least $1 million invested in shares of Prudential Mutual
Funds (excluding money market funds other than those acquired pursuant to the
exchange privilege) or 250 eligible employees or participants. In the case of
Benefit Plans whose accounts are held directly with the Transfer Agent or
Prudential Securities and for which the Transfer Agent or Prudential Securities
does individual account record keeping (Direct Account Benefit Plans) and
Benefit Plans sponsored by Prudential Securities or its subsidiaries (Prudential
Securities or Subsidiary Prototype Benefit Plans), Class A shares may be
purchased at NAV by participants who are repaying loans made from such plans to
the participant.
Prudential Retirement Programs. Class A shares may be purchased at NAV by
certain savings, retirement and deferred compensation plans, qualified or
non-qualified under the Internal Revenue Code, for which Prudential serves as
the plan administrator or recordkeeper, provided that (i) the plan has at least
$1 million in existing assets or 250 eligible employees and (ii) the Fund is an
available investment option. These plans include pension, profit-sharing,
stock-bonus or other employee benefit plans under Section 401 of the Internal
Revenue Code, deferred compensation and annuity plans under Sections 457 or
403(b)(7) of the Internal Revenue Code and plans that participate in the
Transfer Agent's PruArray and SmartPath Programs (benefit plan recordkeeping
services) (hereafter referred to as a PruArray or SmartPath Plan). All plans of
a company for which Prudential serves as plan administrator or recordkeeper are
aggregated in meeting the $1 million threshold. The term "existing assets" as
used herein includes stock issued by a plan sponsor, shares of Prudential Mutual
Funds and shares of certain unaffiliated mutual funds that participate in the
PruArray or SmartPath Program (Participating Funds). "Existing assets" also
include monies invested in the Guaranteed Interest Account (GIA), a group
annuity insurance product issued by Prudential, and units of The Stable Value
Fund (SVF), an unaffiliated bank collective fund. Class A shares may also be
purchased at NAV by plans that have monies invested in GIA and SVF, provided (i)
the purchase is made with the proceeds of a redemption from either GIA or SVF
and (ii) Class A shares are an investment option of the plan.
PruArray Association Benefit Plans. Class A shares are also offered at NAV
to Benefit Plans or non-qualified plans sponsored by employers which are members
of a common trade, professional or membership association (Association) that
participate in the PruArray Program provided that the Association enters into a
written agreement with Prudential. Such Benefit Plans or non-qualified plans may
purchase Class A shares at NAV without regard to the assets or number of
participants in the individual employer's qualified plan(s) or non-qualified
plans so long as the employers in the Association (i) have retirement plan
assets in the aggregate of at least $1 million or 250 participants in the
aggregate and (ii) maintain their accounts with the Transfer Agent.
PruArray Savings Program. Class A shares are also offered at NAV to
employees of companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under this
Program, a limited number of Prudential Mutual Funds are available for purchase
at NAV by Individual Retirement Accounts and Savings Accumulation Plans of the
company's employees. The Program is available only to (i) employees who open an
IRA or Savings Accumulation Plan account with the Transfer Agent and (ii)
spouses of employees who open an IRA account with the Transfer Agent. The
program is offered to companies that have at least 250 eligible employees.
Special Rules Applicable to Retirement Plans. After a Benefit Plan or a
PruArray or SmartPath Plan qualifies to purchase Class A shares at NAV, all
subsequent purchases will be made at NAV.
31
<PAGE>
Other Waivers. In addition, Class A shares may be purchased at NAV,
through Prudential Securities or the Transfer Agent, by the following persons:
(a) officers of the Prudential Mutual Funds (including the Fund), (b)employees
of Prudential Securities and PIFM and their subsidiaries and members of the
families of such persons who maintain an "employee related" account at
Prudential Securities or the Transfer Agent, (c) employees of subadvisers of the
Prudential Mutual Funds provided that purchases at NAV are permitted by such
person's employer, (d) Prudential, employees and special agents of Prudential
and its subsidiaries and all persons who have retired directly from active
service with Prudential or one of its subsidiaries, (e) registered
representatives and employees of dealers who have entered into a selected dealer
agreement with Prudential Securities provided that purchases at NAV are
permitted by such person's employer, (f) investors who have a business
relationship with a financial adviser who joined Prudential Securities from
another investment firm, provided that (i) the purchase is made within 180 days
of the commencement of the financial adviser's employment at Prudential
Securities, or within one year in the case of Benefit Plans, (ii) the purchase
is made with proceeds of a redemption of shares of any open-end non-money market
fund sponsored by the financial adviser's previous employer (other than a fund
which imposes a distribution or service fee of .25 of 1% or less) and (iii) the
financial adviser served as the client's broker on the previous purchase and (g)
investors in Individual Retirement Accounts, provided the purchase is made with
the proceeds of a tax-free rollover of assets from a Benefit Plan for which
Prudential Investments serves as the recordkeeper or administrator.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions. See "Purchase and
Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class
A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing
one of the deferred sales alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges."
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 the following
categories of investors: (i) pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code, deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal
Revenue Code and non-qualified plans for which the Fund is an available option
(collectively, Benefit Plans); provided such Benefit Plans (in combination with
other plans sponsored by the same employer or group of related employers) have
at least $50 million in defined contribution assets; (ii) participants in any
fee-based program or trust program sponsored by Prudential Securities, The
Prudential Savings Bank, F.SB. or any affiliate which includes mutual funds as
investment options and for which the Fund is an available option; (iii) certain
participants in the MEDLEY Program (group variable annuity contracts) sponsored
by Prudential, for whom Class Z shares of the Prudential Mutual Funds are an
available investment option, (iv) Benefit Plans for which Prudential Retirement
Services serves as recordkeeper and as of September 20, 1996, (a) were Class Z
shareholders of
32
<PAGE>
the Prudential Mutual Funds or (b) executed a letter of intent to purchase Class
Z shares of the Prudential Mutual Funds, (v) current and former
Directors/Trustees of the Prudential Mutual Funds (including the Fund); and (vi)
employees of Prudential and/or Prudential Securities who participate in a
Prudential-sponsored employee savings plan. 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 NEXT DETERMINED
AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE TRANSFER AGENT OR
PRUDENTIAL SECURITIES. See "How the Fund Values its Shares." In certain cases,
however, redemption proceeds will be reduced by the amount of any applicable
CDSC, as described below. See "Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM YOUR SHARES THROUGH PRUDENTIAL SECURITIES. PLEASE CONTACT YOUR PRUDENTIAL
SECURITIES FINANCIAL ADVISER.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR
REDEMPTION SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF
YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE
OF THE CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE
REDEMPTION REQUEST TO BE PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION,
PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE
TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All
correspondence and documents concerning redemptions should be sent to the Fund
in care of its Transfer Agent, Prudential Mutual Fund Services LLC, Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid
to a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves this right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Prudential Preferred Financial Services offices. In the
case of redemptions from a PruArray or SmartPath Plan, if the proceeds of the
redemption are invested in another investment option of the plan in the name of
the record holder and at the same address as reflected in the Transfer Agent's
records, a signature guarantee is not required.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST, EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to determine
the value of its net assets, or (d) during any other period when the Commission,
by order, so permits; provided that applicable rules and regulations of the
Commission shall govern as to whether the conditions prescribed in (b), (c) or
(d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL
THE FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR CASHIER'S CHECK.
33
<PAGE>
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 net asset value of less than $500 due to a redemption. The Fund will give
such shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No CDSC will be imposed on any such
involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If 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 Prudential Securities, at the time the repurchase
privilege is exercised to adjust your account for the CDSC you previously paid.
Thereafter, any redemptions will be subject to the CDSC applicable at the time
of the redemption. See "Contingent Deferred Sales Charges" below. Exercise of
the repurchase privilege 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.
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:
34
<PAGE>
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
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
35
<PAGE>
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 Prudential
Securities or Prusec, at the time of redemption, that you are entitled to waiver
of the CDSC and provide the Transfer Agent with such supporting documentation as
it may deem appropriate. The waiver will be granted subject to confirmation of
your entitlement. See "Purchase and Redemption of Fund Shares--Waiver of the
Contingent Deferred Sales Charge--Class B Shares" in the Statement of Additional
Information.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS C SHARES.
PruArray or SmartPath Plans. The CDSC will be waived on redemptions from
qualified and non-qualified retirement and deferred compensation plans that
participate in the Transfer Agent's PruArray and SmartPath Programs.
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 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,
36
<PAGE>
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 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 SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON
THE FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE
OF SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC, AT THE ADDRESS NOTED ABOVE.
37
<PAGE>
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 Prudential Securities or Prusec that
they are eligible for this special exchange privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at NAV.
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.
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. If you hold shares through
Prudential Securities you should contact your financial adviser.
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 or Prudential Securities account (including a
Command Account). For additional information about this service, you may contact
your Prudential Securities financial adviser, Prusec representative or the
Transfer Agent directly.
38
<PAGE>
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 Prudential Securities or the
Transfer Agent. If you are considering adopting such a plan, you should consult
with your own legal or tax adviser with respect to the establishment and
maintenance of such a plan.
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 (908)
417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
39
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<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>
- --------------------------------------------------------------------------------
THE PRUDENTIAL MUTUAL FUND FAMILY
- --------------------------------------------------------------------------------
Prudential offers a broad range of mutual funds designed to meet your
individual needs. We welcome you to review the investment options available
through our family of funds. For more information on the Prudential Mutual
Funds, including charges and expenses, contact your Prudential Securities
financial adviser or Prusec representative or telephone the Fund at (800)
225-1852 for a free prospectus. Read the prospectus carefully before you invest
or send money.
- --------------------------------------------------------------------------------
- --------------------------------------------------
TAXABLE BOND FUNDS
- --------------------------------------------------
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
- --------------------------------------------------
TAX-EXEMPT BOND FUNDS
- --------------------------------------------------
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Term Series
Prudential Municipal Series Fund
Florida Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
- --------------------------------------------------
GLOBAL FUNDS
- --------------------------------------------------
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
- --------------------------------------------------
EQUITY FUNDS
- --------------------------------------------------
Prudential Balanced Fund
Prudential Distressed Securities Fund, Inc.
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Index Series Fund
Prudential Bond Market Index Fund
Prudential Europe Index Fund
Prudential Pacific Index Fund
Prudential Small-Cap Index Fund
Prudential Stock Index Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Active Balanced Fund
Prudential Jennison Growth Fund
Prudential Jennison Growth &
Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
- --------------------------------------------------
MONEY MARKET FUNDS
- --------------------------------------------------
o Taxable Money Market Funds
Cash Accumulation Trust
Liquid Assets Fund
National Money Market Fund
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
o Tax-Free Money Market Funds
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
o Command Funds
Command Money Fund
Command Government Fund
Command Tax-Free Fund
o Institutional Money Market Funds
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
- --------------------------------------------------------------------------------
B-1
<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 ................................................... 33
Conversion Feature--Class B Shares ........................................ 36
How to Exchange Your Shares ............................................... 37
Shareholder Services ...................................................... 38
DESCRIPTION OF SECURITY RATINGS ............................................ A-1
THE PRUDENTIAL MUTUAL FUND FAMILY .......................................... B-1
================================================================================
MF169A
- --------------------------------------------------------------------------------
CUSIP Nos.: Class A: 37936L-30-2
Class B: 37936L-40-1
Class C: 37936L-50-0
Class Z: 37936L-20-3
- --------------------------------------------------------------------------------
THE GLOBAL
TOTAL RETURN
FUND, INC.
P R O S P E C T U S
MARCH 4, 1998
WWW.PRUDENTIAL.COM
[LOGO] PRUDENTIAL
INVESTMENTS
<PAGE>
THE GLOBAL TOTAL RETURN FUND, INC.
Statement of Additional Information
dated March 4, 1998
The Global Total Return Fund, Inc. (the Fund) is an open-end,
non-diversified management investment company, or a mutual fund, whose
investment objective is to seek total return, the components of which are
current income and capital appreciation. The Fund will seek 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. The Fund may also
purchase and sell certain derivatives, including put and call options and engage
in transactions involving foreign currency exchange contracts, futures contracts
and options on such futures. There can be no assurance that the Fund's
investment objective will be achieved. Investing in foreign government
securities, options and futures contracts involves considerations and possible
risks which are different from those ordinarily associated with investing in
U.S. Government securities.
The Fund's address is Gateway Center Three, 100 Mulberry Street, Newark,
New Jersey 07102-4077, and its telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should
only be read in conjunction with the Fund's Prospectus, dated March 4, 1998,
a copy of which may be obtained from the Fund upon request.
TABLE OF CONTENTS
CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
---- ---------------
General Information ................................... B-2 27
Investment Objective and Policies ..................... B-2 10
Additional Investment Policies ........................ B-5 14
Investment Restrictions ............................... B-16 20
Directors and Officers ................................ B-16 21
Manager ............................................... B-20 21
Distributor ........................................... B-22 22
Portfolio Transactions and Brokerage .................. B-23 23
Purchase and Redemption of Fund Shares ................ B-24 28
Shareholder Investment Account ........................ B-27 38
Net Asset Value ....................................... B-31 24
Performance Information ............................... B-31 24
Taxes, Dividends and Distributions .................... B-33 25
Custodian, Transfer and Dividend Disbursing Agent
and Independent Accountants ......................... B-35 23
Financial Statements .................................. B-36 --
Report of Independent Accountants ..................... B-46
Independent Auditors Report .......................... B-48 --
Appendix I--General Investment Information ............ I-1 --
Appendix II--Historical Performance Data .............. II-1 --
Appendix III--Information Relating to Prudential ...... III-1 --
================================================================================
MF169B
<PAGE>
GENERAL INFORMATION
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. In connection with a change in the Fund's investment objective approved
by shareholders in November, 1994, shareholders approved a change in the name of
the Fund to The Global Total Return Fund, Inc. The Fund operated as a closed-end
fund prior to January 15, 1996. On December 6, 1995, shareholders approved
open-ending the Fund, and since January 15, 1996, the Fund has operated as an
open-end fund.
INVESTMENT OBJECTIVE AND POLICIES
U.S. GOVERNMENT SECURITIES
MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT INSTRUMENTALITIES.
Mortgages backing the securities purchased by the Fund include conventional
thirty year fixed rate mortgages, graduated payment mortgages, fifteen year
mortgages and adjustable rate mortgages. All of these mortgages can be used to
create pass-through securities. A pass-through security is formed when mortgages
are pooled together and undivided interests in the pool or pools are sold. The
cash flow from the mortgages is passed through to the holders of the securities
in the form of periodic payments of interest, principal and prepayments (net of
a service fee). Prepayments occur when the holder of an individual mortgage
prepays the remaining principal before the mortgage's scheduled maturity date.
As a result of the pass-through of prepayments of principal on the underlying
securities, mortgage-backed securities are often subject to more rapid
prepayment of principal than their stated maturity would indicate. The remaining
expected average life of a pool of mortgage loans underlying a mortgage-backed
security is a prediction of when the mortgage loans will be repaid and is based
upon a variety of factors, such as the demographic and geographic
characteristics of the borrowers and the mortgaged properties, the length of
time that each of the mortgage loans has been outstanding, the interest rates
payable on the mortgage loans and the current interest rate environment.
During periods of declining interest rates, prepayments of mortgages
underlying mortgage-backed securities can be expected to accelerate. When
mortgage obligations are prepaid, the Fund reinvests the prepaid amounts in
securities, the yields of which reflect interest rates prevailing at that time.
Therefore, the Fund's ability to maintain a portfolio of high-yielding
mortgage-backed securities will be adversely affected to the extent that
prepayments of mortgages must be reinvested in securities which have lower
yields than the prepaid mortgages. Moreover, prepayments of mortgages which
underlie securities purchased at a premium generally will result in capital
losses.
GNMA CERTIFICATES. Certificates of the Government National Mortgage
Association (GNMA Certificates) are mortgage-backed securities, which evidence
an undivided interest in a pool or pools of mortgages. GNMA Certificates that
the Fund purchases are the "modified pass-through" type, which entitle the
holder to receive timely payment of all interest and principal payments due on
the mortgage pool, net of fees paid to the "issuer" and GNMA, regardless of
whether or not the mortgagor actually makes the payment.
GNMA GUARANTEE. The National Housing Act authorizes GNMA to guarantee the
timely payment of principal and interest on securities backed by a pool of
mortgages insured by the Federal Housing Administration (FHA) or the Farmers'
Home Administration (FMHA), or guaranteed by the Veterans Administration (VA).
The GNMA guarantee is backed by the full faith and credit of the United States.
GNMA is also empowered to borrow without limitation from the U.S. Treasury if
necessary to make any payments required under its guarantee.
LIFE OF GNMA CERTIFICATES. The average life of a GNMA Certificate is
likely to be substantially shorter than the original maturity of the mortgages
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will usually result in the return of the greater part of principal
investment long before the maturity of the mortgages in the pool. Foreclosures
impose no risk to principal investment because of the GNMA guarantee, except to
the extent that the Fund has purchased the certificates above par in the
secondary market.
FHLMC SECURITIES. The Federal Home Loan Mortgage Corporation (FHLMC) was
created in 1970 through enactment of Title III of the Emergency Home Finance Act
of 1970. Its purpose is to promote development of a nationwide secondary market
in conventional residential mortgages.
FHLMC presently issues two types of mortgage pass-through securities,
mortgage participation certificates (PCs) and guaranteed mortgage certificates
(GMCs). The Fund does not intend to invest in GMCs. PCs resemble GNMA
Certificates in that each PC represents a pro rata share of all interest and
principal payments made and owed on the underlying pool. FHLMC guarantees timely
monthly payment of interest on PCs and the stated principal amount.
B-2
<PAGE>
GMCs also represent a pro rata interest in a pool of mortgages. However,
these instruments pay interest semi-annually and return principal once a year in
guaranteed minimum payments. The expected average life of these securities is
approximately ten years.
FNMA SECURITIES. The Federal National Mortgage Association (FNMA) was
established in 1938 to create a secondary market in mortgages insured by the
FHA.
FNMA issues guaranteed mortgage pass-through certificates (FNMA
Certificates). FNMA Certificates resemble GNMA Certificates in that each FNMA
Certificate represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. FNMA guarantees timely payment of interest
and principal on FNMA Certificates.
ADJUSTABLE RATE MORTGAGE SECURITIES. Generally, adjustable rate mortgage
securities (ARMs) have a specified maturity date and amortize principal over
their life. In periods of declining interest rates, there is a reasonable
likelihood that ARMs will experience increased rates of prepayment of principal.
However, the major difference between ARMs and fixed rate mortgage securities
(FRMs) is that the interest rate and the rate of amortization of principal of
ARMs can and do change in accordance with movements in a particular,
pre-specified, published interest rate index. The amount of interest on an ARM
is calculated by adding a specified amount, the "margin," to the index, subject
to limitations on the maximum and minimum interest that is charged during the
life of the mortgage or to maximum and minimum changes to that interest rate
during a given period. Because the interest rate on ARMs generally moves in the
same direction as market interest rates, the market value of ARMs tends to be
more stable than that of long-term fixed-rate securities.
FIXED-RATE MORTGAGE SECURITIES. The Fund anticipates investing in
high-coupon fixed-rate mortgage securities. Such securities are collateralized
by fixed-rate mortgages and tend to have high prepayment rates when the level of
prevailing interest rates declines significantly below the interest rates on the
mortgages. Thus, under those circumstances, the securities are generally less
sensitive to interest rate movements than lower coupon FRMs.
CHARACTERISTICS OF MORTGAGE-BACKED SECURITIES. The interest rates paid on
the ARMs in which the Fund invests generally are readjusted at intervals of one
year or less to an increment over some predetermined interest rate index. There
are two main categories of indices: those based on U.S. Treasury securities and
those derived from a calculated measure such as a cost of funds index or a
moving average of mortgage rates. Commonly utilized indices include the one-year
and five-year constant maturity Treasury Note rates, the three-month Treasury
Bill rate, the 180-day Treasury Bill rate, rates on longer-term Treasury
securities, the 11th District Federal Home Loan Bank Cost of Funds, the National
Median Cost of Funds, the one-month or three-month London Interbank Offered Rate
(LIBOR), the prime rate of a specific bank, or commercial paper rates. Some
indices, such as the one-year constant maturity Treasury Note rate, closely
mirror changes in market interest rate levels. Others, such as the 11th District
Home Loan Bank Cost of Funds index (often related to ARMs issued by FNMA), tend
to lag changes in market rate levels and tend to be somewhat less volatile.
The underlying mortgages which collateralize the ARMs, collateralized
mortgage obligations and Real Estate Mortgage Investment Conduits in which the
Fund invests will frequently have caps and floors which limit the maximum amount
by which the loan rate to the residential borrower may change up or down (1) per
reset or adjustment interval and (2) over the life of the loan. Some residential
mortgage loans restrict periodic adjustments by limiting changes in the
borrower's monthly principal and interest payments rather than limiting interest
rate changes. These payment caps may result in negative amortization.
The market value of mortgage securities, like other U.S. Government
securities, will generally vary inversely with changes in market interest rates,
declining when interest rates rise and rising when interest rates decline.
However, mortgage securities, while having comparable risk of decline during
periods of rising rates, usually have less potential for capital appreciation
than other investments of comparable maturities due to the likelihood of
increased prepayments of mortgages as interest rates decline. In addition, to
the extent such mortgage securities are purchased at a premium, mortgage
foreclosures and unscheduled principal prepayments generally will result in some
loss of the holders' principal to the extent of the premium paid. On the other
hand, if such mortgage securities are purchased at a discount, an unscheduled
prepayment of principal will increase current and total returns and will
accelerate the recognition of income which when distributed to shareholders will
be taxable as ordinary income.
FOREIGN SECURITIES
Foreign securities in which the Fund will invest will generally be
denominated in foreign currencies, will be traded on foreign markets and will be
affected by changes in currency exchange rates and in exchange control
regulations. A change in the value of a foreign currency against the U.S. dollar
will result in a corresponding change in the U.S. dollar value of the Fund's
assets
B-3
<PAGE>
denominated in that currency. These changes will affect the Fund's 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 value of the U.S. dollar
strengthens against a foreign currency after the Fund's income has been accrued
and translated into U.S. dollars, the Fund would experience a foreign currency
loss. Similarly, if the U.S. dollar value weakens against a foreign currency
between the time the Fund incurs expenses 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 currency gains or losses that increase or
decrease an investment company's taxable income. Similarly, dispositions of
certain debt securities (by sale, at maturity or otherwise) at a U.S. dollar
value 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
investment company taxable income. The exchange rates between the U.S. dollar
and other currencies can be volatile and are determined by such factors as
supply and demand in the currency exchange markets, international balances of
payments, government intervention, speculation and other economic and political
conditions.
Foreign securities include securities of any foreign country the
investment adviser considers appropriate for investment by the Fund. Foreign
securities may also include securities of foreign issuers that are traded in
U.S. dollars in the United States although the underlying security is usually
denominated in a foreign currency. These securities include but are not limited
to securities traded in the form of American Depositary Receipts.
The costs attributable to foreign investing are higher than the costs of
domestic investing. For example, the cost of maintaining custody of foreign
securities generally exceeds custodian costs for domestic securities, and
transaction and settlement costs of foreign investing are frequently higher than
those attributable to domestic investing. Foreign investment income may be
subject to foreign withholding or other government taxes that could reduce the
return to the Fund on those securities. Tax treaties between the United States
and certain foreign countries may, however, reduce or eliminate the amount of
foreign tax to which the Fund would be subject.
In the event of a default of foreign debt obligations, it may be difficult
for the Fund to obtain or enforce a judgment against the issuer of the
securities.
CORPORATE AND OTHER NON-GOVERNMENT DEBT SECURITIES
ZERO COUPON, PAY-IN-KIND OR DEFERRED PAYMENT SECURITIES
The Fund may also invest in zero coupon, pay-in-kind or deferred payment
securities. Zero coupon securities are securities that are sold at a discount to
par value and on which interest payments are not made during the life of the
security. Upon maturity, the holder is entitled to receive the par value of the
security. While interest payments are not made on such securities, holders of
such securities are deemed to have received annually "phantom income." The Fund
accrues income with respect to these securities prior to the receipt of cash
payments. Pay-in-kind securities are securities that have interest payable by
delivery of additional securities. Upon maturity, the holder is entitled to
receive the aggregate par value of the securities. Deferred payment securities
are securities that remain a zero coupon security until a predetermined date, at
which time the stated coupon rate becomes effective and interest becomes payable
at regular intervals. Zero coupon, pay-in-kind and deferred payment securities
may be subject to greater fluctuation in value and lesser liquidity in the event
of adverse market conditions than comparably rated securities paying cash
interest at regular intervals.
CUSTODIAL RECEIPTS
Obligations issued or guaranteed as to principal and interest by the U.S.
Government, foreign governments or semi-governmental entities may be acquired by
the Fund in the form of custodial receipts that evidence ownership of future
interest payments, principal payments or both on certain notes or bonds. Such
notes and bonds are held in custody by a bank on behalf of the owners. These
U.S. Government custodial receipts are known by various names, including
"Treasury Receipts," "Treasury Investment Growth Receipts" (TIGRs) and
"Certificates of Accrual on Treasury Securities" (CATS). The Fund will not
invest more than 5% of its assets in such custodial receipts.
B-4
<PAGE>
ADDITIONAL INVESTMENT POLICIES
In seeking to protect against the effect of changes in interest rates or
currency exchange rates that are adverse to the present or prospective position
of the Fund and to attempt to enhance returns, the Fund may employ certain
hedging, return enhancement and risk management techniques including the
purchase and sale of options, futures and options on futures on debt securities,
aggregates of debt securities, financial indices, U.S. and foreign government
debt securities and foreign currencies and forward contracts on foreign
currencies. The Fund's ability to engage in these practices may be limited by
tax considerations and certain other legal considerations. See "Taxes, Dividends
and Distributions."
OPTIONS ON SECURITIES
The Fund may purchase put and call options and write covered put and call
options on debt securities, aggregates of debt securities or indices of prices
thereof, other financial indices and U.S. and foreign government debt
securities. These may include options traded on U.S. or foreign exchanges and
options traded on U.S. or foreign over-the-counter markets (OTC Options).
When the Fund writes an option, it receives a premium which it retains
whether or not the option is exercised. The Fund's principal objective in
writing options is to attempt to realize, through the receipt of premiums, a
greater return than would be realized on the underlying securities alone.
The purchaser of a call option has the right, for a specified period of
time, to purchase the securities subject to the option at a specified price (the
exercise price). By writing a call option, the Fund becomes obligated during the
term of the option, upon exercise of the option, to sell, depending upon the
terms of the option contract, the underlying securities or a specified amount of
cash to the purchaser against receipt of the exercise price.
Conversely, the purchaser of a put option has the right, for a specified
period of time, to sell the securities subject to the option to the writer of
the put at a specified exercise price. By writing a put option, the Fund becomes
obligated during the term of the option to purchase the securities underlying
the option at the exercise price, upon exercise of the option.
The Fund may write only "covered" options. This means that so long as the
Fund is obligated as the writer of a call option, it will own the underlying
securities subject to the option or an option to purchase the same underlying
securities, having an exercise price equal to or less than the exercise price of
the "covered" option, or will establish and maintain with its Custodian for the
term of the option a segregated account consisting of cash or other liquid
assets having a value at least equal to the fluctuating market value of the
optioned securities. A put option written by the Fund will be considered
"covered" if, so long as the Fund is obligated as the writer of the option, it
owns an option to sell the underlying securities subject to the option having an
exercise price equal to or greater than the exercise price of the "covered"
option, or it deposits and maintains with its Custodian in a segregated account
cash or other liquid assets having a value equal to or greater than the exercise
price of the option. There is no limitation to the amount of call options the
Fund may write. However, the Fund may only write covered put options to the
extent that cover for such options does not exceed 25% of the Fund's net assets.
The Fund may also buy and write straddles (i.e., a combination of a call
and a put written on the same security at the same strike price where the same
segregated collateral is considered "cover" for both the put and the call). In
such cases, the Fund will also deposit in a segregated account with its
Custodian cash or other liquid assets equivalent to the amount, if any, by which
the put is "in-the-money," i.e., the amount by which the exercise price of the
put exceeds the current market value of the underlying security. It is
contemplated that the Fund's use of straddles will be limited to 5% of the
Fund's net assets (meaning that the securities used for cover or segregated as
described above will not exceed 5% of the Fund's net assets at the time the
straddle is written). The writing of a call and a put on the same security at
the same stock price where the call and put are covered by different securities
is not considered a straddle for the purposes of this limit.
The Fund may write both American style options and European style options.
An American style option is an option which may be exercised by the holder at
any time prior to its expiration. A European style option may only be exercised
as of the expiration of the option. The writer of an American style option has
no control over when the underlying securities must be sold, in the case of a
call option, or purchased, in the case of a put option, since such options may
be exercised by the holder at any time prior to the expiration of the option.
Whether or not an option expires unexercised, the writer retains the amount of
the premium. This amount may be offset or exceeded, in the case of a covered
call option, by a decline and, in the case of a covered put option, by an
increase in the market value of the underlying security during the option
period. If a call option is exercised, the writer must fulfill the obligation to
sell the underlying security at the exercise price, which will usually be lower
than the then market value of the underlying security. If a put option is
exercised, the writer must fulfill the obligation to purchase the underlying
security at the exercise price, which will usually exceed the then market value
of the underlying security.
Prior to being notified of exercise of the option, the writer of an
exchange-traded option that wishes to terminate its obligation may effect a
"closing purchase transaction" by buying an option of the same series as the
option previously written.
B-5
<PAGE>
(Options of the same series are options with respect to the same underlying
security, having the same expiration date and the same strike price.) The effect
of the purchase is that the writer's position will be cancelled by the
exchange's affiliated clearing organization. However, the writer of an option
may not effect a closing purchase transaction after being notified of the
exercise of the option. Likewise, the holder of an option may liquidate a
position by effecting a "closing sale transaction" by selling an option of the
same series as the option previously purchased. There is no guarantee that
either a closing purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will
permit the Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both, or in the case of
a written put option, will permit the Fund to write another put option to the
extent that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If the Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrently with the sale of the
security.
The Fund will realize a profit from a closing transaction if the price of
the transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option; the Fund will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss in closing out a call option is likely to be offset in whole or in part by
appreciation of the underlying security owned by the Fund.
An exchange-traded option position may be closed out only where there
exists a secondary market for an option of the same series. If a secondary
market does not exist, the Fund might not be able to effect a closing sale
transaction in a particular option it has purchased with the result that the
Fund would have to exercise the option in order to realize any profit. If the
Fund is unable to effect a closing purchase transaction in an option the Fund
has written, it will not be able to sell the underlying security until the
option expires or it delivers the underlying security upon exercise or it
otherwise covers its position. Reasons for the absence of a liquid secondary
market on an exchange include the following: (i) there may be insufficient
trading interest in certain options; (ii) restrictions may be imposed by an
exchange on opening transactions or closing transactions or both; (iii) trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; (iv) unusual
or unforeseen circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or clearing organization may not at all times be
adequate to handle current trading volume; or (vi) one or more exchanges could,
for economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options would continue to
be exercisable in accordance with their terms.
Exchange-traded options in the U.S. are issued by a clearing organization
affiliated with the exchange on which the option is listed which, in effect,
gives its guarantee to every exchange-traded option transaction. In contrast,
OTC Options are contracts between the Fund and its counterparty with no clearing
organization guarantee. Thus, when the Fund purchases an OTC Option, it relies
on the dealer from which it has purchased the OTC Option to make or take
delivery of the securities underlying the option. Failure by the dealer to do so
would result in the loss of the premium paid by the Fund as well as the loss of
the expected benefit of the transaction. The investment adviser pursuant to
procedures approved by the Board of Directors will evaluate the creditworthiness
of any dealer from which the Fund proposes to purchase OTC Options.
Exchange-traded options generally have a continuous liquid market while
OTC Options may not. Consequently, the Fund will generally be able to realize
the value of an OTC Option it has purchased only by exercising it or reselling
it to the dealer who issued it. Similarly, when the Fund writes an OTC Option,
it generally will be able to close out the OTC Option prior to its expiration
only by entering into a closing purchase transaction with the dealer which
originally purchased the OTC Option. While the Fund will enter into OTC Options
only with dealers which agree to, and which are expected to be capable of,
entering into closing transactions with the Fund, there can be no assurance that
the Fund will be able to liquidate an OTC Option at a favorable price at any
time prior to expiration. Until the Fund is able to effect a closing purchase
transaction in a covered OTC call option the Fund has written, it will not be
able to liquidate securities used as cover until the option expires or is
exercised or different cover is substituted. In the event of insolvency of the
counterparty, the Fund may be unable to liquidate an OTC Option. With respect
to options written by the Fund, the inability to enter into a closing purchase
transaction could result in material losses to the Fund.
The Fund may write options in connection with buy-and-write transactions;
that is, the Fund may purchase a security and concurrently write a call option
against that security. The exercise price of the call the Fund determines to
write will depend upon the expected price movement of the underlying security.
The exercise price of a call option may be below (in-the-money), equal to
(at-the-money) or above (out-of-the-money) the current value of the underlying
security at the time the option is written. Buy-and-write transactions using
in-the-money call options may be used when it is expected that the price of the
underlying
B-6
<PAGE>
security will remain flat or decline moderately during the option period.
Buy-and-write transactions using at-the-money call options may be used when it
is expected that the price of the underlying security will remain fixed or
advance moderately during the option period. A buy-and-write transaction using
out-of-the-money call options may be used when it is expected that the premium
received from writing the call option plus the appreciation in the market price
of the underlying security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. If the call option
is exercised in such a transaction, the Fund's maximum gain will be the premium
received by it for writing the option, adjusted upwards or downwards by the
difference between the Fund's purchase price of the security and the exercise
price of the option. If the option is not exercised and the price of the
underlying security declines, the amount of such decline will be offset in part,
or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund may elect to close out the position or
take delivery of the underlying security at the exercise price. The Fund's
return will be the premium received from the put option minus the amount by
which the market price of the security is below the exercise price.
Out-of-the-money, at-the-money and in-the-money put options may be used by the
Fund in the same market environments in which call options are used in
equivalent buy-and-write transactions.
The Fund may purchase call options on debt securities it intends to
acquire in order to hedge against an anticipated market appreciation in the
price of the underlying securities at limited risk and with a limited cash
outlay. If the market price does rise as anticipated, the Fund will benefit from
that rise but only to the extent that the rise exceeds the premiums paid. If the
anticipated rise does not occur or if it does not exceed the premium, the Fund
will bear the expense of the option premiums and transaction costs without
gaining an offsetting benefit.
The Fund may purchase put options on debt securities to hedge against a
decline in the value of its portfolio. If the market price of the Fund's
portfolio should increase, however, the profit which the Fund might otherwise
have realized will be reduced by the amount of the premium paid for the put
option and by transaction costs. The Fund may purchase call options on debt
securities to hedge against an anticipated rise in the price it will have to pay
for debt securities it intends to buy in the future. If the market price of the
debt securities should fall instead of rise, however, the benefit the Fund
obtains from purchasing the securities at a lower price will be reduced by the
amount of the premium paid for the call options and by transaction costs.
However, if the market price of the security increases, the profit the Fund
realizes on the sale of the security will be reduced by the premium paid for,
and the commissions paid in connection with, the put option.
The Fund may purchase put options if the Fund believes that a defensive
posture is warranted for all or a portion of its portfolio. Protection is
provided during the life of the put because the put gives the Fund the right to
sell the underlying security at the put exercise price, regardless of a decline
in the underlying security's market price below the exercise price. This right
limits the Fund's losses from the security's possible decline in value below the
strike price of the option to the premium paid for the put option and related
transaction costs.
The Fund may wish to protect certain portfolio securities against a
decline in market value through the purchase of put options on other carefully
selected securities, which the investment adviser believes may move in the same
direction as those portfolio securities. If the investment adviser's judgment is
correct, changes in the value of the put options should generally offset changes
in the value of the portfolio securities being hedged. If the investment
adviser's judgment is not correct, the value of the securities underlying the
put option may decrease less than the value of the Fund's portfolio securities
and therefore the put option may not provide complete protection against a
decline in the value of the Fund's portfolio securities below the level sought
to be protected by the put option.
The Fund may similarly wish to hedge against appreciation in the value of
debt securities that it intends to acquire through the purchase of call options
on other carefully selected debt securities, which the investment adviser
believes may move in the same direction as those portfolio securities. In such
circumstances the Fund will be subject to risks analogous to those summarized
above in the event that the correlation between the value of a call option so
purchased and the value of the securities intended to be acquired by the Fund is
not as close as anticipated and the value of the securities underlying the call
option increases less than the value of the securities to be acquired by the
Fund.
SPECIAL CONSIDERATIONS APPLICABLE TO OPTIONS
ON TREASURY BONDS AND NOTES. Because trading interest in Treasury Bonds
and Notes tends to center on the most recently auctioned issues, the Exchanges
will not indefinitely continue to introduce new series of options with
expirations to replace expiring options on particular issues. Instead, the
expirations introduced at the commencement of options trading on a particular
issue will be allowed to run their course, with the possible addition of a
limited number of new expirations as the original ones
B-7
<PAGE>
expire. Options trading on each series of Bonds or Notes will thus be phased out
as new options are listed on the more recent issues, and a full range of
expiration dates will not ordinarily be available for every series on which
options are traded.
ON TREASURY BILLS. Because the deliverable Treasury Bill changes from week
to week, writers of Treasury Bill call options cannot provide in advance for
their potential exercise settlement obligations by acquiring and holding the
underlying security. However, if the Fund holds a long position in Treasury
Bills with a principal amount corresponding to the option contract size, the
Fund may be hedged from a risk standpoint. In addition, the Fund will maintain
in a segregated account with its Custodian Treasury Bills maturing no later than
those which would be deliverable in the event of an assignment of an exercise
notice to ensure that it can meet its open option obligations.
ON GNMA CERTIFICATES. The Fund may purchase and write options on GNMA
Certificates in the over-the-counter market and, to the extent available, on any
Exchange.
Since the remaining principal balance of GNMA Certificates declines each
month as a result of mortgage payments, the Fund, as a writer of a covered GNMA
call option holding GNMA Certificates as "cover" to satisfy its delivery
obligation in the event of assignment of an exercise notice, may find that its
GNMA Certificates no longer have sufficient remaining principal balance for this
purpose. Should this occur, the Fund will enter into a closing purchase
transaction or will purchase additional GNMA Certificates from the same pool (if
obtainable) or replacement GNMA Certificates in the cash market in order to
remain covered or substitute cover.
A GNMA Certificate held by the Fund to cover a call option the Fund has
written in any but the nearest expiration month may cease to represent cover for
the option in the event of a decline in the GNMA coupon rate at which new pools
are originated under the FHA/VA loan ceiling in effect at any given time. Should
this occur, the Fund will no longer be covered, and the Fund will either enter
into a closing purchase transaction or replace the Certificate with a
Certificate which represents cover. When the Fund closes its option position or
replaces the Certificate, it may realize an unanticipated loss and incur
transaction costs.
FUTURES CONTRACTS
The Fund will enter into futures contracts only for certain bona fide
hedging and risk management purposes and to attempt to enhance return. The Fund
may enter into futures contracts for the purchase or sale of debt securities,
aggregates of debt securities or indices of prices thereof, other financial
indices, U.S. Government securities, corporate debt securities and certain
foreign government debt securities (collectively, interest rate futures
contracts). It may also enter into futures contracts for the purchase or sale of
foreign currencies or composite foreign currencies (such as the European
Currency Unit) in which securities held or to be acquired by the Fund are
denominated, or the value of which have a high degree of positive correlation to
the value of such currencies as to constitute an appropriate vehicle for
hedging. The Fund may enter into such futures contracts both on U.S. and foreign
exchanges.
A "sale" of a futures contract (or a "short" futures position) means the
assumption of a contractual obligation to deliver the securities or currency
underlying the contract at a specified price at a specified future time. A
"purchase" of a futures contract (or a "long" futures position) means the
assumption of a contractual obligation to acquire the securities or currency
underlying the contract at a specified price at a specified future time. Certain
futures contracts are settled on a net cash payment basis rather than by the
sale and delivery of the securities or currency underlying the futures contract.
U.S. futures contracts have been designed by exchanges that have been designated
as "contract markets" by the Commodity Futures Trading Commission (the CFTC), an
agency of the U.S. Government, and must be executed through a futures commission
merchant (i.e., a brokerage firm) which is a member of the relevant contract
market. Futures contracts trade on these contract markets and the exchange's
affiliated clearing organization guarantees payment of margin as between the
clearing members of the exchange.
At the time a futures contract is purchased or sold, the Fund must
allocate cash or other liquid assets as a deposit payment (initial margin). It
is expected that the initial margin on U.S. exchanges will vary from one-half of
1% to 4% of the total value of the contract. Under certain circumstances,
however, such as during periods of high volatility, the Fund may be required by
an exchange to increase the level of its initial margin payment. Thereafter, the
futures contract is valued daily and the payment in cash of "variation margin"
may be required, a process known as "mark-to-market." Each day the Fund is
required to provide or is entitled to receive variation margin in an amount
equal to any change in the value of the contract since the preceding day.
Although futures contracts by their terms may call for the actual delivery
or acquisition of underlying assets, in most cases the contractual obligation is
extinguished by offset before the expiration of the contract. The offsetting of
a contractual obligation is accomplished by buying (to offset an earlier sale)
or selling (to offset an earlier purchase) an identical futures contract calling
for delivery in the same month. Such a transaction cancels the obligation to
make or take delivery of the underlying commodity. When the Fund purchases or
sells futures contracts, the Fund will incur brokerage fees and related
transaction costs.
The ordinary spreads between values in the cash and futures markets, due
to differences in the character of those markets, are subject to distortions. In
addition, futures contracts entail risks. First, all participants in the futures
market are subject to initial
B-8
<PAGE>
and variation margin requirements. Rather than meeting additional variation
margin requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing price distortions. Third,
from the point of view of speculators, the margin deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Increased participation by speculators in the futures market may cause
temporary price distortions. Due to the possibility of distortion, a correct
forecast of general interest rate trends by the investment adviser may still not
result in a successful transaction.
If the Fund seeks to hedge against a decline in the value of its portfolio
securities and sells futures contracts on other securities which historically
have had a high degree of positive correlation to the value of the portfolio
securities, the value of its portfolio securities might decline more rapidly
than the value of a poorly correlated futures contract rises. In that case, the
hedge will be less effective than if the correlation had been greater. In a
similar but more extreme situation, the value of the futures position might in
fact decline while the value of the portfolio securities holds steady or rises.
This would result in a loss that would not have occurred but for the attempt to
hedge.
OPTIONS ON FUTURES CONTRACTS
The Fund will also enter into options on futures contracts for certain
bona fide hedging and risk management purposes and to attempt to enhance return.
The Fund may purchase put and call options and write (i.e., sell) "covered" put
and call options on futures contracts that are traded on U.S. and foreign
exchanges. An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the option exercise period. The
writer of the option is required upon exercise to assume a short futures
position (if the option is a call) or a long futures position (if the option is
a put). Upon exercise of the option, the assumption of offsetting futures
positions by the writer and holder of the option will be accompanied by delivery
of the accumulated cash balance in the writer's futures margin account which
represents the amount by which the market price of the futures contract at
exercise, exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract.
The Fund may write (i.e., sell) put and call options on futures contracts
only if they are covered. The Fund will be considered "covered" with respect to
a call option it writes on a futures contract if the Fund owns the securities or
currency which is deliverable under the futures contract or an option to
purchase that futures contract having a strike price equal to or less than the
strike price of the "covered" option and having an expiration date not earlier
than the expiration date of the "covered" option, or if it segregates and
maintains with its Custodian for the term of the option cash or other liquid
assets equal to the fluctuating value of the optioned futures. The Fund will be
considered "covered" with respect to a put option it writes on a futures
contract if it owns an option to sell that futures contract having a strike
price equal to or greater than the strike price of the "covered" option and
having an expiration date not earlier than the expiration date of the "covered"
option, or if it segregates and maintains with its Custodian for the term of the
option cash or other liquid assets at all times equal in value to the exercise
price of the put (less any initial margin deposited by the Fund with its
Custodian with respect to such put option). There is no limitation on the amount
of the Fund's assets which can be placed in the segregated account.
Writing a put option on a futures contract serves as a partial hedge
against an increase in the value of debt securities the Fund intends to acquire.
If the futures price at expiration of the option is above the exercise price,
the Fund will retain the full amount of the option premium which provides a
partial hedge against any increase that may have occurred in the price of the
debt securities the Fund intends to acquire. If the market price of the
underlying futures contract is below the exercise price when the option is
exercised, the Fund will incur a loss, which may be wholly or partially offset
by the decrease in the value of the securities the Fund intends to acquire.
Writing a call option on a futures contract serves as a partial hedge
against a decrease in the value of the Fund's portfolio securities. If the
market price of the underlying futures contract at expiration of a written call
option is below the exercise price, the Fund will retain the full amount of the
option premium, thereby partially hedging against any decline that may have
occurred in the Fund's holdings of debt securities. If the futures price when
the option is exercised is above the exercise price, however, the Fund will
incur a loss, which may be wholly or partially offset by the increase in the
value of the securities in the Fund's portfolio which were being hedged.
The Fund will purchase put options on futures contracts to hedge its
portfolio against the risk of a decline in the value of the debt securities it
owns as a result of rising interest rates or fluctuating currency exchange
rates. The Fund will also purchase call options on futures contracts as a hedge
against an increase in the value of securities the Fund intends to acquire as a
result of declining interest rates or fluctuating currency exchange rates. If
the futures price at expiration of a written call option is below the
B-9
<PAGE>
exercise price, the Fund will retain the full amount of the option premium,
thereby partially hedging against any decline that may have occurred in the
Fund's holdings of debt securities. If the futures price when the option is
exercised is above the exercise price, however, the Fund will incur a loss,
which may be wholly or partially offset by the increase of the value of the
securities in the Fund's portfolio which were being hedged.
If the investment adviser wishes to shorten the effective average maturity
of the Fund, the Fund may sell a futures contract or a call option thereon, or
purchase a put option on that futures contract. If the investment adviser wishes
to lengthen the effective average maturity of the Fund, the Fund may buy a
futures contract or a call option thereon or sell a put option.
INTEREST RATE FUTURES CONTRACTS AND OPTIONS THEREON
The Fund will purchase or sell interest rate futures contracts to take
advantage of or to protect the Fund against fluctuations in interest rates
affecting the value of debt securities which the Fund holds or intends to
acquire. For example, if interest rates are expected to increase, the Fund might
sell futures contracts on debt securities, the values of which historically have
a high degree of positive correlation to the values of the Fund's portfolio
securities. Such a sale would have an effect similar to selling an equivalent
value of the Fund's portfolio securities. If interest rates increase, the value
of the Fund's portfolio securities will decline, but the value of the futures
contracts to the Fund will increase at approximately an equivalent rate thereby
keeping the net asset value of the Fund from declining as much as it otherwise
would have. The Fund could accomplish similar results by selling debt securities
with longer maturities and investing in debt securities with shorter maturities
when interest rates are expected to increase. However, since the futures market
may be more liquid than the cash market, the use of futures contracts as a risk
management technique allows the Fund to maintain a defensive position without
having to sell its portfolio securities.
Similarly, the Fund may purchase interest rate futures contracts when it
is expected that interest rates may decline. The purchase of futures contracts
for this purpose constitutes a hedge against increases in the price of debt
securities (caused by declining interest rates) which the Fund intends to
acquire. Since fluctuations in the value of appropriately selected futures
contracts should approximate that of the debt securities that will be purchased,
the Fund can take advantage of the anticipated rise in the cost of the debt
securities without actually buying them. Subsequently, the Fund can make the
intended purchase of the debt securities in the cash market and currently
liquidate its futures position. To the extent the Fund enters into futures
contracts for this purpose, it will maintain a segregated account with the
Fund's Custodian sufficient to cover the Fund's obligations with respect to such
futures contracts, which will consist of cash or other liquid assets from its
portfolio in an amount equal to the difference between the fluctuating market
value of such futures contracts and the aggregate value of the initial margin
deposited by the Fund with its Custodian with respect to such futures contracts.
The purchase of a call option on a futures contract is similar in some
respects to the purchase of a call option on an individual security. Depending
on the pricing of the option compared to either the price of the futures
contract upon which it is based or the price of the underlying debt securities,
it may or may not be less risky than ownership of the futures contract or
underlying debt securities. As with the purchase of futures contracts, when the
Fund is not fully invested it may purchase a call option on a futures contract
to hedge against a market advance due to declining interest rates.
The purchase of a put option on a futures contract is similar to the
purchase of protective put options on portfolio securities. The Fund will
purchase a put option on a futures contract to hedge the Fund's portfolio
against the risk of rising interest rates and consequent reduction in the value
of portfolio securities.
The amount of risk the Fund assumes when it purchases an option on a
futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of an
option also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the securities which are deliverable upon
exercise of the futures contract. If the futures price at expiration of the
option is below the exercise price, the Fund will retain the full amount of the
option premium which provides a partial hedge against any decline that may have
occurred in the Fund's portfolio holdings. The writing of a put option on a
futures contract constitutes a partial hedge against increasing prices of the
securities which are deliverable upon exercise of the futures contract. If the
futures price at expiration of the option is higher than the exercise price, the
Fund will retain the full amount of the option premium which provides a partial
hedge against any increase in the price of debt securities which the Fund
intends to purchase. If a put or call option the Fund has written is exercised,
the Fund will incur a loss which will be reduced by the amount of the premium it
received. Depending on the degree of correlation between changes in the value of
its portfolio securities and changes in the value of its futures positions, the
Fund's losses from options on futures it has written may to some extent be
reduced or increased by changes in the value of its portfolio securities.
At the time of delivery of securities pursuant to an interest rate futures
contract, adjustments are made to recognize differences in value arising from
the delivery of securities with a different interest rate from that specified in
the contract. In some
B-10
<PAGE>
(but not many) cases, securities called for by a futures contract may have a
shorter term than the term of the futures contract and, consequently, may not in
fact have been issued when the futures contract was entered.
The ordinary spreads between prices in the cash and futures markets, due
to differences in the character of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Increased participation by speculators in the futures market may cause temporary
price distortions. Due to the possibility of distortion, a correct forecast of
general interest rate trends by the investment adviser may still not result in a
successful transaction.
In addition, futures contracts entail risks. Although the Fund believes
that use of such contracts will benefit the Fund, if the investment adviser's
investment judgment about the general direction of interest rates is incorrect,
the Fund's overall performance would be poorer than if it had not entered into
any such contracts. For example, if the Fund has hedged against the possibility
of an increase in interest rates which would adversely affect the price of bonds
held in its portfolio and interest rates decrease instead, the Fund will lose
part or all of the benefit of the increased value of its bonds which it has
hedged because it will have offsetting losses in its futures positions. In
addition, particularly in such situations, if the Fund has insufficient cash, it
may have to sell bonds from its portfolio to meet daily variation margin
requirements. Such sales of bonds may be, but will not necessarily be, at
increased prices which reflect the rising market. The Fund may have to sell
securities at a time when it may be disadvantageous to do so.
CURRENCY FUTURES AND OPTIONS THEREON
Generally, foreign currency futures contracts and options thereon are
similar to the interest rate futures contracts and options thereon discussed
previously. By entering into currency futures and options thereon on U.S. and
foreign exchanges, the Fund will seek to establish the rate at which it will be
entitled to exchange U.S. dollars for another currency at a future time. By
selling currency futures, the Fund will seek to establish the number of dollars
it will receive at delivery for a certain amount of a foreign currency. In this
way, whenever the Fund anticipates a decline in the value of a foreign currency
against the U.S. dollar, the Fund can attempt to "lock in" the U.S. dollar value
of some or all of the securities held in its portfolio that are denominated in
that currency. By purchasing currency futures, the Fund can establish the number
of dollars it will be required to pay for a specified amount of a foreign
currency in a future month. Thus if the Fund intends to buy securities in the
future and expects the U.S. dollar to decline against the relevant foreign
currency during the period before the purchase is effected, the Fund can attempt
to "lock in" the price in U.S. dollars of the securities it intends to acquire.
The purchase of options on currency futures will allow the Fund, for the
price of the premium and related transaction costs it must pay for the option,
to decide whether or not to buy (in the case of a call option) or to sell (in
the case of a put option) a futures contract at a specified price at any time
during the period before the option expires. If the investment adviser, in
purchasing an option, has been correct in its judgment concerning the direction
in which the price of a foreign currency would move as against the U.S. dollar,
the Fund may exercise the option and thereby take a futures position to hedge
against the risk it had correctly anticipated or close out the option position
at a gain that will offset, to some extent, currency exchange losses otherwise
suffered by the Fund. If exchange rates move in a way the investment adviser did
not anticipate, however, the Fund will have incurred the expense of the option
without obtaining the expected benefit; any such movement in exchange rates may
also thereby reduce rather than enhance the Fund's profits on its underlying
securities transactions.
OPTIONS ON CURRENCIES
Instead of purchasing or selling futures or forward currency exchange
contracts, the Fund may attempt to accomplish similar objectives by purchasing
put or call options on currencies or by writing put options or covered call
options on currencies either on exchanges or in over-the-counter markets. A put
option gives the Fund the right to sell a currency at the exercise price until
the option expires. A call option gives the Fund the right to purchase a
currency at the exercise price until the option expires. Both options serve to
insure against adverse currency price movements in the underlying portfolio
assets designated in a given currency. The Fund's use of options on currencies
will be subject to the same limitations as its use of options on securities,
described above. Currency options may be subject to position limits which may
limit the ability of the Fund to fully hedge its positions by purchasing the
options. Over-the-counter options differ from traded options in that they are
two-party contracts with price and other terms negotiated between buyer and
seller and do not have as much market liquidity as exchange-traded options. The
Fund will not purchase put or call options if, as a result thereof, the value of
the options would exceed 5% of the Fund's net assets.
B-11
<PAGE>
As in the case of interest rate futures contracts and options thereon, the
Fund may hedge against the risk of a decrease or increase in the U.S. dollar
value of a foreign currency denominated debt security which the Fund owns or
intends to acquire by purchasing or selling options contracts, futures contracts
or options thereon with respect to a foreign currency other than the foreign
currency in which such debt security is denominated, where the values of such
different currencies (vis-a-vis the U.S. dollar) historically have a high degree
of positive correlation.
FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund may engage in currency transactions otherwise than on futures
exchanges to protect against future changes in the level of future currency
exchange rates. The Fund will conduct such currency exchange transactions either
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 forward contracts to
purchase or sell currency. A forward contract on foreign currency involves 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 risk of shifting of a
forward currency contract will be substantially the same as a futures contract
having similar terms. The Fund's dealing in forward currency exchange will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is the purchase or sale of forward currency with
respect to specific receivables or payables of the Fund generally arising in
connection with the purchase or sale of its portfolio securities and accruals of
interest receivable and Fund expenses. Position hedging is the forward sale of
currency with respect to portfolio security positions denominated or quoted in
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.
The Fund may not position hedge 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 held in its portfolio
denominated or quoted in, or currently convertible into, such currency. If the
Fund enters into a position-hedging transaction, the transaction will be
"covered" by the position being hedged or the Fund's Custodian or sub-custodian
will place cash or other liquid assets in a segregated account of the Fund (less
the value of the "covering" positions, if any) in an amount equal to the value
of the Fund's total assets committed to the consummation of the given forward
contract. If the value of the securities placed in the segregated account
declines, additional cash or other liquid assets will be placed in the account
so that the value of the account will, at all times, equal the amount of the
Fund's net commitment with respect to the forward contract.
At or before the maturity of a forward sale contract, the Fund may either
sell a portfolio security and make delivery of the currency, or retain the
security and offset its contractual obligations to deliver the currency by
purchasing a second contract pursuant to which the Fund will obtain, on the same
maturity date, the same amount of the currency which it is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund, at the time of execution of the offsetting transaction,
will incur a gain or a loss to the extent that movement has occurred in forward
contract prices. Should forward prices decline during the period between the
Fund's entering into a forward contract for the sale of a currency and the date
it enters into an offsetting contract for the purchase of the currency, the Fund
will realize a gain to the extent the price of the currency it has agreed to
purchase is less than the price of the currency it has agreed to sell. Should
forward prices increase, the Fund will suffer a loss to the extent the price of
the currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. Closing out forward purchase contracts involves similar
offsetting transactions.
The cost to the Fund of engaging in currency transactions varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because forward transactions in currencies
are usually conducted on a principal basis, no fees or commissions are involved.
The use of foreign currency contracts does not eliminate fluctuations in the
underlying prices of the securities, but it does establish a rate of exchange
that can be achieved in the future. In addition, although forward currency
contracts limit the risk of loss due to a decline in the value of the hedged
currency, they also limit any potential gain that might result if the value of
the currency increases.
If a decline in any currency is generally anticipated by the investment
adviser, the Fund may not be able to contract to sell the currency at a price
above the level to which the currency is anticipated to decline.
ADDITIONAL RISKS OF OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Options, futures contracts and options thereon may be traded on foreign
exchanges. Such transactions may not be regulated as effectively as similar
transactions in the U.S., may not involve a clearing mechanism and related
guarantees, and are subject to the risk of governmental actions affecting
trading in, or the prices of, foreign securities. The value of such positions
also
B-12
<PAGE>
could be adversely affected by (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in the foreign markets during non-business hours in the U.S.,
(iv) the imposition of different exercise and settlement terms and procedures
and margin requirements than in the U.S. and (v) lesser trading volume.
Exchanges on which options, futures and options on futures are traded may
impose limits on the positions that the Fund may take in certain circumstances.
In addition, the hours of trading of financial futures contracts and options
thereon may not conform to the hours during which the Fund may trade the
underlying securities. To the extent the futures markets close before the
securities markets, significant price and rate movements can take place in the
securities markets that cannot be reflected in the futures markets.
SPECIAL RISK CONSIDERATIONS RELATING TO FUTURES AND OPTIONS THEREON
Certain risks are inherent in the Fund's use of futures contracts and
options on futures. One such risk arises because the correlation between
movements in the price of futures contracts or options on futures and movements
in the price of the securities hedged or used for cover will not be perfect.
Another risk is that the price of futures contracts or options on futures may
not move inversely with changes in interest rates. If the Fund has sold futures
contracts to hedge securities held by the Fund and the value of the futures
position declines more than the price of such securities increases, the Fund
will realize a loss on the futures contracts which is not completely offset by
the appreciation in the price of the hedged securities. Similarly, if the Fund
has written a call on a futures contract and the value of the call increases by
more than the increase in the value of the securities held as cover, the Fund
may realize a loss on the call which is not completely offset by the
appreciation in the price of the securities held as cover and the premium
received for writing the call.
The Fund's ability to establish and close out positions in futures
contracts and options on futures contracts will be subject to the development
and maintenance of liquid markets. Although the Fund generally will purchase or
sell only those futures contracts and options thereon for which there appears to
be a liquid market, there is no assurance that a liquid market on an exchange
will exist for any particular futures contract or option thereon at any
particular time. In the event no liquid market exists for a particular futures
contract or option thereon in which the Fund maintains a position, it will not
be possible to effect a closing transaction in that contract or to do so at a
satisfactory price and the Fund would have to either make or take delivery under
the futures contract or, in the case of a written option, wait to sell the
underlying securities until the option expires or is exercised or, in the case
of a purchased option, exercise the option. In the case of a futures contract or
an option on a futures contract which the Fund has written and which the Fund is
unable to close, the Fund would be required to maintain margin deposits on the
futures contract or option and to make variation margin payments until the
contract is closed.
Successful use of futures contracts and options thereon and forward
contracts by the Fund is subject to the ability of the investment adviser to
predict correctly movements in the direction of interest and foreign currency
rates. If the investment adviser's expectations are not met, the Fund would be
in a worse position than if a hedging strategy had not been pursued. For
example, if the Fund has hedged against the possibility of an increase in
interest rates which would adversely affect the price of securities in its
portfolio and the price of such securities increases instead, the Fund will lose
part or all of the benefit of the increased value of its securities because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash to meet daily variation margin
requirements, it may have to sell securities to meet the requirements. These
sales may, but will not necessarily, be at increased prices which reflect the
rising market. The Fund may have to sell securities at a time when it is
disadvantageous to do so.
Pursuant to the requirements of the Commodity Exchange Act, as amended,
all U.S. futures contracts and options thereon must be traded on an exchange.
Since a clearing corporation effectively acts as the counterparty on every
futures contract and option thereon, the counterparty risk depends on the
strength of the clearing or settlement corporation associated with the exchange.
Additionally, although the exchanges provide a means of closing out a position
previously established, there can be no assurance that a liquid market will
exist for a particular contract at a particular time. In the case of options on
futures, if such a market does not exist, the Fund, as the holder of an option
on futures contracts, would have to exercise the option and comply with the
margin requirements for the underlying futures contract to realize any profit,
and if the Fund were the writer of the option, its obligation would not
terminate until the option expired or the Fund was assigned an exercise notice.
LIMITATIONS ON THE PURCHASE AND SALE OF FUTURES CONTRACTS AND OPTIONS ON FUTURES
CONTRACTS
The Fund will engage in transactions in futures contracts and options
thereon only for bona fide hedging, return enhancement and risk management
purposes, in each case in accordance with the rules and regulations of the CFTC,
and not for speculation.
In accordance with CFTC regulations, the Fund may not purchase or sell
futures contracts or options thereon for return enhancement or risk management
purposes if immediately thereafter the sum of the amounts of initial margin
deposits on the
B-13
<PAGE>
Fund's existing futures and premiums paid for options on futures would exceed 5%
of the liquidation value of the Fund's total assets after taking into account
unrealized profits and unrealized losses on any such contracts; provided,
however, that in the case of an option that is in-the-money at the time of the
purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The above restriction does not apply to the purchase and sale of
futures contracts and options thereon for bona fide hedging purposes. In
instances involving the purchase of futures contracts or call options thereon or
the writing of put options thereon by the Fund, an amount of cash or other
liquid assets equal to the market value of the futures contracts and options
thereon (less any related margin deposits), will be deposited in a segregated
account with the Fund's Custodian (or a futures commission merchant) to cover
the position, or alternative cover will be employed, thereby insuring that the
use of such instruments is unleveraged.
The Fund's purchase and sale of futures contracts and purchase and writing
of options on futures contracts will be for the purpose of protecting its
portfolio against anticipated future changes in interest rates or foreign
currency exchange which might otherwise either adversely affect the value of the
Fund's portfolio securities or adversely affect the prices of securities that
the Fund intends to purchase at a later date, to change the effective duration
of the Fund's portfolio and to enhance the Fund's return. The Fund expects that
in 75% of the transactions involving an anticipatory hedge it will purchase
securities for its portfolio when it closes out its earlier purchase of futures
or call options thereon or put options it has written thereon. Under unusual
market conditions, however, the Fund may terminate any of such positions without
a corresponding purchase of securities.
In addition, CFTC regulations may impose limitations on the Fund's ability
to engage in certain return enhancement and risk management strategies. There
are no limitations on the Fund's use of futures contracts and options on futures
contracts beyond the restrictions set forth above.
Although the Fund intends to purchase or sell futures and options on
futures only on exchanges where there appears to be an active market, there is
no guarantee that an active market will exist for any particular contract or at
any particular time. If there is not a liquid market at a particular time, it
may not be possible to close a futures position at such time, and, in the event
of adverse price movements, the Fund would continue to be required to make daily
cash payments of variation margin. However, in the event a futures contract has
been used to hedge portfolio securities, such securities will not be sold until
the futures contract can be terminated. In such circumstances, an increase in
the price of securities, if any, may partially or completely offset losses on
the futures contract. However, there is no guarantee that the price movements of
the securities will, in fact, correlate with the price movements in the futures
contracts and thus provide an offset to losses on a futures contract.
ILLIQUID SECURITIES
The Fund may not hold more than 15% of its net assets in repurchase
agreements which have a maturity of longer than seven days or in other illiquid
securities, including securities that are illiquid by virtue of the absence of a
readily available market (either within or outside of the United States) or
legal or contractual restrictions on resale. Historically, illiquid securities
have included securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of 1933, as
amended (Securities Act), securities which are otherwise not readily marketable
and repurchase agreements having a maturity of longer than seven days.
Securities which have not been registered under the Securities Act are referred
to as private placements or restricted securities and are purchased directly
from the issuer or in the secondary market. Mutual funds do not typically hold a
significant amount of these restricted or other illiquid securities because of
the potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and a mutual fund might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. A mutual fund might also
have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The investment adviser anticipates that the
market for certain restricted securities such as institutional commercial paper
and foreign securities will expand further as a result of this regulation and
the development of automated systems for the trading, clearance and settlement
of unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc.
B-14
<PAGE>
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The investment adviser will monitor
the liquidity of such restricted securities subject to the supervision of the
Board of Directors. In reaching liquidity decisions, the investment adviser will
consider, inter alia, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers wishing to purchase or sell
the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer). With respect to commercial paper that is issued in reliance on
Section 4(2) of the Securities Act, to be considered liquid (i) it must be rated
in one of the two highest rating categories by at least two nationally
recognized statistical rating organizations (NRSRO), or if only one NRSRO rates
the securities, by that NRSRO, or, if unrated, be of comparable quality in the
view of the investment adviser; and (ii) it must not be "traded flat" (i.e.,
without accrued interest) or in default as to principal or interest. Repurchase
agreements subject to demand are deemed to have a maturity equal to the notice
period.
The staff of the Securities and Exchange Commission (Commission) has taken
the position that purchased over-the-counter options and the assets used as
"cover" for written over-the-counter options are illiquid securities unless the
Fund and the counterparty have provided for the Fund, at the Fund's election, to
unwind the over-the-counter option. The exercise of such an option ordinarily
would involve the payment by the Fund of an amount designed to reflect the
counterparty's economic loss from an early termination, but does allow the Fund
to treat the assets used as "cover" as "liquid." The Fund will also treat
non-U.S. Government interest-only and principal-only mortgage backed security
strips as illiquid so long as the staff of the Commission maintains its position
that such securities are illiquid.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements, wherein the seller agrees
to repurchase a security from the Fund at a mutually agreed-upon time and price.
The period of maturity is usually quite short, possibly overnight or a few days,
although it may extend over a number of months. The Fund does not currently
intend to invest in repurchase agreements whose maturity exceeds one year. The
resale price is in excess of the purchase price, reflecting an agreed-upon rate
of return effective for the period of time the Fund's money is invested in the
security. The Fund's repurchase agreements will at all times be fully
collateralized in an amount at least equal to the resale price. The instruments
held as collateral are valued daily, and as the value of instruments declines,
the Fund will require additional collateral. If the seller defaults and the
value of the collateral securing the repurchase agreement declines, the Fund may
incur a loss.
The Fund participates in a joint repurchase account with other investment
companies managed by Prudential Investments Fund Management LLC (PIFM) pursuant
to an order of the Commission. On a daily basis, any uninvested cash balances of
the Fund may be aggregated with such of other investment companies and invested
in one or more repurchase agreements. Each fund participates in the income
earned or accrued in the joint account based on the percentage of its
investment.
SEGREGATED ACCOUNTS
When the Fund is required to segregate assets in connection with certain
hedging transactions, it will maintain cash or liquid assets in a segregated
account with the Fund's Custodian. "Liquid assets" mean cash, U.S. Government
securities, equity securities (including foreign securities), debt obligations
or other liquid, unencumbered assets, marked-to-market daily.
PORTFOLIO TURNOVER
The Fund has no fixed policy with respect to portfolio turnover; however,
as a result of the Fund's investment policies, its annual portfolio turnover
rate may exceed 100% although the rate is not expected to exceed 250%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the Fund's
portfolio securities, excluding securities having a maturity at the date of
purchase of one year or less. High portfolio turnover (over 100%) may involve
correspondingly greater brokerage commissions and other transaction costs which
will be borne directly by the Fund. The Fund's portfolio turnover rate was 43%,
32% and 256% for the fiscal years ended December 31, 1997, 1996 and 1995,
respectively. The Fund's portfolio turnover rate for the fiscal year ended
December 31, 1995 was high as a result of the Subadviser's attempt to minimize
the impact on principal of rising yields in the global bond market. See
"Portfolio Transactions and Brokerage" and "Taxes, Dividends and Distributions."
B-15
<PAGE>
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities. A "majority of the Fund's
outstanding voting securities," when used in this Statement of Additional
Information, means the lesser of (i) 67% of the voting shares represented at a
meeting at which more than 50% of the outstanding voting shares are present in
person or represented by proxy or (ii) more than 50% of the outstanding voting
shares.
The Fund may not:
1. Purchase securities on margin, except such short-term credits as
may be necessary for the clearance of transactions; provided that the
deposit or payment by the Fund of initial or maintenance margin in
connection with futures or options is not considered the purchase of a
security on margin.
2. Make short sales of securities or maintain a short position.
3. Issue senior securities, borrow money or pledge its assets,
except that the Fund may borrow from banks up to 20% of the value of its
total assets (calculated when the loan is made) for temporary,
extraordinary or emergency purposes, for the clearance of transactions or
for investment purposes. The Fund may pledge up to 20% of the value of its
total assets to secure such borrowings. For purposes of this restriction,
the purchase or sale of securities on a when-issued or delayed delivery
basis, forward foreign currency exchange contracts and collateral
arrangements relating thereto, and collateral arrangements with respect to
interest rate swap transactions, reverse repurchase agreements, dollar
roll transactions, options, futures contracts and options thereon and
obligations of the Fund to Directors pursuant to deferred compensation
arrangements are not deemed to be pledge of assets or the issuance of a
senior security.
4. Buy or sell commodities, commodity contracts, real estate or
interests in real estate. Transactions in foreign currencies, financial
futures contracts and forward contracts and any related options thereon
are not considered by the Fund to be transactions in commodities or
commodity contracts.
5. Make loans, except through (i) repurchase agreements and (ii) the
purchase of debt obligations and bank deposits.
6. Make investments for the purpose of exercising control or
management.
7. Act as an underwriter (except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities in
the Fund's investment portfolio).
8. Except for securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, invest 25% or more of its
total assets at the time of purchase in any one industry or in the
securities of any central government or supranational issuer.
Whenever any fundamental investment policy or investment restriction
states a maximum percentage of the Fund's assets, it is intended that if the
percentage limitation is met at the time the investment is made, a later change
in percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that the Fund's
asset coverage for borrowings falls below 300%, the Fund will take prompt action
to reduce its borrowings, as required by applicable law.
DIRECTORS AND OFFICERS
POSITION PRINCIPAL OCCUPATIONS AND
NAME, ADDRESS AND AGE(1) WITH FUND OTHER AFFILIATIONS
- ------------------------ --------- -------------------------
Edward D. Beach (73) Director President and Director of BMC Fund,
Inc., a closed-end investment
company; formerly, Vice Chairman
of Broyhill Furniture Industries,
Inc.; Certified Public
Accountant; Secretary and
Treasurer of Broyhill Family
Foundation Inc.; Member of the
Board of Trustees of Mars Hill
College; Director of The High
Yield Income Fund, Inc.
Delayne Dedrick Gold (59) Director Marketing and Management
Consultant; Director of The High
Yield Income Fund, Inc.
B-16
<PAGE>
POSITION PRINCIPAL OCCUPATIONS AND
NAME, ADDRESS AND AGE(1) WITH FUND OTHER AFFILIATIONS
- ------------------------ --------- -------------------------
*Robert F. Gunia (51) Vice Vice President (since September
President 1997) of Prudential Investments;
and Director Executive Vice President and
Treasurer (since December 1996)
of Prudential Investments Fund
Management LLC (PIFM); Senior
Vice President (since March 1987)
of Prudential Securities
Incorporated (Prudential
Securities); formerly Chief
Administrative Officer (July
1990-September 1996), Director
(January 1989-September 1996) and
Executive Vice President,
Treasurer and Chief Financial
Officer (June 1987-September
1996) of Prudential Mutual Fund
Management, Inc.; Vice President
and Director (since May 1989) of
The Asia Pacific Fund, Inc.;
Director of The High Yield Income
Fund, Inc.
Douglas H. McCorkindale (58) Director Vice Chairman (since March 1984)
and President (since September
1997) of Gannett Co. Inc.
(publishing and media); Director
of Gannett Co. Inc., Frontier
Corporation and Continental
Airlines, Inc.
*Mendel A. Melzer, CFA (37) Director Chief Investment Officer (since
751 Broad St. October 1996) of Prudential
Newark, NJ 07102 Mutual Funds; formerly Chief
Financial Officer (November
1955-September 1996) of
Prudential Investments, Senior
Vice President and Chief
Financial Officer (April
1993-November 1995) of Prudential
Preferred Financial Services,
Managing Director (April
1991-April 1993) of Prudential
Investment Advisors and Senior
Vice President (July 1989-April
1991) of Prudential Capital
Corporation; Chairman and
Director of Prudential Series
Fund, Inc.; Director of The High
Yield Income Fund, Inc.
Thomas T. Mooney (56) Director President of the Greater Rochester
Metro Chamber of Commerce; former
Rochester City Manager; Trustee
of Center for Governmental
Research, Inc.; Director of Blue
Cross of Rochester, The Business
Council of New York State,
Executive Service Corps of
Rochester, Monroe County Water
Authority, Rochester Jobs, Inc.,
Monroe County Industrial
Development Corporation,
Northeast Midwest Institute and
The High Yield Income Fund, Inc.;
President, Director and Treasurer
of First Financial Fund, Inc. and
The High Yield Plus Fund, Inc.
Stephen P. Munn (55) Director Chairman (since January 1994),
Director and President (since
1988) and Chief Executive Officer
(1988-December 1993) of Carlisle
Companies Incorporated
(manufacturer of industrial
products).
*Richard A. Redeker (54) President Employee of Prudential Investments;
751 Broad St. and Director formerly President, Chief
Newark, NJ 07102 Executive Officer and Director
(October 1993-September 1996) of
Prudential Mutual Fund
Management, Inc. (PMF), Executive
Vice President, Director and
Member of the Operating Committee
(October 1993-September 1996) of
Prudential Securities, Director
(October 1993-September 1996) of
Prudential Securities Group,
Inc.; Executive Vice President
(July 1994-September 1996) of The
Prudential Investment
Corporation; Director (January
1994-September 1996) of
Prudential Mutual Fund
Distributors, Inc. and Prudential
Mutual Fund Services, Inc., and
Senior Executive Vice President
and Director (September
1978-September 1993) of Kemper
Financial Services, Inc.;
President and Director of The
High Yield Income Fund, Inc.
B-17
<PAGE>
POSITION PRINCIPAL OCCUPATIONS AND
NAME, ADDRESS AND AGE(1) WITH FUND OTHER AFFILIATIONS
- ------------------------ --------- -------------------------
Robin B. Smith (58) Director Chairman and Chief Executive
Officer (since August 1996),
formerly President and Chief
Executive Officer (January
1989-August 1996) and President
and Chief Operating Officer
(September 1981-December 1988) of
Publishers Clearing House;
Director of BellSouth
Corporation, Texaco Inc., Spring
Industries Inc. and Kmart
Corporation.
Louis A. Weil, III (56) Director Publisher and Chief Executive
Officer (since January 1996) and
Director (since September 1991)
of Central Newspapers, Inc.;
Chairman of the Board (since
January 1996), Publisher and
Chief Executive Officer (August
1991-December 1995) of Phoenix
Newspapers, Inc.; formerly
Publisher (May 1989-March 1991)
of Time Magazine, President,
Publisher & CEO (February
1986-August 1989) of The Detroit
News and member of the Advisory
Board, Chase Manhattan
Bank-Westchester; Director of The
High Yield Income Fund, Inc.
Clay T. Whitehead (59) Director President (since May 1983) of
National Exchange Inc. (new
business development firm).
Grace C. Torres (38) Treasurer First Vice President (since
and Principal December 1996) of PIFM; First
Financial and Vice President (since March 1994)
Accounting of Prudential Securities;
Officer formerly First Vice President
(March 1994-September 1996) of
PMF and Vice President (July
1989-March 1994) of Bankers Trust
Corporation.
Stephen M. Ungerman (44) Assistant Tax Director (since March 1996) of
Treasurer Prudential Investments and the
Private Asset Group of The
Prudential Insurance Company of
America; formerly First Vice
President (February
1993-September 1996) of PMF and
Senior Tax Manager (1981-January
1993) of Price Waterhouse LLP.
S. Jane Rose (52) Secretary Senior Vice President (since
December 1996) of PIFM; Senior
Vice President and Senior Counsel
(since July 1992) of Prudential
Securities: formerly Senior Vice
President (January 1991-September
1996) and Senior Counsel (June
1987-September 1996) of PMF.
Marguerite E. H. Assistant Vice President and Associate
Morrison (41) Secretary General Counsel (since December
1996) of PIFM, Vice President and
Associate General Counsel (since
September 1987) of Prudential
Securities; formerly Vice
President and Associate General
Counsel (June 1991-September
1996) of PMF. Vice President and
Associate General Counsel of
Prudential Securities.
- ----------
(1) Unless otherwise noted, the address of the Directors and Officers is c/o
Prudential Investments Fund Management LLC, Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102-4077.
* "Interested" Director, as defined in the Investment Company Act, by reason
of affiliation with Prudential, Prudential Securities or PIFM.
B-18
<PAGE>
Directors and officers of the Fund are also trustees, directors and
officers of some or all of the other investment companies distributed by
Prudential Securities.
The officers conduct and supervise the daily business operations of the
Fund, while the Directors, in addition to their functions set forth under
"Manager" and "Distributor," review such actions and decide on general policy.
Pursuant to the terms of the Management Agreement with the Fund, the
Manager pays all compensation of officers and employees of the Fund as well as
the fees and expenses of all Directors of the Fund who are affiliated persons of
the Manager. The Fund pays each of its Directors who is not an affiliated person
of PIFM or the investment adviser annual compensation of $3,000, in addition to
certain out-of-pocket expenses. The amount of annual compensation paid to each
Director may change as a result of the introduction of additional funds on the
boards of which the Directors will be asked to serve.
Directors may receive their Directors' fees pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of such Directors' fees which accrue interest at a rate
equivalent to the prevailing rate applicable to 90-day U.S. Treasury bills at
the beginning of each calendar quarter or, pursuant to an SEC exemptive order,
at the daily rate of return of the Fund. Payment of the interest so accrued is
also deferred and accruals become payable at the option of the Director. The
Fund's obligation to make payments of deferred Directors' fees, together with
interest thereon, is a general obligation of the Fund. Currently Ms. Smith has
agreed to defer her fees at the Fund rate.
The Directors have adopted a retirement policy which calls for the
retirement of Directors on December 31 of the year in which they reach the age
of 72, except that retirement is being phased in for Directors who were age 68
or older as of December 31, 1993. Under this phase-in provision, Mr. Beach is
scheduled to retire on December 31, 1999.
The following table sets forth the aggregate compensation paid by the Fund
to the Directors who are not affiliated with the Manager for the fiscal year
ended December 31, 1997 and the aggregate compensation paid to such Directors
for service on the Fund's Board and the boards of all other investment companies
managed by PIFM (Fund Complex) for the calendar year ended December 31, 1997.
TOTAL 1997
COMPENSATION
FROM FUND
AGGREGATE AND FUND
COMPENSATION COMPLEX PAID
NAME OF DIRECTOR FROM FUND TO DIRECTORS
---------------- ------------ ------------
Edward D. Beach ............................ $3,000 $135,000(38/63)**
Delayne Dedrick Gold ....................... $3,000 $135,000(38/63)**
Robert F. Gunia+ ........................... -- --
Donald D. Lennox (Retired Director) ........ $3,000 $ 90,000(26/50)**
Douglas H. McCorkindale* ................... $3,000 $ 70,000(20/35)**
Mendel A. Melzer+ .......................... -- --
Thomas T. Mooney* .......................... $3,000 $115,000(31/64)**
Stephen P. Munn ............................ $3,000 $ 45,000(15/21)**
Richard A. Redeker+ ........................ -- --
Robin B. Smith* ............................ $3,000 $ 90,000(27/34)**
Louis A. Weil III .......................... $3,000 $ 90,000(26/50)**
Clay T. Whitehead .......................... $3,000 $ 45,000(15/21)**
- ----------
+ Robert F. Gunia, Mendel A. Melzer and Richard A. Redeker, who are
interested Directors, do not receive compensation from the Fund or any
fund in the Fund Complex.
* Total compensation from all of the funds in the Fund Complex for the
calendar year ended December 31, 1997 includes amounts deferred at the
election of Directors under the funds' deferred compensation plans.
Including accrued interest, total compensation amounted to approximately
$71,640, $143,909 and $139,097 for Messrs. McCorkindale and Mooney and Ms.
Smith, respectively.
** Indicates number of funds/portfolios in Fund Complex (including the Fund)
to which aggregate compensation relates.
As of February 6, 1998, the Directors and officers of the Fund as a group
owned less than 1% of the outstanding common stock of the Fund. As of February
6, 1998 the Fund held Class A shares representing deferred compensation of Ms.
Smith. Although Directors are not the recordholders of shares held as deferred
fees, they are subject to the same rate of return as Fund shareholders.
As of February 6, 1998, Prudential Securities was record holder of
5,245,914 Class A shares (22.9%), 211,991 Class B shares (73.2%), 15,112 Class C
shares (59.5%) and 102,287 Class Z shares (99.9%) of the Fund. In the event of
any meetings of
B-19
<PAGE>
shareholders, Prudential Securities will forward, or cause the forwarding of,
proxy materials to the beneficial owners for which it is the record holder.
As of February 6,1998 the beneficial owners, directly or indirectly, of
more than 5% of the outstanding shares of any class of shares of the Fund were
Smith Barney Inc., 333 West 34th St, New York, NY 10001-2483, who held 1,477,146
Class A shares (6.4%); Smith Barney, Inc. 388 Greenwich Street, New York, NY
10013-2339, who held 19,107 Class B shares (6.6%); Mrs. Pauline C. Desrosiers,
1077 East Rd., Tiverton, RI 02878-2804 who held 1,298 Class C shares (5.1%); Mr.
Jack Albalah & Mrs. Arlene Albalah JT TEN, P.O. Box 2052, Fairlawn, NJ
07410-4818 who held 1,270 Class C shares (5.0%); Donaldson, Lufkin & Jenrette
Securities Corporation, P.O. Box 2052, Jersey City, NJ 07303-2052 who held 2,926
Class C shares (11.5%); Prudential Securities C/F Richard J. Finkelstein, SEP
DTD 09/25/92, 870 S. Green Bay Rd., Lake Forest, IL 60045-3964 who held 1,397
Class C shares (5.5%); Prudential Securities, C/F Mr. Alfred F. Ortwein, Jr.,
IRA Rollover, DTD 03/20/97, 2045 Mount Heron Dr., Ellicott City, MD 21042-1851
who held 1,980 Class C shares (7.7%); Richard Headley, 2045 N. Green Bay Rd.,
Racine, WI 53405-1503 who held 1,920 Class C shares (7.5%); Terri Headley, 2045
N. Green Bay Rd., Racine, WI 53405-1503 who held 1,438 Class C shares (5.6%);
Prudential Bank and Trust Co., C/F The IRA of Leona N. Murphy, 53 W. Shore Dr.,
Arcadia, OK 73007-7107 who held 2,341 Class C shares (9.2%); Mrs. Mildred
Weintraub TTEE, Mildred Weintraub Trust, UA DTD 07/30/89, 274 Running Springs
Dr., Palm Desert, CA 92211-3200 who held 4,343 Class C shares (17.0%); Mr. Irwin
Peckman TTEE, Irving C. Rosenkrantz Marital Trust, UA DTD 05/12/96, 3566 Loire
Ln., Palm Beach Gardens, FL 33410-1465 who held 2,573 Class C shares (10.1%);
Mr. Ben Edwards TTEE, George Stratton Edwards Trust, UA DTD 11/19/97, 190
Fisherville Rd., Collierville, TN 38017-4102 who held 5,436 Class Z shares
(5.3%); Mr. Charles Smith, Jr., 2 Hazelwood Ct., San Antonio, TX 78257-1706 who
held 6,022 Class Z shares (5.8%); Prudential Securities, C/F Mrs. Mary Kay
Estigoy, IRA DTD 06/16/97, 5805 Glen Eagles Dr., West Bloomfield, MI 48323-2206
who held 7,466 Class Z shares (7.2%) and Mrs. Tracey H. Pullen, 25903 Mission
St., Carmel, CA 93923-9211 who held 12,852 Class Z shares (12.5%).
MANAGER
The manager of the Fund is Prudential Investments Fund Management LLC
(PIFM or the Manager), Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077. PIFM serves as manager to all of the other investment
companies that, together with the Fund, comprise the "Prudential Mutual Funds."
See "How the Fund is Managed" in the Prospectus. As of January 31, 1998, PIFM
managed and/or administered open-end and closed-end management investment
companies with assets of approximately $63 billion. According to the Investment
Company Institute, as of October 31, 1997, the Prudential Mutual Funds were the
17th largest family of mutual funds in the United States.
PIFM is a subsidiary of Prudential Securities and Prudential. Prudential
Mutual Fund Services LLC (PMFS or the Transfer Agent), a wholly owned subsidiary
of PIFM, serves as the transfer agent for the Prudential Mutual Funds and in
addition, provides customer service, recordkeeping and management and
administration services to qualified plans.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PIFM, subject to the supervision of the Fund's Board of Directors
and in conformity with the stated policies of the Fund, manages both the
investment operations of the Fund and the composition of the Fund's portfolio,
including the purchase, retention, disposition and loan of securities. In
connection therewith, PIFM is obligated to keep certain books and records of the
Fund. PIFM also administers the Fund's corporate affairs and, in connection
therewith, furnishes the Fund with office facilities, together with those
ordinary clerical and bookkeeping services which are not being furnished by
State Street Bank and Trust Company, the Fund's custodian, and PMFS, the Fund's
transfer and dividend disbursing agent. The management services of PIFM for the
Fund are not exclusive under the terms of the Management Agreement and PIFM is
free to, and does, render management services to others.
For its services, PIFM receives, pursuant to the Management Agreement, a
fee at an annual rate of .75 of 1% of the Fund's average daily net assets up to
$500 million, .70 of 1% of such assets between $500 million and $1 billion and
.65 of 1% of such assets in excess of $1 billion. The fee is computed daily and
payable monthly. The Management Agreement also provides that, in the event the
expenses of the Fund (including the fees of PIFM, but excluding interest, taxes,
brokerage commissions, distribution fees and litigation and indemnification
expenses and other extraordinary expenses not incurred in the ordinary course of
the Fund's business) for any fiscal year exceed the lowest applicable annual
expense limitation established and enforced pursuant to the statutes or
regulations of any jurisdiction in which the Fund's shares are qualified for
offer and sale, the compensation due to PIFM will be reduced by the amount of
such excess. No jurisdiction currently limits the Fund's expenses.
B-20
<PAGE>
In connection with its management of the business affairs of the Fund,
PIFM bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel
except the fees and expenses of members of the Board of Directors who are not
affiliated persons of PIFM or the Fund's investment adviser;
(b) all expenses incurred by PIFM or by the Fund in connection with
managing the ordinary course of the Fund's business, other than those assumed by
the Fund as described below; and
(c) the costs and expenses payable to The Prudential Investment
Corporation, doing business as Prudential Investments (PI or the Subadviser),
pursuant to the subadvisory agreement between PIFM and PI (the Subadvisory
Agreement).
Under the terms of the Management Agreement, the Fund is responsible for
the payment of the following expenses: (a) the fees payable to the Manager, (b)
the fees and expenses of Directors who are not affiliated persons of the Manager
or the Fund's investment adviser, (c) the fees and certain expenses of the
Custodian and Transfer Agent, including the cost of providing records to the
Manager in connection with its obligation of maintaining required records of the
Fund and of pricing the Fund's shares, (d) the charges and expenses of legal
counsel and independent accountants for the Fund, (e) brokerage commissions and
any issue or transfer taxes chargeable to the Fund in connection with its
securities transactions, (f) all taxes and corporate fees payable by the Fund to
governmental agencies, (g) the fees of any trade associations of which the Fund
may be a member, (h) the cost of stock certificates representing shares of the
Fund, (i) the cost of fidelity and liability insurance, (j) certain organization
expenses of the Fund and the fees and expenses involved in registering and
maintaining registration of the Fund and of its shares with the Commission and
the states, including the preparation and printing of the Fund's registration
statements and prospectuses for such purposes, (k) allocable communications
expenses with respect to investor services and all expenses of shareholders' and
Board of Directors' meetings and of preparing, printing and mailing reports,
proxy statements and prospectuses to shareholders in the amount necessary for
distribution to the shareholders, (l) litigation and indemnification expenses
and other extraordinary expenses not incurred in the ordinary course of the
Fund's business and (m) distribution fees.
The Management Agreement provides that PIFM will not be liable for any
error of judgment or for any loss suffered by the Fund in connection with the
matters to which the Management Agreement relates, except a loss resulting from
willful misfeasance, bad faith, gross negligence or reckless disregard of duty.
The Management Agreement provides that it will terminate automatically if
assigned, and that it may be terminated without penalty by either party upon not
more than 60 days' nor less than 30 days' written notice. The Management
Agreement will continue in effect for a period of more than two years from the
date of execution only so long as such continuance is specifically approved at
least annually in conformity with the Investment Company Act. The Management
Agreement was last approved by the Board of Directors of the Fund, including a
majority of the Directors who are not parties to the contract or interested
persons of any such party as defined in the Investment Company Act, on May 21,
1997 and by shareholders of the Fund on September 29, 1988.
PIFM earned management fees of $1,549,812, $2,317,938 and $4,098,739 for
the fiscal years ended December 31, 1997, 1996 and 1995, respectively.
PIFM has entered into a Subadvisory Agreement with PI. The Subadvisory
Agreement provides that PI will furnish investment advisory services in
connection with the management of the Fund. In connection therewith, PI is
obligated to keep certain books and records of the Fund. PI has entered into an
agreement with PRICOA Asset Management Ltd. (PRICOA and collectively with PI,
the investment adviser) under which PRICOA provides investment advisory services
to the Fund. 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. PI is reimbursed by PIFM for the
reasonable costs and expenses incurred by PI in furnishing those services.
PRICOA is reimbursed by PI for its reasonable costs and expenses incurred in
furnishing advisory services. Between October 1 and December 31, 1997, PRICOA
was paid by PI a fee at an annual rate of .30 of 1% of the Fund's average daily
net assets for furnishing these services.
The investment adviser maintains a credit unit which provides credit
analysis and research on taxable fixed-income securities. The portfolio manager
routinely consults with the credit unit in managing the Fund's portfolio. The
credit unit reviews on an ongoing basis issuers of taxable fixed-income
obligations, including prospective purchases and portfolio holdings of the Fund.
Credit analysts have broad access to research and financial reports, data
retrieval services and industry analysts.
Credit analysts review financial statements published by corporate (and
governmental) issuers to examine income statements, balance sheets and cash flow
numbers. They evaluate this data against their expectations of sales, earnings
growth and trends in credit ratios. They study the impact of economic,
regulatory and political developments on companies and
B-21
<PAGE>
industries and look at the relative value of companies. They are in regular
communication both in person and by telephone with company management, Wall
Street analysts and rating agencies.
The PI Subadvisory Agreement was last approved by the Board of Directors,
including a majority of the Board of Directors who are not parties to the
contract or interested persons of any such party as defined in the Investment
Company Act, on May 21, 1997 and was approved by shareholders of the Fund on
September 29, 1988.
The PI Subadvisory Agreement provides that it will terminate in the event
of its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The PI Subadvisory Agreement may be
terminated by the Fund, PIFM or PI upon not more than 60 days' nor less than 30
days' written notice. The PI Subadvisory Agreement provides that it will
continue in effect for a period of more than two years from its execution only
so long as such continuance is specifically approved at least annually in
accordance with the requirements of the Investment Company Act. The PRICOA
Subadvisory Agreement provides that PRICOA can terminate it on 60 days' written
notice and that PI can terminate it at any time and the termination would take
effect immediately. The PRICOA Subadvisory Agreement also provides that it will
terminate automatically in the event of its assignment (as defined in the
Investment Company Act).
DISTRIBUTOR
Prudential Securities Incorporated (Prudential Securities or the
Distributor), One Seaport Plaza, New York, New York 10292 acts as the
distributor of the Fund's shares.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively the Plans) adopted by the Fund
under Rule 12b-1 under the Investment Company Act and a distribution agreement
(the Distribution Agreement), the Distributor incurs the expenses of
distributing the Fund's Class A, Class B and Class C shares. The Distributor
also incurs the expenses of distributing the Fund's Class Z shares under a
Distribution Agreement, none of which are reimbursed or paid for by the Fund.
See "How the Fund is Managed--Distributor" in the Prospectus.
Prior to January 15, 1996, the Fund operated as a closed-end fund and
offered only one class of shares (the then existing Class A shares). On
September 11, 1995, the Board of Directors, including a majority of the
Directors who were not interested persons of the Fund and who had no direct or
indirect financial interest in the operation of the Plans or in any agreement
related to the Plans (the Rule 12b-1 Directors), at a meeting called for the
purpose of voting on the Class A Plan, adopted a plan of distribution for the
Class A shares of the Fund. The Class A Plan was approved by shareholders of the
Fund on December 6, 1995. On September 11, 1995, the Rule 12b-1 Directors, at a
meeting called for the purpose of voting on the Class B and Class C Plans,
adopted plans of distribution for the Class B and Class C shares of the Fund.
The Class B and Class C Plans were approved by the sole shareholder of each
class on January 15, 1996.
CLASS A PLAN. For the fiscal year ended December 31, 1997, the Distributor
received payments of $307,192 under the Class A Plan. This amount was primarily
expended for payments of account servicing fees to financial advisers and other
persons who sell Class A shares. For the fiscal year ended December 31, 1997,
the Distributor also received approximately $37,800 in initial sales charges.
CLASS B PLAN. For the fiscal year ended December 31, 1997, the Distributor
received $9,344 from the Fund under the Class B Plan and spent $87,800 in
distributing the Fund's Class B shares. It is estimated that of the latter
amount, 19.5% ($17,100) was spent on printing and mailing of prospectuses to
other than current shareholders; 11.0% ($9,700) on compensation to Pruco
Securities Corporation, an affiliated broker-dealer (Prusec), for commissions to
its representatives and other expenses, including an allocation of overhead and
other branch office distribution-related expenses, incurred by it for
distribution of Fund shares; and 69.5% ($61,000) in the aggregate for (i)
payments of commissions and account servicing fees to financial advisers 24.3%
($21,300) and (ii) an allocation of overhead and other branch office
distribution-related expenses for payments of related expenses 45.2% ($39,700).
The term "overhead and other branch office distribution-related expenses"
represents (a) the expenses of operating Prudential Securities' branch offices
in connection with the sale of Fund shares, including lease costs, the salaries
and employee benefits of operations and sales support personnel, utility costs,
communications costs and the costs of stationery and supplies, (b) the costs of
client sales seminars, (c) expenses of mutual fund sales coordinators to promote
the sale of Fund shares and (d) other incidental expenses relating to branch
promotion of Fund sales.
The Distributor also receives the proceeds of contingent deferred sales
charges paid by investors upon certain redemptions of Class B shares. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred SaleS Charges"
in the Prospectus. For the fiscal year ended December 31, 1997, the Distributor
received approximately $6,000 in contingent deferred sales charges attributable
to Class B shares.
CLASS C PLAN. For the fiscal year ended December 31, 1997, the Distributor
received $2,984 under the Class C Plan and spent $13,700 in distributing Class C
shares. It is estimated that of the latter amount, 55.6% ($7,600) was spent on
printing and
B-22
<PAGE>
mailing of prospectuses to other than current shareholders; and 44.4% ($6,100)
on the aggregate of (i) payments of commissions and account servicing fees to
financial advisers (14.7% or $2,000) and (ii) an allocation of overhead and
other branch office distribution-related expenses (29.7% or $4,100).
The Distributor also receives the proceeds of contingent deferred sales
charges paid by investors upon certain redemptions of Class C shares. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred SaleS Charges"
in the Prospectus. For the fiscal year ended December 31, 1997, the Distributor
received approximately $4,900 in contingent deferred sales charges attributable
to Class C shares.
The Class A, Class B and Class C Plans continue in effect from year to
year, provided that each such continuance is approved at least annually by a
vote of the Board of Directors, including a majority vote of the Rule 12b-1
Directors, cast in person at a meeting called for the purpose of voting on such
continuance. A Plan may be terminated at any time, without penalty, by the vote
of a majority of the Rule 12b-1 Directors or by the vote of the holders of a
majority of the outstanding shares of the applicable class of the Fund on not
more than 30 days' written notice to any other party to the Plan. The Plans may
not be amended to increase materially the amounts to be spent for the services
described therein without approval by the shareholders of the applicable class
(by both Class A and Class B shareholders, voting separately, in the case of
material amendments to the Class A Plan), and all material amendments are
required to be approved by the Board of Directors in the manner described above.
Each Plan will automatically terminate in the event of its assignment. The Fund
will not be contractually obligated to pay expenses incurred under any Plan if
it is terminated or not continued.
Pursuant to each Plan, the Board of Directors will review at least
quarterly a written report of the distribution expenses incurred on behalf of
each class of shares of the Fund by the Distributor. The report will include an
itemization of the distribution expenses and the purposes of such expenditures.
In addition, as long as the Plans remain in effect, the selection and nomination
of Rule 12b-1 Directors shall be committed to the Rule 12b-1 Directors.
Pursuant to the Distribution Agreement, the Fund has agreed to indemnify
the Distributor to the extent permitted by applicable law against certain
liabilities under federal securities laws. The Distribution Agreement was last
approved by the Board of Directors, including a majority of the Rule 12b-1
Directors, on May 21, 1997.
NASD MAXIMUM SALES CHARGE RULE. Pursuant to rules of the NASD, the
Distributor is required to limit aggregate initial sales charges, deferred sales
charges and asset-based sales charges to 6.25% of total gross sales of each
class of shares. Interest charges on unreimbursed distribution expenses equal to
the prime rate plus one percent per annum may be added to the 6.25% limitation.
Sales from the reinvestment of dividends and distributions are not included in
the calculation of the 6.25% limitation. The annual asset-based sales charge on
shares of the Fund may not exceed .75 of 1% per class. The 6.25% limitation
applies to each class of the Fund rather than on a per shareholder basis. If
aggregate sales charges were to exceed 6.25% of total gross sales of any class,
all sales charges on shares of that class would be suspended.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities,
futures contracts and options on such securities and futures for the Fund, the
selection of brokers, dealers and futures commission merchants to effect the
transactions and the negotiation of brokerage commissions, if any. (For purposes
of this section, the term "Manager" includes the investment adviser.) On a
national securities exchange, broker-dealers may receive negotiated brokerage
commissions on Fund portfolio transactions, including options, futures, and
options on futures transactions and the purchase and sale of underlying
securities upon the exercise of options. On a foreign securities exchange,
commissions may be fixed. Orders may be directed to any broker or futures
commission merchant including, to the extent and in the manner permitted by
applicable law, Prudential Securities and its affiliates.
In the over-the-counter market, securities are generally traded on a "net"
basis with dealers acting as principal for their own accounts without a stated
commission, although the price of the security usually includes a profit to the
dealer. In underwritten offerings, securities are purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments and agency securities may be purchased directly from the
issuer, in which case no commissions or discounts are paid. The Fund will not
deal with Prudential Securities (or any affiliate) in any transaction in which
Prudential Securities (or any affiliate) acts as principal. Thus, it will not
deal in the over-the-counter market with Prudential Securities acting as market
maker, and it will not execute a negotiated trade with Prudential Securities if
execution involves Prudential Securities' acting as principal with respect to
any part of the Fund's order.
B-23
<PAGE>
In placing orders for portfolio securities of the Fund, the Manager is
required to give primary consideration to obtaining the most favorable price and
efficient execution. This means that the Manager will seek to execute each
transaction at a price and commission, if any, which provide the most favorable
total cost or proceeds reasonably attainable in the circumstances. While the
Manager generally seeks reasonably competitive spreads or commissions, the Fund
will not necessarily be paying the lowest spread or commission available. Within
the framework of this policy, the Manager will consider the research and
investment services provided by brokers, dealers or futures commission merchants
who effect or are parties to portfolio transactions of the Fund, the Manager or
the Manager's other clients. Such research and investment services are those
which brokerage houses customarily provide to institutional investors and
include statistical and economic data and research reports on particular
companies and industries. Such services are used by the Manager in connection
with all of its investment activities, and some of such services obtained in
connection with the execution of transactions for the Fund may be used in
managing other investment accounts. Conversely, brokers, dealers or futures
commission merchants furnishing such services may be selected for the execution
of transactions of such other accounts, whose aggregate assets are far larger
than the Fund's, and the services furnished by such brokers, dealers or futures
commission merchants may be used by the Manager in providing investment
management for the Fund. Commission rates are established pursuant to
negotiations with the broker, dealer or futures commission merchant based on the
quality and quantity of execution services provided by the broker, dealer or
futures commission merchant in the light of generally prevailing rates. The
Manager's policy is to pay higher commissions to brokers and futures commission
merchants, other than Prudential Securities, for particular transactions than
might be charged if a different broker had been selected, on occasions when, in
the Manager's opinion, this policy furthers the objective of obtaining best
price and execution. In addition, the Manager is authorized to pay higher
commissions on brokerage transactions for the Fund to brokers and futures
commission merchants other than Prudential Securities in order to secure
research and investment services described above, subject to review by the
Fund's Board of Directors from time to time as to the extent and continuation of
this practice. The allocation of orders among brokers and futures commission
merchants and the commission rates paid are reviewed periodically by the Fund's
Board of Directors. Portfolio securities may not be purchased from any
underwriting or selling syndicate of which Prudential Securities (or any
affiliate), during the existence of the syndicate, is a principal underwriter
(as defined in the Investment Company Act), except in accordance with rules of
the Commission. This limitation, in the opinion of the Fund, will not
significantly affect the Fund's ability to pursue its present investment
objective. However, in the future, in other circumstances, the Fund may be at a
disadvantage because of this limitation in comparison to other funds with
similar objectives but not subject to such limitations.
Subject to the above considerations, Prudential Securities (or any
affiliate) may act as a broker or futures commission merchant for the Fund. In
order for Prudential Securities (or any affiliate) to effect any portfolio
transactions for the Fund, the commissions, fees or other remuneration received
by Prudential Securities (or any affiliate) must be reasonable and fair compared
to the commissions, fees or other remuneration paid to other such brokers or
futures commission merchants in connection with comparable transactions
involving similar securities or futures contracts being purchased or sold on an
exchange or board of trade during a comparable period of time. This standard
would allow Prudential Securities (or any affiliate) to receive no more than the
remuneration which would be expected to be received by an unaffiliated broker or
futures commission merchant in a commensurate arm's-length transaction.
Furthermore, the Board of Directors of the Fund, including a majority of the
non-interested Directors, have adopted procedures which are reasonably designed
to provide that any commissions, fees or other remuneration paid to Prudential
Securities (or any affiliate) are consistent with the foregoing standard. In
accordance with Section 11(a) of the Securities Exchange Act of 1934, as
amended, Prudential Securities may not retain compensation for effecting
transactions on a national securities exchange for the Fund unless the Fund has
expressly authorized the retention of such compensation. Prudential Securities
must furnish to the Fund at least annually a statement setting forth the total
amount of all compensation retained by Prudential Securities for transactions
effected by the Fund during the applicable period. Brokerage transactions with
Prudential Securities (or any affiliate) are also subject to such fiduciary
standards as may be imposed upon Prudential Securities (or such affiliates) by
applicable law.
The Fund paid no brokerage commissions, including none to Prudential
Securities or any affiliate, for the fiscal years ended December 31, 1997, 1996
and 1995.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next
determined net asset value (NAV) per share plus a sales charge which, at the
election of the investor, may be imposed either (i) at the time of purchase
(Class A shares) or (ii) on a deferred basis (Class B or Class C shares). Class
Z shares of the Fund are offered to a limited group of investors at NAV without
any sales charge. See "Shareholder Guide--How to Buy Shares of the Fund" in the
Prospectus.
Each class of shares represents an interest in the same assets of the Fund
and is identical in all respects except that (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
B-24
<PAGE>
any sales charges and distribution and/or service fees), which may affect
performance, (ii) each class has exclusive voting rights with respect to any
matter submitted to shareholders that relates solely to its arrangement and has
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class, (iii) each
class has a different exchange privilege, (iv) only Class B shares have a
conversion feature and (v) Class Z shares are offered exclusively for sale to a
limited group of investors. See "Distributor" and "Shareholder Investment
Account--Exchange Privilege."
ISSUANCE OF FUND SHARES FOR SECURITIES
Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to (i) reorganizations, (ii) statutory mergers, or
(iii) other acquisitions of portfolio securities that: (a) meet the investment
objective and policies of the Fund, (b) are liquid and not subject to
restrictions on resale, (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange or
market, and (d) are approved by the Fund's investment adviser.
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A* shares of the Fund are sold at a maximum sales charge of
4% and Class B*, Class C* and Class Z shares are sold at NAV. Using the Fund's
NAV at December 31, 1997, the maximum offering price of the Fund's shares is as
follows:
CLASS A
Net asset value and redemption price per Class A share ........ $7.88
Maximum sales charge (4% of offering price) ................... .33
Maximum offering price to public .............................. $8.21
CLASS B
Net asset value, offering price and redemption price
to public per Class B share* .................................. $7.89
CLASS C
Net asset value, offering price and redemption price
to public per Class C share* .................................. $7.89
CLASS Z
Net asset value, redemption price and offering price
to public per Class Z share ................................... $7.88
- ----------
* Class B and Class C shares are subject to a contingent deferred sales
charge on certain redemptions. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential Mutual Funds, the purchases
may be combined to take advantage of the reduced sales charges applicable to
larger purchases. See the table of breakpoints under "Shareholder
Guide--Alternative Purchase Plan" in the Prospectus.
An eligible group of related Fund investors includes any combination of
the following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or group
that holds 25% or more of the outstanding voting securities of a
company will be deemed to control the company, and a partnership
will be deemed to be controlled by each of its general partners);
(e) a trust created by the individual, the beneficiaries of which are
the individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act
account created by the individual or the individual's spouse; and
(g) one or more employee benefit plans of a company controlled by an
individual.
B-25
<PAGE>
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charges will be granted
subject to confirmation of the investor's holdings. The Combined Purchase and
Cumulative Purchase Privilege does not apply to individual participants in any
retirement or group plans.
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) to determine the
reduced sales charge. However, the value of shares held directly with the
Transfer Agent and through Prudential Securities will not be aggregated to
determine the reduced sales charge. All shares must be held either directly with
the Transfer Agent or through Prudential Securities. The value of existing
holdings for purposes of determining the reduced sales charge is calculated
using the maximum offering price (NAV plus maximum sales charge) as of the
previous business day. See "Net Asset Value" in the Prospectus. The Distributor
must be notified at the time of purchase that the investor is entitled to a
reduced sales charge. The reduced sales charges will be granted subject to
confirmation of the investor's holdings. Rights of accumulation are not
available to individual participants in any retirement or group plans.
LETTER OF INTENT. Reduced sales charges are available to investors (or an
eligible group of related investors), including retirement and group plans, who
enter into a written Letter of Intent providing for the purchase, within a
thirteen-month period, of shares of the Fund and shares of other Prudential
Mutual Funds (Investment Letter of Intent). Retirement and group plans may also
qualify to purchase Class A shares at NAV by entering into a Letter of Intent
whereby they agree to enroll, within a thirteen-month period, a specified number
of eligible employees or participants (Participant Letter of Intent).
For purposes of the Investment Letter of Intent, all shares of the Fund
and shares of other Prudential Mutual Funds (excluding money market funds other
than those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent
and through Prudential Securities will not be aggregated to determine the
reduced sales charge. All shares must be held either directly with the Transfer
Agent or through Prudential Securities.
A Letter of Intent permits a purchaser, in the case of an Investment
Letter of Intent, to establish a total investment goal to be achieved by any
number of investments over a thirteen-month period and, in the case of a
Participant Letter of Intent, to establish a minimum eligible employee or
participant enrollment goal over a thirteen-month period. Each investment made
during the period, in the case of an Investment Letter of Intent will receive
the reduced sales charge applicable to the amount represented by the goal, as if
it were a single investment. In the case of a Participant Letter of Intent, each
investment made during the period will be made at net asset value. Escrowed
Class A shares totaling 5% of the dollar amount of the Letter of Intent will be
held by the Transfer Agent in the name of the purchaser, except in the case of
retirement and group plans where the employer or plan sponsor will be
responsible for paying any applicable sales charge. The effective date of an
Investment Letter of Intent (except in the case of retirement and group plans)
may be back-dated up to 90 days, in order that any investments made during this
90-day period, valued at the purchaser's cost, can be applied to the fulfillment
of the Letter of Intent goal.
The Investment Letter of Intent does not obligate the investor to
purchase, nor the Fund to sell, the indicated amount. Similarly, the Participant
Letter of Intent does not obligate the retirement or group plan to enroll the
indicated number of eligible employees or participants. In the event the Letter
of Intent goal is not achieved within the thirteen-month period, the purchaser
(or the employer or plan sponsor in the case of any retirement or group plan) is
required to pay the difference between the sales charge otherwise applicable to
the purchases made during this period and sales charge actually paid. Such
payment may be made directly to the Distributor or, if not paid, the Distributor
will liquidate sufficient escrowed shares to obtain such difference. If the goal
is exceeded in an amount which qualifies for a lower sales charge, a price
adjustment is made by refunding to the purchaser the amount of excess sales
charge, if any, paid during the thirteen-month period. Investors electing to
purchase Class A shares of the Fund pursuant to a Letter of Intent should
carefully read such Letter of Intent.
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will, in the
case of an Investment Letter of Intent, be granted subject to confirmation of
the investor's holdings or in the case of a Participant Letter of Intent,
subject to confirmation of the number of eligible employees or participants in
the retirement or group plan. Letters of Intent are not available to individual
participants in any retirement or group plans.
B-26
<PAGE>
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
The contingent deferred sales charge (CDSC) is waived under circumstances
described in the Prospectus. See "Shareholder Guide--How to Sell Your
Shares--Waiver of Contingent Deferred Sales Charges--Class B Shares" in the
Prospectus. In connection with these waivers, the Transfer Agent will require
you to submit the supporting documentation set forth below.
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
Death A copy of the shareholder's death
certificate or, in the case of a
trust, a copy of the grantor's
death certificate, plus a copy of
the trust agreement identifying the
grantor.
Disability--An individual will be A copy of the Social Security
considered disabled if he or she is Administration award letter or a
unable to engage in any substantial letter from a physician on the
gainful activity by reason of any physician's letterhead stating that
medically determinable physical or the shareholder (or, in the case of
mental impairment which can be a trust, the grantor) is
expected to result in death or to permanently disabled. The letter
be of long-continued and indefinite must also indicate the date of
duration. disability.
Distribution from an IRA or 403(b) A copy of the distribution form
Custodial Account from the custodial firm indicating
(i) the date of birth of the
shareholder and (ii) that the
shareholder is over age 59 1/2 and
is taking a normal
distribution--signed by the
shareholder.
Distribution from Retirement Plan A letter signed by the plan
administrator/trustee indicating
the reason for the distribution.
Excess Contributions A letter from the shareholder (for
an IRA) or the plan
administrator/trustee on company
letterhead indicating the amount of
the excess and whether or not taxes
have been paid.
The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which the shares are held for the
investor by the Transfer Agent. If a stock certificate is desired, it must be
requested in writing for each transaction. Certificates are issued only for full
shares and may be redeposited in the Account at any time. There is no charge to
the investor for issuance of a certificate. The Fund makes available to the
shareholders the following privileges and plans.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund at net asset
value on the record date. An investor may direct the Transfer Agent in writing
not less than five (5) full business days prior to the record date to have
subsequent dividends and/or distributions sent in cash rather than reinvested.
In the case of recently purchased shares for which registration instructions
have not been received on the record date, cash payment will be made directly to
the dealer. Any shareholder who receives a cash payment representing a dividend
or distribution may reinvest such distribution at NAV by returning the check or
the proceeds to the Transfer Agent within 30 days after the payment date. Such
investment will be made at the NAV per share next determined after receipt of
the check or proceeds by the Transfer Agent. Such shareholder will receive
credit for any CDSC paid in connection with the amount of proceeds being
reinvested.
EXCHANGE PRIVILEGE
The Fund makes available to its shareholders the privilege of exchanging
their shares of the Fund for shares of certain other Prudential Mutual Funds,
including one or more specified money market funds, subject in each case to the
minimum investment requirements of such funds. Shares of such other Prudential
Mutual Funds may also be exchanged for shares of the Fund. All exchanges are
made on the basis of the relative NAV next determined after receipt of an order
in proper form. An exchange will be treated as a redemption and purchase for tax
purposes. Shares may be exchanged for shares of another fund only if shares of
B-27
<PAGE>
such fund may legally be sold under applicable state laws. For retirement and
group plans having a limited menu of Prudential Mutual Funds, the exchange
privilege is available for those funds eligible for investment in the particular
program.
It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
CLASS A. Shareholders of the Fund will be able to exchange their Class A
shares for Class A shares of certain other Prudential Mutual Funds, shares of
Prudential Government Securities Trust (Short-Intermediate Term Series) and
shares of the money market funds specified below. No fee or sales load will be
imposed upon the exchange. Shareholders of money market funds who acquired such
shares upon exchange of Class A shares may use the exchange privilege only to
acquire Class A shares, of the Prudential Mutual Funds participating in the
Class A exchange privilege.
The following money market funds participate in the Class A exchange
privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets, Inc. (Class A Shares)
Prudential Tax-Free Money Fund, Inc.
CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B
and Class C shares of the Fund for Class B and Class C shares, respectively, of
certain other Prudential Mutual Funds and shares of Prudential Special Money
Market Fund, Inc. No CDSC may be payable upon such exchange, but a CDSC may be
payable upon the redemption of Class B and Class C shares acquired as a result
of the exchange. The applicable sales charge will be that imposed by the Fund in
which shares were initially purchased and the purchase date will be deemed to be
the first day of the month after the initial purchase, rather than the date
of the exchange.
Class B and Class C shares of the Fund may also be exchanged for shares of
an eligible money market fund without imposition of any CDSC at the time of
exchange. Upon subsequent redemption from such money market fund or after
re-exchange into the Fund, such shares will be subject to the CDSC calculated by
excluding the time such shares were held in the money market fund. In order to
minimize the period of time in which shares are subject to a CDSC, shares
exchanged out of the money market fund will be exchanged on the basis of their
remaining holding periods, with the longest remaining holding periods being
transferred first. In measuring the time period shares are held in a money
market fund and "tolled" for purposes of calculating the CDSC holding period,
exchanges are deemed to have been made on the last day of the month. Thus, if
shares are exchanged into the Fund from a money market fund during the month
(and are held in the Fund at the end of the month), the entire month will be
included in the CDSC holding period. Conversely, if shares are exchanged into a
money market fund prior to the last day of the month (and are held in the money
market fund on the last day of the month), the entire month will be excluded
from the CDSC holding period. For purposes of calculating the five year holding
period applicable to the Class B conversion feature, the time period during
which Class B shares were held in a money market fund will be excluded.
At any time after acquiring shares of other funds participating in the
Class B or Class C exchange privilege, a shareholder may again exchange those
shares (and any reinvested dividends and distributions) for Class B or Class C
shares of the Fund, respectively without subjecting such shares to any CDSC.
Shares of any fund participating in the Class B or Class C exchange privilege
that were acquired through reinvestment of dividends or distributions may be
exchanged for Class B or Class C shares, respectively of other funds without
being subject to any CDSC.
CLASS Z. Class Z shares may be exchanged for Class Z shares of other
Prudential Mutual Funds.
Additional details about the exchange privilege and prospectuses for each
of the Prudential Mutual Funds are available from the Transfer Agent, Prudential
Securities or Prusec. The exchange privilege may be modified, terminated or
suspended on sixty
B-28
<PAGE>
days' notice, and any fund, including the Fund, or the Distributor, has the
right to reject any exchange application relating to such fund's shares.
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average cost
per share is lower than it would be if a constant number of shares were bought
at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2011, the cost of four years at a private
college could reach $210,000 and over $90,000 at a public university.(1)
The following chart shows how much you would need in monthly investments
to achieve specified lump sums to finance your investment goals.(2)
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
-------------------- -------- -------- -------- --------
25 Years ................ $ 110 $ 165 $ 220 $ 275
20 Years ................ 176 264 352 440
15 Years ................ 296 444 592 740
10 Years ................ 555 833 1,110 1,388
5 Years ................ 1,371 2,057 2,742 3,428
See "Automatic Savings Accumulation Plan."
- ----------
(1) Source information concerning the costs of education at public and
private universities is available from The College Board Annual Survey of
Colleges, 1993. Average costs for private institutions include tuition, fees,
room and board.
(2) The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not intended
to reflect the performance of an investment in shares of the Fund. The
investment return and principal value of an investment will fluctuate so that an
investor's shares when redeemed may be worth more or less than their original
cost.
AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP)
Under ASAP, an investor may arrange to have a fixed amount automatically
invested in shares of the Fund monthly by authorizing his or her bank account or
Prudential Securities account (including a Command Account) to be debited to
invest specified dollar amounts in shares of the Fund. The investor's bank must
be a member of the Automatic Clearing House System. Share certificates are not
issued to ASAP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through
Prudential Securities or the Transfer Agent. Such withdrawal plan provides for
monthly or quarterly checks in any amount, except as provided below, up to the
value of the shares in the shareholder's account. Withdrawals of Class B or
Class C shares may be subject to a CDSC. See "Shareholder Guide--How to Sell
Your Shares--Contingent Deferred Sales Charges" in the Prospectus.
In the case of shares held through the Transfer Agent (i) a $10,000
minimum account value applies, (ii) withdrawals may not be for less than $100
and (iii) the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at NAV on
shares held under this plan. See "Shareholder Investment Account--Automatic
Reinvestment of Dividends and/or Distributions."
B-29
<PAGE>
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may be
terminated at any time, and the Distributor reserves the right to initiate a fee
of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.
Withdrawal payments should not be considered as dividends, yield or
income. If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with purchases of additional shares are
inadvisable because of the applicable sales charges to (i) the purchase of Class
A shares and (ii) the withdrawal of Class B and Class C shares. Each shareholder
should consult his or her own tax adviser with regard to the tax consequences of
the plan, particularly used in connection with a retirement plan.
TAX-DEFERRED RETIREMENT PLANS
Various qualified retirement plans, including a 401(k) plan, self-directed
individual retirement accounts and "tax-deferred accounts" under Section
403(b)(7) of the Internal Revenue Code are available through the Distributor.
These plans are for use by both self-employed individuals and corporate
employers. These plans permit either self-direction of accounts by participants,
or a pooled account arrangement. Information regarding the establishment of
these plans, the administration, custodial fees and other details are available
from Prudential Securities or the Transfer Agent.
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.
TAX-DEFERRED RETIREMENT ACCOUNTS
INDIVIDUAL RETIREMENT ACCOUNTS. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account until
the earnings are withdrawn. The following chart represents a comparison of the
earnings in a personal savings account with those in an IRA, assuming a $2,000
annual contribution, and 8% rate of return and a 39.6% federal income tax
bracket and shows how much more retirement income can accumulate within an IRA
as opposed to a taxable individual savings account.
TAX-DEFERRED COMPOUNDING(1)
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
---------- ------- ---
10 years $ 26,165 $ 31,291
15 years 44,675 58,649
20 years 68,109 98,846
25 years 97,780 157,909
30 years 135,346 244,692
- ----------
(1) The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings in
a traditional IRA account will be subject to tax when withdrawn from the
account. Distributions from a Roth IRA which meet the conditions required under
the Internal Revenue Code will not be subject to tax upon withdrawal from the
account.
MUTUAL FUND PROGRAMS
From time to time, the Fund may be included in a mutual fund program with
other Prudential Mutual Funds. Under such a program, a group of portfolios will
be selected and thereafter marketed collectively. Typically, these programs are
created with an investment theme, e.g., to seek greater diversification,
protection from interest rate movements or access to different management
styles. In the event such a program is instituted, there may be a minimum
investment requirement for the program as a whole. The Fund may waive or reduce
the minimum initial investment requirements in connection with such a program.
The mutual funds in the program may be purchased individually or as part
of a program. Since the allocation of portfolios included in the program may not
be appropriate for all investors, investors should consult their Prudential
Securities Financial Adviser or Prudential/Prusec Representative concerning the
appropriate blend of portfolios for them. If investors elect to
B-30
<PAGE>
purchase the individual mutual funds that constitute the program in an
investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
NET ASSET VALUE
The NAV per share is the value of the Fund (assets, including securities
at value, minus liabilities) divided by the number of shares outstanding. The
Fund computes its NAV at 4:15 P.M., New York time, on each day the New York
Stock Exchange is open for trading except days on which no orders to purchase,
sell or redeem Fund shares have been received or on days on which changes in the
value of the Fund's portfolio investments do not affect NAV. In the event the
New York Stock Exchange closes early on any business day, the NAV of the Fund's
shares shall be determined at a time between such closing and 4:15 P.M., New
York time. The New York Stock Exchange is closed on the following holidays: New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Under the Investment Company Act, the Board of Directors is responsible
for determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Board of Directors, the value of the
Fund's portfolio will be determined as follows.
Government securities for which quotations are available will be based on
the prices provided by independent pricing services. Pricing services consider
such factors as security prices, yields, maturities, call features, ratings and
developments relating to specific securities in arriving at securities
valuations. Other portfolio securities that are actively traded in the over-the-
counter market, including listed securities for which the primary market is
believed to be over-the-counter, will be valued at the average of the quoted bid
and asked prices provided by an independent pricing service or by principal
market makers. Any security for which the primary market is on an exchange is
valued at the last sale price on such exchange on the day of valuation or, if
there was no sale on such day, the last bid price quoted on such day. Quotations
of foreign securities in a foreign currency are converted to U.S. dollar
equivalents at the current rate obtained from a recognized bank or dealer, and
forward currency exchange contracts are valued at the current cost of covering
or offsetting the contract. Options will be valued at their last sale price as
of the close of trading on the applicable commodities exchange or board of
trade. If there is no sale on the applicable exchange or board of trade on a
given day, options will be valued at the average of the quoted bid and asked
prices as of the close of the applicable exchange. The Fund may engage pricing
services to obtain such prices. Over-the-counter options will be valued at the
average of the bid and asked prices provided by principal market makers. Options
will be valued at market value or fair value if no market exists. Futures
contracts are marked to market daily, and options thereon are valued at their
last sale price, as of the close of the applicable commodities exchange.
Securities or other assets for which reliable market quotations are not
readily available, or for which the pricing agent or principal market maker does
not provide a valuation or methodology or provides a valuation or methodology
that, in the judgment of the Manager or investment adviser (or Valuation
Committee or Board of Directors), does not represent fair value, are valued by
the Valuation Committee or Board of Directors in consultation with the Manager
or investment adviser. Short-term instruments which mature in 60 days or less
are valued at amortized cost, if their original maturity was 60 days or less, or
by amortizing their value on the 61st day prior to maturity, unless the Fund's
Manager determines that such valuation does not represent fair value. Repurchase
agreements will be valued at cost plus accrued interest. Securities or other
assets for which reliable market quotations are not readily available are valued
by the Manager in good faith at fair market value in accordance with procedures
adopted by the Board of Directors on the basis of the following factors: cost of
the security, transactions in comparable securities, relationships among various
securities and such other factors as may be determined by the Manager to
materially affect the value of the security.
NAV is calculated separately for each class. The NAV of Class B and Class
C shares will generally be lower than the NAV of Class A shares as a result of
the larger distribution-related fee to which Class B and Class C shares are
subject. The NAV of Class Z shares will generally be higher than the NAV of
Class A, Class B or Class C shares as a result of the fact that Class Z shares
are not subject to any distribution and/or service fee. It is expected, however,
that the NAV per share 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.
PERFORMANCE INFORMATION
AVERAGE ANNUAL TOTAL RETURN. The Fund may from time to time advertise its
average annual total return. Average annual total return is determined
separately for Class A, Class B, Class C and Class Z shares. See "How the Fund
Calculates Performance" in the Prospectus.
B-31
<PAGE>
Average annual total return is computed according to the following
formula:
P(1+T)^n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value at the end of the one, five or ten
year periods (or fractional portion thereof) of a
hypothetical $1,000 investment made at the beginning of the
one, five or ten year periods.
Average annual total return does not take into account any federal or
state income taxes that may be payable upon redemption.
The average annual total returns for Class A shares for the one, five year
and ten year and since inception (July 7, 1986) periods ended December 31, 1997
were .37%, 9.43%, 8.38% and 10.15%, respectively. The Fund was a closed-end
investment company prior to January 15, 1996. The average annual total returns
for Class B shares for the one year and since inception (January 15, 1996)
periods ended December 31, 1997 were (1.02)% and 6.17%, respectively. The
average annual total returns for Class C shares for the one year and since
inception (January 15, 1996) periods ended December 31, 1997 were 2.98% and
8.08%, respectively. The average total return for Class Z shares for the since
inception (March 17, 1997) period was 5.56%. Since this period was less than one
year, the figure is not annualized.
AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for the classes. See
"How the Fund Calculates Performance" in the Prospectus.
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed according to the following formula:
ERV-P
-----
P
Where: P = a hypothetical initial payment of $1,000.
ERV = ending redeemable value of a hypothetical $1,000 payment made
at the beginning of the one, five or ten year periods (or
fractional portion thereof) at the end of the one, five or
ten year periods.
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
The Fund's aggregate total returns for Class A shares for the one, five
and ten year and since inception (July 7, 1986) periods ended December 31, 1997
were 4.55%, 63.42%, 132.82% and 216.24%, respectively. The Fund was a closed-end
investment company prior to January 15, 1996. The aggregate total returns for
the Class B shares for the one year and since inception (January 15, 1996)
periods ended December 31, 1997 were 3.98% and 16.44%, respectively. The
aggregate total returns for Class C shares for the one year and since inception
(January 15, 1996) periods ended December 31, 1997 were 3.98% and 16.45%,
respectively. The aggregate total return for Class Z shares for the since
inception (March 17, 1997) period ended December 31, 1997 was 5.56%.
YIELD. The Fund may from time to time advertise its yield as calculated
over a 30-day period. Yield is calculated separately for Class A, Class B, Class
C and Class Z shares. The yield will be computed by dividing the Fund's net
investment income per share earned during this 30-day period by the maximum
offering price per share on the last day of this period. Yield is calculated
according to the following formula:
YIELD = 2[((a - b)/(cd) + 1)^6 - 1]
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
Yield fluctuates and an annualized yield quotation is not a representation
by the Fund as to what an investment in the Fund will actually yield for any
given period.
The yields for the 30 days ended December 31, 1997, were 5.38%, 5.01%,
4.75% and 5.78% for the Class A, Class B, Class C and Class Z shares,
respectively.
B-32
<PAGE>
From time to time, the performance of the Fund may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long term and the rate of inflation.(1)
[THE FOLLOWING TABLE WAS DEPICTED AS A BAR GRAPH IN THE PRINTED MATERIAL]
PERFORMANCE
COMPARISON OF DIFFERENT
TYPES OF INVESTMENTS
OVER THE LONG TERM
(1/1926 - 9/1997)
----------------------------
COMMON STOCKS 11.0%
LONG-TERM
GOVT. BONDS 5.1%
INFLATION 3.1%
(1) Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation--1997
Yearbook" (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. Common stock returns
are based on the Standard & Poor's 500 Stock Index, a market-weighted, unmanaged
index of 500 common stocks in a variety of industry sectors. It is a commonly
used indicator of broad stock price movements. This chart is for illustrative
purposes only, and is not intended to represent the performance of any
particular investment or fund. Investors cannot invest directly in an index.
Past Performance is not a guarantee of future results.
TAXES, DIVIDENDS AND DISTRIBUTIONS
GENERAL. The Fund has elected to qualify and intends to continue to
qualify as a regulated investment company under Subchapter M of the Internal
Revenue Code for each taxable year. Accordingly, the Fund must, among other
things, (a) derive at least 90% of its gross income (without reduction for
losses from the sale or other disposition of securities or foreign currencies)
from dividends, interest, payments with respect to securities loans and gains
from the sale or other disposition of securities or foreign currencies or other
income, including, but not limited to, gains from options and futures on such
securities or foreign currencies; (b) diversify its holdings so that, at the end
of each fiscal quarter, (i) 50% of the value of the Fund's assets is represented
by cash, U.S. Government securities and other securities limited, in respect of
any one issuer, to an amount not greater than 5% of the value of the Fund's
assets and 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of its assets is invested in the securities of any
one issuer (other than U.S. Government securities); and (c) distribute to its
shareholders at least 90% of its net investment income and net short-term gains
(i.e., the excess of net short-term capital gains over net long-term capital
losses) in each year.
The Fund declares dividends at least quarterly in an amount based on
actual net investment income determined in accordance with generally accepted
accounting principles. A portion of such dividend may also include projected net
investment income. Such dividends will be payable in additional shares of the
Fund unless otherwise requested by the shareholder.
Net capital gains (i.e., the excess of net long-term capital gains over
net short-term capital losses), if any, will be distributed at least annually.
In determining the amount of capital gains to be distributed, any capital loss
carryforwards from prior years will be offset against capital gains. The Fund
had a capital loss carryforward for federal income tax purposes at December 31,
1997 of approximately $2,165,900 which expires in 2002.
The per share dividends on Class B and Class C shares typically will be
lower than the per share dividends on Class A and Class Z shares as a result of
the higher distribution-related fee applicable to the Class B and Class C shares
and lower on Class A shares in relation to Class Z shares. The per share
distributions of net capital gains, if any, will be paid in the same amount for
Class A, Class B, Class C and Class Z shares. See "Net Asset Value."
Distributions of net investment income, net currency gains and net
short-term capital gains will be taxable to the shareholder at ordinary income
rates regardless of whether the shareholder receives such distributions in
additional shares or in cash.
B-33
<PAGE>
Distributions of net capital gains, if any, are taxable as long-term capital
gains regardless of how long the investor has held his or her Fund shares.
However, if a shareholder holds shares in the Fund for not more than six months,
then any loss recognized on the sale of such shares will be treated as long-term
capital loss to the extent of any distribution on the shares which was treated
as long-term capital gain. To the extent that, in a given year, distributions to
shareholders exceed recognized net investment income and recognized short-term
and long-term capital gains for the year, shareholders will receive a return of
capital in respect of such year and, in an annual statement, will be notified of
the amount of any return of capital for such year. Shareholders will be notified
annually by the Fund as to the federal tax status of dividends and distributions
made by the Fund. A 4% nondeductible excise tax will be imposed on the Fund to
the extent the Fund does not meet certain distribution requirements by the end
of each calendar year. Distributions may be subject to additional state and
local taxes. See "Taxes, Dividends and Distributions" in the Prospectus.
Gains or losses attributable to fluctuations in exchange rates which occur
between the time the Fund accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time the
Fund actually collects such receivables or pays such liabilities are treated as
ordinary income or ordinary loss. Similarly, gains or losses on forward foreign
currency exchange contracts or on disposition of debt securities denominated in
a foreign currency attributable to fluctuations in the value of the foreign
currency between the date of acquisition of the security and the date of
disposition also are treated as ordinary gain or loss. These gains or losses,
referred to under the Code as "Section 988" gains or losses, increase or
decrease the amount of the Fund's investment company taxable income available to
be distributed to its shareholders as ordinary income, rather than increasing or
decreasing the amount of the Fund's net capital gain. If Section 988 losses
exceed other investment company taxable income during a taxable year, the Fund
would not be able to make any taxable ordinary dividend distributions, or
distributions made before the losses were realized would be recharacterized as a
return of capital to shareholders, rather than as an ordinary dividend, reducing
each shareholder's basis in his or her Fund shares.
Forward currency contracts, options and futures contracts entered into by
the Fund may create "straddles" for federal income tax purposes. Positions which
are part of a straddle will be subject to certain wash sale, short sale and
constructive sale provisions of the Internal Revenue Code. In the case of a
straddle, the Fund may be required to defer the recognition of losses on
positions it holds to the extent of any unrecognized gain on offsetting
positions held by the Fund.
A "passive foreign investment company" (PFIC) is a foreign corporation
that, in general, meets either of the following tests: (a) at least 75% of its
gross income is passive or (b) an average of at least 50% of its assets produce,
or are held for the production of, passive income. If the Fund acquires and
holds stock in a PFIC beyond the end of the year of its acquisition, the Fund
will be subject to federal income tax on a portion of any "excess distribution"
received on the stock or of any gain from disposition of the stock
(collectively, PFIC income), plus interest thereon, even if the Fund distributes
the PFIC income as a taxable dividend to its shareholders. The balance of the
PFIC income will be included in the Fund's investment company taxable income,
and accordingly, will not be taxable to it to the extent that income is
distributed to its shareholders. The Fund may make a "mark-to-market" election
with respect to any marketable stock it holds of a PFIC. If the election is in
effect, at the end of the Fund's taxable year, the Fund will recognize the
amount of gains, if any, with respect to PFIC stock. No loss will be recognized
on PFIC stock, except to the extent of gains recognized in prior years.
Alternatively, the Fund, if it meets certain requirements, may elect to treat
any PFIC in which it invests as a "qualified electing fund," in which case, in
lieu of the foregoing tax and interest obligation, the Fund will be required to
include in income each year its pro rata share of the qualified electing fund's
annual ordinary earnings and net capital gain, even if they are not distributed
to the Fund; those amounts would be subject to the distribution requirements
applicable to the Fund described above.
Any loss realized on a sale, redemption or exchange of shares of the Fund
by a shareholder will be disallowed to the extent the shares are replaced within
a 61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the Fund.
Distributions of net investment income made to a nonresident alien
individual, fiduciary of a foreign estate or trust or foreign corporation or
foreign partnership (foreign shareholder) will be subject to U.S. withholding
tax at a rate of 30% (or lower treaty rate), unless the dividends are
effectively connected with the U.S. trade or business of the shareholder. Gains
realized upon the sale or redemption of shares of the Fund by a foreign
shareholder, and distributions of net long-term capital gains to a foreign
shareholder will generally not be subject to U.S. income tax unless the gain is
effectively connected with a trade or business carried on by the shareholder
within the United States. In the case of a foreign shareholder who is a
nonresident alien individual, the Fund may be required to withhold U.S. federal
income tax at the rate of 31% of distributions of net long-term capital gains
unless IRS Form W-8 is provided. If distributions are effectively connected with
a U.S. trade or business carried on by a foreign shareholder, distributions of
net investment income and net long-term capital gains will be subject to U.S.
income tax at the graduated rates applicable to U.S. citizens or domestic
corporations. The tax consequences to a foreign shareholder entitled to
B-34
<PAGE>
claim the benefits of an applicable tax treaty may be different from those
described herein. Foreign shareholders are advised to consult their own tax
advisers with respect to the particular tax consequences to them of an
investment in the Fund.
Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine the effective rate of
foreign tax in advance since the amount of the Fund's assets to be invested in
various countries is not known.
If the Fund is liable for foreign taxes, the Fund expects to meet the
requirements of the Internal Revenue Code for "passing-through" to its
shareholders foreign taxes paid, but there can be no assurance that the Fund
will be able to do so. Under the Internal Revenue Code, if more than 50% of the
value of the Fund's total assets at the close of its taxable year consists of
stock or securities of foreign corporations, the Fund will be eligible and may
file an election with the Internal Revenue Service to "pass-through" to the
Fund's shareholders the amount of foreign taxes paid by the Fund. Pursuant to
this election shareholders will be required to: (i) include in gross income (in
addition to taxable dividends actually received) their pro rata share of the
foreign taxes paid by the Fund; (ii) treat their pro rata share of foreign taxes
as paid by them; and (iii) either deduct their pro rata share of foreign taxes
in computing their taxable income or, subject to certain limitations, use it as
a foreign tax credit against U.S. income taxes. No deduction for foreign taxes
may be claimed by a shareholder who does not itemize deductions. A shareholder
that is a nonresident alien individual or foreign corporation may be subject to
U.S. withholding tax on the income resulting from the election described in this
paragraph, but may not be able to claim a credit or deduction against such tax
for the foreign taxes treated as having been paid by such shareholder. A
tax-exempt shareholder will not ordinarily benefit from this election. The
amount of foreign taxes for which a shareholder may claim a credit in any year
will generally be subject to various limitations including a separate limitation
for "passive income," which includes, among other things, dividends, interest
and certain foreign currency gains.
Each shareholder will be notified within 60 days after the close of the
Fund's taxable year whether the foreign taxes paid by the Fund will
"pass-through" for that year and, if so, such notification will designate (a)
the shareholder's portion of the foreign taxes paid to each such country and (b)
the portion of the dividend which represents income derived from sources within
each such country.
LISTED OPTIONS AND FUTURES. Exchange-traded futures contracts, listed
options on futures contracts and listed options on U.S. Government securities
constitute "Section 1256 contracts" under the Internal Revenue Code. Section
1256 contracts are required to be "marked-to-market" at the end of the Fund's
tax year; that is, treated as having been sold at market value. Except with
respect to certain forward foreign currency exchange contracts, sixty percent of
any gain or loss recognized as a result of such "deemed sales" will be treated
as long-term capital gain or loss and the remainder will be treated as
short-term capital gain or loss.
BACKUP WITHHOLDING. With limited exceptions, the Fund is required to
withhold federal income tax at the rate of 31% of all taxable distributions
payable to shareholders who fail to provide the Fund with their correct taxpayer
identification number or to make required certification or who have been
notified by the Internal Revenue Service that they are subject to backup
withholding. Any amounts withheld may be credited against a shareholder's
federal income tax liability.
OTHER TAXATION. Distributions may also be subject to state, local and
foreign taxes depending on each shareholder's particular situation. Shareholders
are advised to consult their own tax advisers with respect to the particular tax
consequences to them of an investment in the Fund.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING
AGENT AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash, and in that capacity maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. Subcustodians provide custodial
services for the Fund's foreign assets held outside the United States. See "How
the Fund is Managed--Custodian and Transfer and Dividend Disbursing Agent" in
the Prospectus.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the Fund.
PMFS is a wholly-owned subsidiary of PIFM. PMFS provides customary transfer
agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, the payment of dividends and distributions, and
related functions. For these services, PMFS receives an annual fee per
shareholder account, a new account set-up fee for each manually-established
account and a monthly inactive zero balance account fee per shareholder account.
PMFS is also reimbursed for its out-of-pocket expenses, including but not
limited to postage, stationery, printing, allocable communications expenses and
other costs. For the fiscal year ended December 31, 1997, the Fund incurred fees
of approximately $288,000 for the services of PMFS.
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York
10036, serves as the Fund's independent accountants and, in that capacity,
audits the Fund's annual financial statements.
B-35
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF THE GLOBAL TOTAL RETURN
DECEMBER 31, 1997 FUND, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT US$
(000) DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--87.6%
- ------------------------------------------------------------
AUSTRALIA--6.5%
A$ 2,750 Federal National Mortgage
Association,
6.375%, 8/15/07 $ 1,806,237
7,000 New South Wales Treasury
Corporation,
6.50%, 5/1/06 4,619,277
8,000 Queensland Treasury
Corporation,
8.00%, 8/14/01 5,586,800
------------
12,012,314
- ------------------------------------------------------------
CANADA--8.6%
C$ 7,000 British Columbia Provincial
Bond,
7.75%, 6/16/03 5,377,849
8,800 Canadian Government Bond,
9.00%, 12/1/04 7,344,955
4,500 Province of Quebec,
6.50%, 10/1/07 3,246,710
------------
15,969,514
- ------------------------------------------------------------
DENMARK--6.4%
Danish Government Bonds,
DKr 40,000 7.00%, 12/15/04 6,379,066
32,750 8.00%, 3/15/06 5,544,112
------------
11,923,178
- ------------------------------------------------------------
GERMANY--12.8%
German Government Bonds,
DM 2,000 6.75%, 4/22/03 1,204,309
18,000 7.375%, 1/3/05 11,279,753
6,200 6.00%, 1/5/06 3,605,635
8,500 6.25%, 1/4/24 4,926,645
5,000 Republic of Colombia,
7.25%, 12/21/00 2,871,579
------------
23,887,921
- ------------------------------------------------------------
GREECE--1.2%
GRD 680,000 Hellenic Republic,
12.60%, 12/31/03 $ 2,314,638
- ------------------------------------------------------------
NETHERLANDS--3.4%
Dutch Government Bonds,
NLG 7,500 7.00%, 6/15/05 4,103,372
3,750 7.50%, 1/15/23 2,245,276
------------
6,348,648
- ------------------------------------------------------------
SPAIN--3.7%
Spanish Government Bonds,
Pts 125,000 10.30%, 6/15/02 992,504
750,000 8.20%, 2/28/09 5,931,302
------------
6,923,806
- ------------------------------------------------------------
SWEDEN--2.0%
SEK 29,000 Swedish Government Bond,
6.00%, 2/9/05 3,684,177
- ------------------------------------------------------------
UNITED KINGDOM--8.3%
BP 300 Powergen PLC,
8.875%, 3/26/03 526,984
400 Republic of Argentina,
11.50%, 8/14/01 665,163
United Kingdom Treasury Bonds,
3,650 7.75%, 9/8/06 6,536,909
3,700 8.75%, 8/25/17 7,749,874
------------
15,478,930
- ------------------------------------------------------------
UNITED STATES--34.7%
CORPORATE BONDS--3.2%
US$ 1,000 Banco Ganadero Colombian Bond
(Colombia),
9.75%, 8/26/99 1,027,500
2,900 Financiera Energetica Nacional
(Colombia),
9.00%, 11/8/99 3,016,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-36
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF THE GLOBAL TOTAL RETURN
DECEMBER 31, 1997 FUND, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT US$
(000) DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ------------------------------------------------------------
CORPORATE BONDS (CONT'D.)
US$ 1,000 Petroleas Mexicano (Mexico),
FRN,
6.71875%, 3/8/99 $ 985,000
1,000 Romanian Commercial Bank,
9.125%, 3/10/00 995,000
------------
6,023,500
SOVEREIGN BONDS--6.0%
3,500 Ministry of Finance (Russia),
10.00%, 6/26/07 3,249,750
1,250 Municipality of Rio De Janeiro
(Brazil),
10.375%, 7/12/99 1,253,125
1,440 Republic of Argentina, FRN,
6.6875%, 3/31/05, Ser. L 1,287,072
1,963 Republic of Brazil, IDU, FRN,
6.8125%, 1/1/01 1,869,281
1,888 Republic of Croatia, FRN,
6.625%, 7/31/06 1,718,293
800 Republic of Lithuania,
7.125%, 7/22/02 758,000
1,000 Oman Sultanate (India),
7.125%, 3/20/02 1,012,500
------------
11,148,021
SUPRANATIONAL BONDS--2.6%
4,800 Corporacion Andina de Fomento,
7.375%, 7/21/00 4,884,000
- ------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS--22.9%
United States Treasury Bond,
8,250 6.625%, 2/15/27 8,949,022
United States Treasury Notes,
12,000 6.75%, 6/30/99 12,185,640
5,000 6.125%, 9/30/00 5,052,350
11,810 7.875%, 11/15/04 13,203,226
3,100 6.25%, 2/15/07 3,198,797
------------
42,589,035
------------
64,644,556
------------
Total long-term investments
(cost US$164,252,387) 163,187,682
------------
SHORT-TERM INVESTMENTS--8.8%
- ------------------------------------------------------------
HUNGARIAN--0.6%
HUF 230,000 Hungarian Government Bond,
23.50%, 5/17/98 $ 1,139,835
- ------------------------------------------------------------
INDONESIA--0.3%
IDR 2,000,000 Asia Pulp And Paper, NCD,
14.45%(a), 1/27/98 356,059
2,000,000 Bakrie Brothers, NCD,
17.50%(a), 2/19/98 163,643
------------
519,702
- ------------------------------------------------------------
UNITED STATES--7.9%
REPURCHASE AGREEMENT--7.6%
US$ 14,222 Joint Repurchase Agreement
Account,
6.63%, 1/2/98 (Note 5) 14,222,000
- ------------------------------------------------------------
SUPRANATIONAL BONDS--0.3%
500 Corporacion Andina de Fomento,
6.625%, 10/14/98 503,750
------------
14,725,750
------------
Total short-term investments
(cost US$17,682,135) 16,385,287
------------
- ------------------------------------------------------------
TOTAL INVESTMENTS--96.4%
(cost $181,934,522) 179,572,969
Other assets in excess of
liabilities--3.6% 6,657,003
------------
Net Assets--100% $186,229,972
------------
------------
</TABLE>
- ---------------
Portfolio securities are classified according to the security's
currency denomination.
(a) Percentages quoted represent yield-to-maturity as of purchase date.
FRN--Floating Rate Note.
IDU--Interest Due and Unpaid Bonds.
NCD--Negotiable Certificate of Deposit.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-37
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES THE GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS DECEMBER 31, 1997
<S> <C>
Investments, at value (cost $181,934,522)............................................................... $ 179,572,969
Foreign currency, at value (cost $1,532,836)............................................................ 1,520,037
Cash.................................................................................................... 10,280
Interest receivable..................................................................................... 4,625,891
Forward currency contracts--amount receivable from counterparties....................................... 1,584,875
Receivable for Fund shares sold......................................................................... 48,024
Other assets............................................................................................ 6,339
-----------------
Total assets......................................................................................... 187,368,415
-----------------
LIABILITIES
Payable for Fund shares reacquired...................................................................... 453,313
Forward currency contracts--amount payable to counterparties............................................ 299,519
Accrued expenses........................................................................................ 238,472
Management fee payable.................................................................................. 121,481
Distribution fee payable................................................................................ 25,658
-----------------
Total liabilities.................................................................................... 1,138,443
-----------------
NET ASSETS.............................................................................................. $ 186,229,972
-----------------
-----------------
Net assets were comprised of:
Common stock, at par................................................................................. $ 236,284
Paid-in capital in excess of par..................................................................... 189,707,864
-----------------
189,944,148
Undistributed net investment income.................................................................. 785,449
Accumulated net realized loss on investments......................................................... (3,315,029)
Net unrealized depreciation on investments and foreign currencies.................................... (1,184,596)
-----------------
Net assets, December 31, 1997........................................................................... $ 186,229,972
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($183,054,467 / 23,225,736 shares of common stock issued and outstanding)......................... $7.88
Maximum sales charge (4% of offering price)............................................................. .33
-----------------
Maximum offering price to public........................................................................ $8.21
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share
($2,300,087 / 291,662 shares of common stock issued and outstanding).............................. $7.89
-----------------
-----------------
Class C:
Net asset value, offering price and redemption price per share
($189,569 / 24,042 shares of common stock issued and outstanding)................................. $7.89
-----------------
-----------------
Class Z:
Net asset value, offering price and redemption price per share
($685,849 / 86,983 shares of common stock issued and outstanding)................................. $7.88
-----------------
-----------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-38
<PAGE>
THE GLOBAL TOTAL RETURN FUND, INC.
STATEMENT OF OPERATIONS
- ------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
NET INVESTMENT INCOME DECEMBER 31, 1997
<S> <C>
Income
Interest and discount earned (net of
foreign withholding taxes of
$290).............................. $ 16,779,396
-----------------
Expenses
Management fee........................ 1,549,812
Distribution fee--Class A............. 307,192
Distribution fee--Class B............. 9,344
Distribution fee--Class C............. 2,984
Transfer agent's fees and expenses.... 405,000
Custodian's fees and expenses......... 224,000
Reports to shareholders............... 128,000
Registration fees..................... 111,000
Legal fees and expenses............... 42,000
Audit fee and expenses................ 36,000
Directors' fees....................... 27,000
Insurance............................. 6,000
Miscellaneous......................... 27,101
-----------------
Total expenses..................... 2,875,433
-----------------
Net investment income.................... 13,903,963
-----------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS
Net realized gain on:
Investment transactions............... (1,564,339)
Foreign currency transactions......... 9,410,711
-----------------
7,846,372
-----------------
Net change in unrealized appreciation (depreciation) on:
Investments........................... (13,503,125)
Foreign currencies.................... 912,282
-----------------
(12,590,843)
-----------------
Net loss on investments and foreign
currencies............................ (4,744,471)
-----------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS................ $ 9,159,492
-----------------
-----------------
</TABLE>
THE GLOBAL TOTAL RETURN FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------
<TABLE>
<CAPTION>
INCREASE (DECREASE) YEAR ENDED DECEMBER 31,
IN NET ASSETS 1997 1996
<S> <C> <C>
Operations:
Net investment income........ $ 13,903,963 $ 20,756,821
Net realized gain on
investment and foreign
currency transactions..... 7,846,372 24,249,957
Net change in unrealized
appreciation
(depreciation) on
investments and foreign
currencies transactions... (12,590,843) (12,340,523)
------------- -----------------
Net increase in net assets
resulting from
operations................ 9,159,492 32,666,255
------------- -----------------
Dividends and distributions
(Note 1)
Dividends from net
investment income
Class A................... (16,523,696) (20,751,908)
Class B................... (108,586) (4,899)
Class C................... (32,330) (14)
Class Z................... (23,135) --
------------- -----------------
(16,687,747) (20,756,821)
------------- -----------------
Distributions in excess of
net investment income
Class A................... (4,744,012) (14,747,171)
Class B................... (44,626) (8,065)
Class C................... (14,046) (12)
Class Z................... (11,622) --
------------- -----------------
(4,814,306) (14,755,248)
------------- -----------------
Fund share transactions (net of
conversions) (Note 6)
Net proceeds from shares
sold...................... 6,921,618 12,515,494
Net asset value of shares
issued in reinvestment of
dividends and
distributions............. 4,960,184 5,694,812
Cost of shares reacquired.... (43,255,074) (344,489,874)(a)
------------- -----------------
Net decrease in net assets
from Fund share
transactions.............. (31,373,272) (326,279,568)
------------- -----------------
Total decrease.................. (43,715,833) (329,125,382)
------------- -----------------
NET ASSETS
Beginning of year............... 229,945,805 559,071,187
------------- -----------------
End of year..................... $ 186,229,972 $ 229,945,805
------------- -----------------
------------- -----------------
</TABLE>
- ---------------
(a) Net of $4,870,794 redemption fee retained by the Fund.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-39
<PAGE>
NOTES TO FINANCIAL STATEMENTS THE GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
The Global Total Return Fund, Inc., (the 'Fund') is an open-end, non-diversified
management investment company whose investment objective is to seek total
return, the components of which are current income and capital appreciation. The
Fund invests primarily in governmental (including supranational),
semi-governmental or governmental agency debt securities or in short-term bank
debt securities or deposits in the United States and in foreign countries
denominated in U.S. dollars or in foreign currencies, including debt securities
issued or guaranteed by the U.S. Government and foreign governments, their
agencies, authorities or instrumentalities (U.S. Government Securities and
Foreign Government Securities, respectively). The remainder is generally
invested in corporate debt securities or longer term bank debt securities. The
bonds are primarily of investment grade, i.e., bonds rated within the four
highest quality grades as determined by Moody's Investor's Service or Standard &
Poor's Rating's Group, or in unrated securities of equivalent quality. In
addition the Fund is permitted to invest up to 10% of the Fund's total assets in
bonds rated below investment grade with a minimum rating of B, or on unrated
securities of equivalent quality. The ability of the issuers of debt securities
held by the Fund to meet their obligations may be affected by economic and
political developments in a specific country or region.
- ------------------------------------------------------------
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Securities Valuation: In valuing the Fund's assets, quotations of foreign
securities in a foreign currency are converted to U.S. dollar equivalents at the
then current currency value. Portfolio securities that are actively traded in
the over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued at the mean between the
most recently quoted bid and asked prices provided by principal market makers.
Any security for which the primary market is on an exchange is valued at the
last sale price on such exchange on the day of valuation or, if there was no
sale on such day, the last bid price quoted on such day. Forward currency
exchange contracts are valued at the current cost of covering or offsetting the
contract on the day of valuation. Securities and assets for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the direction of the Board of Directors of the Fund.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
In connection with transactions in repurchase agreements with U.S. financial
institutions, it is the Fund's policy that its custodian or designated
subcustodians under triparty repurchase agreements as the case may be, take
possession of the underlying collateral securities, the value of which exceeds
the principal amount of the repurchase transaction including accrued interest.
To the extent that any repurchase transaction exceeds one business day, the
value of the collateral is marked-to-market on a daily basis to ensure the
adequacy of the collateral. If the seller defaults and the value of the
collateral declines or if bankruptcy proceedings are commenced with respect to
the seller of the security, realization of the collateral by the Fund may be
delayed or limited.
Foreign Currency Translation: The books and records of the Fund are maintained
in United States dollars. Foreign currency amounts are translated into United
States dollars on the following basis:
(i) market value of investment securities, other assets and liabilities--at the
current rates of exchange.
(ii) purchases and sales of investment securities, income and expenses--at the
rates of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the year, the Fund does not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of the securities held at year-end. Similarly, the Fund does not isolate
the effect of changes in foreign exchange rates from the fluctuations arising
from changes in the market prices of long-term debt securities sold during the
year. Accordingly, such realized foreign currency gains and losses are included
in the reported net realized gains on investment transactions.
Net realized gains or losses on foreign currency transactions represent net
foreign exchange gains or losses from sales and maturities of short-term
securities and forward currency contracts, disposition of foreign currencies,
currency gains or losses realized between the trade and settlement dates on
securities transactions, and the difference between the amounts of interest,
discount and foreign taxes recorded on the Fund's books and the U.S. dollar
equivalent amounts actually received or paid. Net currency gains and losses from
valuing foreign currency denominated assets (excluding investments) and
liabilities at year-end exchange rates are reflected as a component of net
unrealized appreciation or depreciation on investments and foreign currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of U.S. companies as a result of,
among other factors, the possibility of political or economic instability and
the level of governmental supervision and regulation of foreign securities
markets.
Forward Currency Contracts: A forward currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. The Fund enters into forward currency contracts in order to hedge its
exposure to changes in foreign currency exchange rates on its
- --------------------------------------------------------------------------------
B-40
<PAGE>
NOTES TO FINANCIAL STATEMENTS THE GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
foreign portfolio holdings or on specific receivables and payables denominated
in a foreign currency. The contracts are valued daily at current exchange rates
and any unrealized gain or loss is included in net unrealized appreciation or
depreciation on investments and foreign currencies. Gain or loss is realized on
the settlement date of the contract equal to the difference between the
settlement value of the original and renegotiated forward contracts. This gain
or loss, if any, is included in net realized gain (loss) on foreign currency
transactions. Risks may arise upon entering into these contracts from the
potential inability of the counterparties to meet the terms of their contracts.
Security Transactions and Net Investment Income: Security transactions are
recorded on the trade date. Realized and unrealized gains and losses from
security and currency transactions are calculated on the identified cost basis.
Interest income, which is comprised of three elements: state coupon, original
issue discount and market discount, is recorded on the accrual basis. Expenses
are recorded on the accrual basis, which may require the use of certain
estimates by management.
Net investment income (other than distribution fees), and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Taxes: It is the Fund's policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to shareholders. Therefore, no federal
income or excise tax provision is required.
Withholding taxes on foreign interest have been provided for in accordance with
the Fund's understanding of the applicable country's tax rules and rates.
Dividends and Distributions: Dividends are declared quarterly. Distributions of
capital gains, if any, will be declared at least annually. Dividends and
distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
foreign currency transactions.
Reclassification of Capital Accounts: The Fund accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to increase undistributed net investment income by
$5,599,755, increase accumulated net realized loss on investments by $5,422,120,
and decrease paid in capital in excess of
par by $177,635 for realized foreign currency gains realized and recognized
during the year ended December 31, 1997. Net investment income, net realized
gains and net assets were not affected by this change.
- ------------------------------------------------------------
NOTE 2. AGREEMENTS
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ('PIC'); PIC, through an agreement with PRICOA Asset
Management Ltd. ('PRICOA'), furnishes investment advisory services in connection
with the management of the Fund. PIFM pays for the cost of the subadviser's
services, compensation of officers of the Fund, occupancy and certain clerical
and bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly at an annual
rate of .75 of 1% of the Fund's average daily net assets up to $500 million, .70
of 1% of such assets between $500 million and $1 billion, and .65 of 1% of such
assets in excess of $1 billion.
The Fund has a distribution agreement with Prudential Securities Incorporated
('PSI'), which acts as the distributor of the Class A, B, C and Z shares of the
Fund. The Fund compensates PSI for distributing and servicing the Fund's Class
A, Class B and Class C shares, pursuant to plans of distribution (the 'Class A,
B and C Plans'), regardless of expenses actually incurred by PSI. The
distribution fees are accrued daily and payable monthly. No distribution or
service fees are paid to PSI as distributor of the Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net assets of the Class A, B, and C shares, respectively.
Such expenses under the Plans were .15 of 1%, .75 of 1% and .75 of 1% of the
average daily net assets of the Class A, B and C shares, respectively, for the
year ended December 31, 1997.
PSI has advised the Fund that it has received approximately $37,800 in front-end
sales charges resulting from sales of Class A shares during the year ended
December 31, 1997. From these fees, PSI paid such sales charges to Pruco
Securities Corporation, an affiliated broker-dealer, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Fund that for the year ended December 31, 1997, it received
approximately $6,000 and $4,900 in contingent deferred sales charges imposed
upon certain redemptions by Class B and Class C shareholders, respectively.
PSI, PIFM, PIC and PRICOA are indirect, wholly owned subsidiaries of The
Prudential Insurance Company of America.
- --------------------------------------------------------------------------------
B-41
<PAGE>
NOTES TO FINANCIAL STATEMENTS THE GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
The Fund, along with other affiliated registered investment companies (the
'Funds'), entered into a credit agreement (the 'Agreement') with an unaffiliated
lender. The maximum commitment under the Agreement is $200,000,000. Interest on
any such borrowings outstanding will be at market rates. The purpose of the
Agreement is to serve as an alternative source of funding for capital share
redemptions. The Fund did not borrow any amounts pursuant to the Agreement
during the year ended December 31, 1997. The Funds pay a commitment fee at an
annual rate of .055 of 1% on the unused portion of the credit facility. The
commitment fee is accrued and paid quarterly on a pro rata basis by the Funds.
The Agreement expired on December 30, 1997 and has been extended through
December 29, 1998 under the same terms.
- ------------------------------------------------------------
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent and during the year ended December 31, 1997,
the Fund incurred fees of approximately $288,000 for the services of PMFS. As of
December 31, 1997, approximately $22,000 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to nonaffiliates.
- ------------------------------------------------------------
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term investments
for the year ended December 31, 1997, aggregated $76,351,527 and $101,047,961,
respectively.
At December 31, 1997, the Fund had outstanding forward currency contracts to
purchase and sell foreign currencies as follows:
<TABLE>
<CAPTION>
VALUE AT
FOREIGN CURRENCY SETTLEMENT DATE CURRENT APPRECIATION
PURCHASE CONTRACTS PAYABLE VALUE (DEPRECIATION)
- ---------------------- ---------------- ----------- --------------
<S> <C> <C> <C>
German Deutschemarks,
expiring 4/30/98..... $ 3,938,862 $ 3,794,268 $ (144,594)
Greek Drachma,
expiring 4/30/98..... 1,736,178 1,686,859 (49,319)
Norwegian Krone,
expiring 1/29/98..... 5,830,150 5,728,556 (101,594)
---------------- ----------- --------------
$ 11,505,190 $11,209,683 $ (295,507)
---------------- ----------- --------------
---------------- ----------- --------------
</TABLE>
<TABLE>
<CAPTION>
VALUE AT
FOREIGN CURRENCY SETTLEMENT DATE CURRENT
SALE CONTRACTS RECEIVABLE VALUE APPRECIATION
- ---------------------- ---------------- ----------- -------------
<S> <C> <C> <C>
Australian Dollars,
expiring 1/29/98..... $ 12,191,648 $12,038,352 $ 153,296
French Francs,
expiring 1/29/98..... 8,748,331 8,651,912 96,419
Greek Drachma,
expiring 4/30/98..... 3,938,862 3,941,094 (2,232)
Indonesian Rupiah,
expiring 1/27/98..... 764,380 361,304 403,076
Indonesian Rupiah,
expiring 2/19/98..... 761,084 358,551 402,533
Netherlands Guilders,
expiring 1/29/98..... 26,991,491 26,671,790 319,701
Swiss Francs,
expiring 1/29/98..... 11,157,895 10,949,825 208,070
---------------- ----------- -------------
$ 64,553,691 $62,972,828 $ 1,580,863
---------------- ----------- -------------
---------------- ----------- -------------
</TABLE>
The United States federal income tax basis of the Fund's investments at December
31, 1997 was $181,964,820 and, accordingly, net unrealized depreciation for
United States federal income tax purposes was $2,391,851 (gross unrealized
appreciation--$5,515,033; gross unrealized depreciation--$(7,906,884)).
For federal income tax purposes, the Fund had a capital loss carryforward as of
December 31, 1997 of approximately $2,165,900 which expires in 2002. Such
carryforward is after utilization of approximately $2,817,100 to offset net
taxable gains recognized during the year ended December 31, 1997. Accordingly,
no capital gains distribution is expected to be paid to shareholders until net
capital gains have been realized in excess of such amount.
- ------------------------------------------------------------
NOTE 5. JOINT REPURCHASE AGREEMENT ACCOUNT
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or federal agency obligations. As of December 31, 1997, the
Fund had a 1.21% undivided interest in the joint account. The undivided interest
for the Fund represents $14,222,000 in the principal amount. As of such date,
each repurchase agreement in the joint account and the collateral therefor were
as follows:
Credit Suisse First Boston Corp., 6.75%, in the principal amount of
$342,000,000, repurchase price $342,128,250, due 1/2/98. The value of the
collateral including accrued interest was $353,486,750.
Deutsche Morgan Grenfell, 6.80%, in the principal amount of $200,000,000,
repurchase price $200,075,555, due 1/2/98. The value of the collateral including
accrued interest was $204,000,314.
- --------------------------------------------------------------------------------
B-42
<PAGE>
NOTES TO FINANCIAL STATEMENTS THE GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
SBC Warburg Dillon Read, Inc., 6.55%, in the principal amount of $142,000,000,
repurchase price $142,051,672, due 1/2/98. The value of the collateral including
accrued interest was $144,862,841.
Morgan Stanely, Dean Witter, Discover & Co., 5.95%, in the principal amount of
$151,553,000, repurchase price $151,603,097, due 1/2/98. The value of the
collateral including accrued interest was $154,584,932.
Salomon Smith Barney Inc., 6.75%, in the principal amount of $342,000,000,
repurchase price $342,128,250, due 1/2/98. The value of the collateral including
accrued interest was $350,295,372.
- ------------------------------------------------------------
NOTE 6. CAPITAL
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 4%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase. A special exchange privilege is also available for
shareholders who qualified to purchase Class A shares at net asset value.
Effective March 17, 1997, the Fund commenced offering Class Z shares. Class Z
shares are not subject to any sales or redemption charge and are offered
exclusively for sale to a limited group of investors.
There are 2 billion authorized shares of common stock at $.01 par value per
share, divided equally into Class A, B, C and Z shares. As of December 31, 1997
Prudential owned 13,481 Class A shares, 25 Class B shares, 26 Class C shares and
26 Class Z shares.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A SHARES AMOUNT
- ---------------------------------- ----------- -------------
<S> <C> <C>
Year ended December 31, 1997:
Shares sold....................... 376,715 $ 3,080,935
Shares issued in reinvestment of
dividends and distributions..... 594,942 4,768,393
Shares reacquired................. (5,157,652) (42,386,320)
----------- -------------
Net decrease in shares outstanding
before conversion............... (4,185,995) $ (34,536,992)
Shares issued upon conversion from
Class B......................... 2,660 21,866
----------- -------------
Net decrease in shares
outstanding..................... (4,183,335) $ (34,515,126)
----------- -------------
----------- -------------
January 15, 1996(a) through
December 31, 1996:
Shares sold....................... 1,452,073 $ 12,309,850
Shares issued in reinvestment of
dividends and distributions..... 677,779 5,685,377
Shares reacquired................. (40,928,480) (344,455,702)(b)
----------- -------------
Net decrease in shares
outstanding..................... (38,798,628) $(326,460,475)
----------- -------------
----------- -------------
<CAPTION>
Class B SHARES AMOUNT
- ---------------------------------- ----------- -------------
<S> <C> <C>
Year ended December 31, 1997:
Shares sold....................... 288,417 $ 2,365,066
Shares issued in reinvestment of
dividends and distributions..... 14,347 114,426
Shares reacquired................. (29,348) (240,044)
----------- -------------
Net increase in shares outstanding
before conversion............... 273,416 $ 2,239,448
Shares reacquired upon conversion
into Class A.................... (2,660) (21,866)
----------- -------------
Net increase in shares
outstanding..................... 270,756 $ 2,217,582
----------- -------------
----------- -------------
January 15, 1996(a) through
December 31, 1996:
Shares sold....................... 23,745 $ 205,444
Shares issued in reinvestment of
dividends and distributions..... 1,121 9,422
Shares reacquired................. (3,960) (34,172)
----------- -------------
Net increase in shares
outstanding..................... 20,906 $ 180,694
----------- -------------
----------- -------------
<CAPTION>
Class C
- ----------------------------------
<S> <C> <C>
Year ended December 31, 1997:
Shares sold....................... 95,257 $ 776,731
Shares issued in reinvestment of
dividends and distributions..... 5,489 43,719
Shares reacquired................. (76,729) (605,145)
----------- -------------
Net increase in shares
outstanding..................... 24,017 $ 215,305
----------- -------------
----------- -------------
January 15, 1996(a) through
December 31, 1996:
Shares sold....................... 23 $ 200
Shares issued in reinvestment of
dividends and distributions..... 2 13
----------- -------------
Net increase in shares
outstanding..................... 25 $ 213
----------- -------------
----------- -------------
<CAPTION>
Class Z
- ----------------------------------
<S> <C> <C>
March 17, 1997(c) through
December 31, 1997:
Shares sold....................... 85,634 $ 698,886
Shares issued in reinvestment of
dividends and distributions..... 4,243 33,646
Shares reacquired................. (2,894) (23,565)
----------- -------------
Net increase in shares
outstanding..................... 86,983 $ 708,967
----------- -------------
----------- -------------
</TABLE>
- ---------------
(a) Prior to January 15, 1996, the Fund operated as a closed-end, investment
company.
(b) Net of $4,870,794 redemption fee retained by the Fund.
(c) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
B-43
<PAGE>
FINANCIAL HIGHLIGHTS THE GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A (b)
------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1997(c) 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........................ $ 8.38 $ 8.44 $ 7.46 $ 8.76 $ 8.10
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income..................................... .55 .62 .54 .52 .64
Net realized and unrealized gain (loss) on investment and
foreign currencies..................................... (.18) .32 1.25 (1.22) .74
-------- -------- -------- -------- --------
Total from investment operations....................... .37 .94 1.79 (.70) 1.38
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment income...................... (.68) (.62) (.54) (.17) (.30)
Distributions in excess of net investment income.......... (.19) (.50) (.27) -- --
Distributions from capital gains.......................... -- -- -- (.13) (.23)
Distributions in excess of capital gains.................. -- -- -- -- (.19)
Tax return of capital distributions....................... -- -- -- (.30) --
-------- -------- -------- -------- --------
Total distributions.................................... (.87) (1.12) (.81) (.60) (.72)
-------- -------- -------- -------- --------
Redemption fee retained by Fund........................... -- .12 -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year.............................. $ 7.88 $ 8.38 $ 8.44 $ 7.46 $ 8.76
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Per share market price, end of year....................... N/A N/A $ 8.25 $ 6.13 $ 8.00
-------- -------- --------
-------- -------- --------
TOTAL INVESTMENT RETURN BASED ON (a):
Market price........................................... N/A N/A 49.23% (16.12)% 16.50%
Net asset value........................................ 4.55% 13.15% 25.45% (8.10)% 18.12%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)............................. $183,054 $229,770 $559,071 $493,645 $579,942
Average net assets (000).................................. $204,795 $299,026 $549,407 $536,230 $567,128
Ratios to average net assets:
Expenses, including distribution fees.................. 1.39% 1.33% 1.02% 1.04% 1.02%
Expenses, excluding distribution fees.................. 1.24% 1.18% 1.02% 1.04% 1.02%
Net investment income.................................. 6.73% 7.01% 6.50% 6.45% 7.67%
FOR CLASS A, B, C, AND Z SHARES:
Portfolio turnover rate................................ 43% 32% 256% 583% 370%
</TABLE>
- ---------------
(a) Total investment return based on net asset value is calculated assuming a
purchase of shares on the first day and a sale on the last day of each year
reported and includes reinvestment of dividends and distributions. Total
return does not consider the effect of sales load. Prior to January 15, 1996
the Fund operated as a closed-end investment company and total investment
return was calculated based on market value assuming a purchase of common
stock at the current market value on the first day and a sale at the current
market value on the last day of each year reported. Dividends and
distributions are assumed for purposes of this calculation to be reinvested
at prices obtained under the dividend reinvestment plan. This calculation
does not reflect brokerage commissions.
(b) Prior to January 15, 1996 the Fund operated as a closed-end investment
company.
(c) Calculated based upon weighted average shares outstanding during the year.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-44
<PAGE>
FINANCIAL HIGHLIGHTS THE GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B CLASS C
----------------------------- -----------------------------
JANUARY 15, JANUARY 15,
1996(d) 1996(d)
YEAR ENDED THROUGH YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997(f) 1996 1997(f) 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...................... $ 8.39 $ 8.51 $ 8.39 $ 8.51
----- ----- ----- -----
INCOME FROM INVESTMENT OPERATIONS
Net investment income..................................... .49 .57 .49 .57
Net realized and unrealized gain (loss) on investment and
foreign currencies..................................... (.16) .26 (.16) .26
----- ----- ----- -----
Total from investment operations....................... .33 .83 .33 .83
----- ----- ----- -----
LESS DISTRIBUTIONS
Dividends from net investment income...................... (.64) (.57) (.64) (.57)
Distributions in excess of net investment income.......... (.19) (.50) (.19) (.50)
----- ----- ----- -----
Total distributions.................................... (.83) (1.07) (.83) (1.07)
----- ----- ----- -----
Redemption fee retained by Fund........................... -- .12 -- .12
----- ----- ----- -----
Net asset value, end of period............................ $ 7.89 $ 8.39 $ 7.89 $ 8.39
----- ----- ----- -----
----- ----- ----- -----
TOTAL INVESTMENT RETURN(a):............................... 3.98% 11.99% 3.98% 11.99%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................... $2,300 $ 175 $ 190 $ 210(b)
Average net assets (000).................................. $1,246 $ 52 $ 397 $ 204(b)
Ratios to average net assets:
Expenses, including distribution fees.................. 1.99% 1.93%(c) 1.99% 1.93%(c)
Expenses, excluding distribution fees.................. 1.24% 1.18%(c) 1.24% 1.18%(c)
Net investment income.................................. 6.13% 6.41%(c) 6.05% 6.41%(c)
<CAPTION>
CLASS Z
------------
<S> <C>
MARCH 17,
1997(e)
THROUGH
DECEMBER 31,
1997(f)
------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...................... $ 8.32
-----
INCOME FROM INVESTMENT OPERATIONS
Net investment income..................................... .39
Net realized and unrealized gain (loss) on investment and
foreign currencies..................................... .05
-----
Total from investment operations....................... .44
-----
LESS DISTRIBUTIONS
Dividends from net investment income...................... (.69)
Distributions in excess of net investment income.......... (.19)
-----
Total distributions.................................... (.88)
-----
Redemption fee retained by Fund........................... --
-----
Net asset value, end of period............................ $ 7.88
-----
-----
TOTAL INVESTMENT RETURN(a):............................... 5.56%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................... $ 686
Average net assets (000).................................. $ 257
Ratios to average net assets:
Expenses, including distribution fees.................. 1.24%(c)
Expenses, excluding distribution fees.................. 1.24%(c)
Net investment income.................................. 5.41%(c)
</TABLE>
- ---------------
(a) Total investment return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total return does not consider
the effect of sales load. Total returns for periods of less than a full year
are not annualized.
(b) Figure is actual and not rounded to nearest thousand.
(c) Annualized.
(d) Commencement of offering of Class B and Class C shares.
(e) Commencement of offering of Class Z shares.
(f) Calculated based upon weighted average shares outstanding during the period.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-45
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS THE GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
The Global Total Return Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of The Global Total Return Fund, Inc.
(the 'Fund') at December 31, 1997, the results of its operations and the changes
in its net assets and the financial highlights for the year then ended, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as 'financial
statements') are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audit. We
conducted our audit of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at December 31, 1997 by
correspondence with the custodian and brokers, provides a reasonable basis for
the opinion expressed above. The accompanying Statement of Changes in Net Assets
for the year ended December 31, 1996, and Financial Highlights for each of the
four years in the period ended December 31, 1996 were audited by other
independent accountants, whose opinion dated February 14, 1997 was unqualified.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
February 13, 1998
- --------------------------------------------------------------------------------
B-46
<PAGE>
CHANGE OF AUDITORS THE GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
Effective March 1, 1997, Deloitte & Touche LLP was terminated as the Fund's
auditors. For the years ended December 31, 1993 through December 31, 1996,
Deloitte & Touche LLP expressed an unqualified opinion on the Fund's financial
statements. There were no disagreements between Fund management and Deloitte &
Touche LLP prior to their termination. The Board of Directors approved the
termination of Deloitte & Touche LLP and the appointment of Price Waterhouse LLP
as the Fund's independent accountants.
- --------------------------------------------------------------------------------
B-47
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE SHAREHOLDERS AND BOARD OF DIRECTORS OF THE GLOBAL TOTAL RETURN FUND, INC.:
We have audited the accompanying statement of changes in net assets of
The Global Total Return Fund, Inc.for the year ended December 31,
1996, and the financial highlights contained in the prospectus for each of the
years in the five year period ended December 31, 1996. This financial statement
and these financial highlights are the responsibility of the Fund's management.
Our responsibility is to express an opinion on this financial statement and
these financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statement. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statement and financial highlights present
fairly, in all material respects, the changes in net assets and the financial
highlights of The Global Total Return Fund, Inc. for the respective stated
periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
New York, New York
February 14, 1997
B-48
<PAGE>
APPENDIX I--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk, providing balance.
Asset allocation among different types of securities within an overall
investment portfolio helps to reduce risk and to potentially provide stable
returns, while enabling investors to work toward their financial goal(s). Asset
allocation is also a strategy to gain exposure to better performing asset
classes while maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable returns.
Owning a portfolio of securities mitigates the individual risks (and returns) of
any one security. Additionally, diversification among types of securities
reduces the risks and (general returns) of any one type of security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, i.e., principal and interest
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks, such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will fluctuate.
However, owning a security for a long period of time may help investors offset
short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
STANDARD DEVIATION
Standard deviation is an absolute (non-relative) measure of volatility
which, for a mutual fund, depicts how widely the returns varied over a certain
period of time. When a fund has a high standard deviation, its range of
performance has been very wide, implying greater volatility potential. Standard
deviation is only one of several measures of a fund's volatility.
I-1
<PAGE>
APPENDIX II--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart shows the long-term performance of various asset classes and
the rate of inflation.
HISTORICAL PERFORMANCE DATA
[LINE GRAPH IN ORIGINAL]
VALUE OF $1.00 INVESTED
ON 1/1/26 THROUGH 12/31/97
Small Stocks $5,519.97
Common Stocks $1,828.33
Long-Term Bonds $ 39.07
Treasury Bills $ 14.25
Inflation $ 9.02
Source: Stocks, Bonds, Bills, and Inflation 1997 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart is for illustrative
purposes only and is not indicative of the past, present or future performance
of any asset class or any Prudential Mutual Fund.
Generally, stock returns are due to capital appreciation and the reinvestment of
any gains. Bond returns are due to reinvesting interest. Also, stock prices are
usually more volatile than bond prices over the long-term. Small stock returns
for 1926-1980 are those of stocks comprising the 5th quintile of the New York
Stock Exchange. Thereafter, returns are those of the Dimensional Fund Advisors
(DFA) Small Company Fund. Common stock returns are based on the S&P Composite
Index, a market-weighted, unmanaged index of 500 stocks (currently) in a variety
of industries. It is often used as a broad measure of stock market performance.
Long-term government bond returns are measured using a constant one-bond
portfolio with a maturity of roughly 20 years. Treasury bill returns are for a
one-month bill. Treasuries are guaranteed by the government as to the timely
payment of principal and interest; equities are not. Inflation is measured by
the consumer price index (CPI).
II-1
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1987
through 1997. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "Fund Expenses" in the prospectus. The net effect of the
deduction of the operating expenses of a mutual fund on these historical total
returns, including the compounded effect over time, could be substantial.
<TABLE>
<CAPTION>
Historical Total Returns of Different Bond Market Sectors
- ----------------------------------------------------------------------------------------------------------
'87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY
BONDS(1) 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7% 9.6%
- ----------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT
MORTGAGE
SECURITIES(2) 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4% 9.5%
- ----------------------------------------------------------------------------------------------------------
U.S. INVESTMENT GRADE
CORPORATE
BONDS(3) 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3% 10.2%
- ----------------------------------------------------------------------------------------------------------
U.S.
HIGH YIELD
CORPORATE
BONDS(4) 5.0% 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4% 12.8%
- ----------------------------------------------------------------------------------------------------------
WORLD
GOVERNMENT
BONDS(5) 35.2% 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3)%
==========================================================================================================
DIFFERENCE BETWEEN HIGHEST
AND LOWEST RETURN PERCENT 33.2 10.2 18.8 24.9 30.9 11.0 10.3 9.9 5.5 8.7 17.1
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over
150 public issues of the U.S. Treasury having maturities of at least one year.
(2) LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
(3) LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.
(4) LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one year.
(5) SALOMON BROTHERS WORLD GOVERNMENT INDEX (NON-U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the U.S.,
but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
II-2
<PAGE>
This chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.
LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1997)
[LINE GRAPH OMITTED]
Source: Stocks, Bonds, Bills, and Inflation 1997 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex Sinquefield). Used
with permission. All rights reserved. The chart illustrates the historical yield
of the long-term U.S. Treasury Bond from 1926-1997. Yields represent that of an
annually renewed one-bond portfolio with a remaining maturity of approximately
20 years. This chart is for illustrative purposes and should not be construed to
represent the yields of any Prudential Mutual Fund.
II-3
<PAGE>
APPENDIX III--INFORMATION RELATING TO PRUDENTIAL
Set forth below is information relating to The Prudential Insurance
Company of America (Prudential) and its subsidiaries as well as information
relating to the Prudential Mutual Funds. See "How the Fund Is Managed--Manager"
in the Prospectus. The data will be used in sales materials relating to the
Prudential Mutual Funds. Unless otherwise indicated, the information is as of
December 31, 1996 and is subject to change thereafter. All information relies on
data provided by The Prudential Investment Corporation (PIC) or from other
sources believed by the Manager to be reliable. Such information has not been
verified by the Fund.
INFORMATION ABOUT PRUDENTIAL
The Manager and PIC1 are subsidiaries of Prudential, which is one of the
largest diversified services institutions in the world and, based on total
assets, the largest insurance company in North America as of December 31, 1996.
Principal products and services include life and health insurance, other
healthcare products, property and casualty insurance, securities brokerage,
asset management, investment advisory services and real estate brokerage.
Prudential (together with its subsidiaries) employs almost 81,000 persons
worldwide, and maintains a sales force of approximately 11,500 agents and 6,400
financial advisors. Prudential is a major issuer of annuities, including
variable annuities. Prudential seeks to develop innovative products and services
to meet consumer needs in each of its business areas. Prudential uses the rock
of Gibraltar as its symbol. The Prudential rock is a recognized brand name
throughout the world.
Insurance. Prudential has been engaged in the insurance business since
1875. It insures or provides financial services to nearly 50 million people
worldwide. Long one of the largest issuers of individual life insurance, the
Prudential has 22 million life insurance policies in force today with a face
value of $1 trillion. Prudential has the largest capital base ($12.1 billion) of
any life insurance company in the United States. Prudential provides auto
insurance for approximately 1.6 million cars and insures approximately 1.2
million homes.
Money Management. Prudential is one of the largest pension fund managers
in the country, providing pension services to 1 in 3 Fortune 500 firms. It
manages $36 billion of individual retirement plan assets, such as 401(k) plans.
As of December 31, 1996, Prudential had more than $322 billion in assets under
management. Prudential Investments, a business group of Prudential (of which
Prudential Mutual Funds is a key part), manages over $190 billion in assets of
institutions and individuals. In Pensions & Investments, May 12, 1997,
Prudential was ranked third in terms of total assets under management.
Real Estate. The Prudential Real Estate Affiliates, the fourth largest
real estate brokerage network in the United States, has more than 37,000 brokers
and agents across the United States.2
Healthcare. Over two decades ago, Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.6
million Americans receive healthcare from a Prudential managed care membership.
Financial Services. The Prudential Savings Bank FSB, a wholly-owned
subsidiary of Prudential, has over $1 billion in assets and serves nearly 1.5
million customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
As of October 31, 1997, Prudential Investments Fund Management was the
seventeenth largest mutual fund company in the country, with over 2.5 million
shareholders invested in more than 50 mutual fund portfolios and variable
annuities with more than 3.7 million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage
over $55 billion in mutual fund and variable annuity assets. Some of
Prudential's portfolio managers have over 20 years of experience managing
investment portfolios.
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
The Wall Street Journal, The New York Times, Barron's and USA Today.
- ----------
(1) PIC serves as the Subadviser to substantially all of the Prudential Mutual
Funds. Wellington Management Company serves as the subadviser to Global
Utility Fund, Inc., Nicholas-Applegate Capital Management as the
subadviser to Nicholas-Applegate Fund, Inc., Jennison Associates LLC as
the subadviser to Prudential Jennison Series Fund, Inc. and Mercator Asset
Management LP as the subadviser to International Stock Series, a portfolio
of Prudential World Fund, Inc. There are multiple subadvisers for The
Target Portfolio Trust.
(2) As of December 31, 1996.
III-1
<PAGE>
Equity Funds. Forbes magazine listed Prudential Equity Fund among twenty
mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995.
Honorees are chosen annually among mutual funds (excluding sector funds) which
are open to new investors and have had the same management for at least five
years. Forbes considers, among other criteria, the total return of a mutual fund
in both bull and bear markets as well as a fund's risk profile. Prudential
Equity Fund is managed with a "value" investment style by PIC. In 1995,
Prudential Securities introduced Prudential Jennison Fund, a growth-style equity
fund managed by Jennison Associates LLC, a premier institutional equity manager
and a subsidiary of Prudential.
High Yield Funds. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor
approximately 200 issues held in the Prudential High Yield Fund (currently the
largest fund of its kind in the country) along with 100 or so other high yield
bonds, which may be considered for purchase.(3) Non-investment grade bonds, also
known as junk bonds or high yield bonds, are subject to a greater risk of loss
of principal and interest including default risk than higher-rated bonds.
Prudential high yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services
from almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from Pulp and Paper Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to
collect detailed information on which to trade. From natural gas prices in the
Rocky Mountains to the results of local municipal elections, a Prudential
portfolio manager or trader is able to monitor it if it's important to a
Prudential Mutual Fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and
foreign government securities a year. PIC seeks information from government
policy makers. In 1995, Prudential's portfolio managers met with several senior
U.S. and foreign government officials, on issues ranging from economic
conditions in foreign countries to the viability of index-linked securities in
the United States.
Prudential Mutual Funds' portfolio managers and analysts met with over
1,200 companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
Prudential Mutual Fund global equity managers conducted many of their
visits overseas, often holding private meetings with a company in a foreign
language (our global equity managers speak 7 different languages, including
Mandarin Chinese).
Trading Data.(4) On an average day, Prudential Mutual Funds' U.S. and
foreign equity trading desks traded $77 million in securities representing over
3.8 million shares with nearly 200 different firms. Prudential Mutual Funds'
bond trading desks traded $157 million in government and corporate bonds on an
average day. That represents more in daily trading than most bond funds tracked
by Lipper even have in assets.(5) Prudential Mutual Funds' money market desk
traded $3.2 billion in money market securities on an average day, or over $800
billion a year. They made a trade every 3 minutes of every trading day. In 1994,
the Prudential Mutual Funds effected more than 40,000 trades in money market
securities and held on average $20 billion of money market securities.(6)
Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services LLC, the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On an
annual basis, that represents approximately 1.8 million telephone calls
answered.
- ----------
(3) As of December 31, 1996. The number of bonds and the size of the Fund are
subject to change.
(4) Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios
of the Prudential Series Fund and institutional and non-US accounts
managed by Prudential Investments, a business group of PIC, for the year
ended December 31, 1995.
(5) Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate
U.S. Government, Short Investment Grade Debt, Intermediate Grade Debt,
General U.S. Treasury, General U.S. Government and Mortgage Funds.
(6) As of December 31, 1994.
III-2
<PAGE>
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 5,600 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1995, assets held by Prudential Securities for its
clients approximated $168 billion. During 1994, over 28,000 new customer
accounts were opened each month as PSI.(7)
Prudential Securities has a two-year Financial Advisor training program
plus advanced education programs, including Prudential Securities "university,"
which provides advanced education in a wide array of investment areas.
Prudential Securities is the only Wall Street firm to have its own in-house
Certified Financial Planner (CFP) program. In the December 1995 issue of
Registered Rep, an industry publication, Prudential Securities Financial Advisor
training programs received a grade of A- (compared to an industry average of
B+).
In 1995, Prudential Securities' equity research team ranked 8th in
Institutional Investor magazine's 1995 "All America Research Team" survey. Five
Prudential Securities' analysts were ranked as first-team finishers.(8)
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architects(SM), a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis system
that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
advisor or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- ----------
(7) As of December 31, 1994.
(8) On an annual basis, Institutional Investor magazine surveys more than 700
institutional money managers, chief investment officers and research
directors, asking them to evaluate analysts in 76 industry sectors. Scores
are produced by taking the number of votes awarded to an individual
analyst and weighing them based on the size of the voting institution. In
total, the magazine sends its survey to approximately 2,000 institutions
and a group of European and Asian institutions.
III-3
